193
14
15
THA
194
This form of taxation presented itself at an early point in our discussions as an obvious sphere in which considerable additional revenue might be found. A large part of the public expenditure incurred by this Colony is properly municipal expenditure and it would seem appropriate that an increase of this nature should be met by a raised assessment.
A suitable increase in the rate would, no doubt, yield extra revenue of the order we assume to be contemplated, e.g. an addition of 8% would produce about $3,000,000. It would be appropriate to a large section of local public expenditure and would present little difficulty in collection by com- parison with other forms of increased taxation. We believe, however, that the final test of its acceptability must lie in the justice of its incidence, a matter to which our attention is clearly directed by our terms of reference.
The burden of an increase in the rates would be likely to be divided in the first place between tenant and landlord. If there were a shortage of houses most of it might be shifted at once to the tenant; if there were a surplus the landlord might have to suffer it temporarily. In the long run most of it would probably be shifted to the tenant, since capital seeking investment in property would still expect more or less the same net return after deducting rates. The tenants or occupiers consist partly of business enterprises, on whom the effect would be to tax disproportionately those, e.g. factories and dock companies, whose businesses require a large area of land, and partly of private occupiers, predominantly the dwellers in tenement houses. On the private occupier the assessment acts as a very approximate income tax, which, however, bears more heavily in proportion to income on the poor than on the better off, instead of bearing progressively more heavily on the higher incomes, as is expected of a modern taxation system. An increase in the rates would, in fact, be what is called a regressive, rather than a progressive
tax.
In so far as an increase of rates was not passed on to the tenant, it would constitute a tax on a particular class of investor, the landlord, and would be discriminating as between him and others deriving income from capital invested in the Colony.
We have also been impressed by the view that any increased taxation having the effect of forcing up rentals and/or comparatively overtaxing "pro- perty capital may be expected to encourage the slums, the eradication of which is one of the purposes for which, we assume, Government expects to have to find further funds. Any tax must force the taxpayer to adjust his mode of living to a reduced net income, but a tax bearing directly on housing accommodation necessarily forces such adjustment into a socially undesirable channel.
Having regard to these considerations of inequity and social evils likely to arise from the incidence of an increase in the rates, we recommend that, in spite of ease and economy of collection and the size of the yield to be expected, this means to additional revenue should be regarded rather as a last
resource.
Corporation Profits Tax.
(b) A tax on the profits, or dividends, of public companies operating in Hong Kong is a second suggestion which, in common with an increase in the assessment, could be made to produce additional revenue of substantial amount. It is estimated that the profits liable to such a tax might be something like $50,000,000 per annum, yielding annually, at 5%, $2,500,000. It would present, however, some difficulties of assessment and collection and it is open to objection on the score of equity. The effective administration of such a tax would require expert scrutiny of companies' accounts by something like an embryo Income Tax Department. Evasion (i.e. illegal concealment of profits liable to tax) would probably be small, but extensive efforts at "avoidance" by devices within the law, e.g. transfer of registry, manipulation of accounts with associated companies outside Hong Kong, might be expected. No doubt such avoidance would be partly met by suitable safeguards in the law, and there would be a substantial body of company profits which would
be unable to escape tax; but only constant expert vigilance could prevent the gradual leaking away of much of that liability.
As regards incidence, such a tax must, at once or eventually, fall upon the shareholders. From the point of view of equity it is open, like a tax on landlords, to the objection that it differentiates unfairly between one group of investors, i.e. shareholders of Hong Kong companies, and others, i.e. those who have invested in property, private businesses or companies registered and operating outside the Colony. As compared with an ordinary income tax, a profits tax would be unfair also as between individual shareholders who would pay, not in proportion to their total incomes but in proportion to their hold- ings in Hong Kong companies.
Though such a tax is unjust in the sense that it is discriminative, we feel that it has at least the merit of spreading the burden over a wider class, namely, all shareholders, rather than settling it upon the more restricted class of landowners. It could, of course, be limited to non-resident share- holders, but attractive as that may be at first sight, we cannot convince ourselves of its equity, while such limitation would at once reduce the yield and open a new loophole for evasion through registration of shares in the names of resident "dummies".
It should finally be observed that this tax would leave unaffected, in so far as they are not shareholders in public companies, the salaried and professional classes, the landlords and the large body of private businessmen, whose opera- tions, although individually smaller in scale than those of big public companies, give rise to a large aggregate of profits.
Income Tax.
We are
(c) Finally we considered the institution of an Income Tax. This is a standard tax in most Western countries, in the British Dominions and in India; and the only important territories in the Colonial Empire in which it does not exist in some form are the Gold Coast. Malaya and Hong Kong. agreed that this direct form of taxation is the most logical, equitable and remunerative, and at the same time the least discriminatory, if it is capable of successful administration. It is unnecessary to argue the theoretical case for such a tax on grounds of equity and we have therefore devoted our considera- tion of this subject rather to its practicability. The grave doubts which are widely felt as to the possibility of its successful administration in this Colony may be summarised as follows:-
1. The economic and geographic situation of the Colony, which is more of a municipality than a country, presents many obvious loopholes for evasion.
2. The primitive system of book-keeping used by Chinese firms would render fair assessments difficult if not impossible.
3. The migratory nature of the Colony's population, and the ex- tremely mixed taxable community with greatly differing standards of living, make Hong Kong unsuited to the tax generally.
4. Many benefits are still to be derived from preserving the Colony as a haven for "refugee" capital. The Colony's prosperity depends to a large extent on the fact that it is the entrepôt of China, a free port, without income tax and without excessive taxation. An unwise fiscal imposition may well upset this precarious prosperity.
5. So radical a departure in fiscal policy would give rise to a demand, now dormant, for popular representation.
6. The full effect of the tax, for one reason or another, would not reach the Chinese community. The European would bear the chief burden and the Chinese escape or evade its incidence. Any differential treatment between races in this small community would be invidious and give rise to intense dissatisfaction.
7.
The administration of an income tax locally would not be possible at an economic cost. A large and expert European staff would have to be imported.