XN000022-1994-05-11 — Page 5

WEDNESDAY, MAY 11, 1994

AT BAY

FURTHERMORE, A TAX WHICH MANAGED TO KEEP SPECULATORS WOULD PROBABLY ALSO DAMPEN DEMAND AMONG THOSE WHO WANTED TO MAKE A LONG-TERM INVESTMENT IN THE PROPERTY MARKET. THIS WOULD INEVITABLY REDUCE THE AVAILABILITY OF PREMISES FOR THOSE END-USERS WHO OPTED TO LEASE RATHER THAN TO OWN PROPERTY. THERE IS ALSO THE DANGER THAT PROPERTY DEVELOPERS WOULD RESPOND BY CUTTING BACK THEIR PRODUCTION, END-USERS WOULD EVENTUALLY FEEL THE PINCH OF THE REDUCED OUTPUT. THE POINT I WISH TO MAKE HERE IS THAT IT IS NOT AT ALL EASY TO WORK OUT A CAPITAL GAINS TAX THAT WOULD SOLVE THE PROBLEM OF PROPERTY SPECULATION WITHOUT CREATING OTHER PROBLEMS IN ITS TRAIN: THERE IS A RISK THAT THE PROPOSED TAX MIGHT HURT THE VERY PEOPLE WE WISH TO HELP.

IMPACT ON THE OVERALL ECONOMY

CONSIDER

APART FROM THE IMPACT ON END-USERS, WE ALSO NEED ΤΟ THE IMPLICATIONS OF A CAPITAL GAINS TAX FOR THE ECONOMY AS A WHOLE. DURING THE PERIOD 1989 TO 1993, PRIVATE SECTOR BUILDING EXPENDITURE TOOK UP 50-60% OF THE OVERALL EXPENDITURE ON BUILDING AND CONSTRUCTION IN THE ECONOMY. THIS EXPENDITURE, TOGETHER WITH THE REAL DEVELOPERS' MARGIN, ACCOUNTED FOR 30-40% OF THE OVERALL INVESTMENT EXPENDITURE IN OUR GDP.

A CAPITAL GAINS TAX ON PROPERTY TRANSACTIONS AS SUGGESTED WOULD THUS IMPACT ON A LARGE SEGMENT OF INVESTMENT IN THE ECONOMY. IN TURN, THIS WOULD HAVE A MULTIPLIER EFFECT ON THE REST OF THE ECONOMY, RESULTING IN CURTAILMENT IN THE OVERALL GDP. ON THE BASIS OF THE RATABLE VALUES OF PROPERTIES IN HONG KONG, WE HAVE CALCULATED THAT THE TOTAL VALUE OF ALL PROPERTIES IN HONG KONG COULD EXCEED $2.3 TRILLION ($2,300 BILLION). NO-ONE SHOULD SPEAK LIGHTLY OF INTRODUCING A CAPITAL GAINS TAX WHEN IT COULD LEAD TO AN UNPREDICTABLE DIMINUTION OF THAT ENORMOUS PART OF HONG KONG'S TOTAL WEALTH.

PRACTICAL ISSUES

AS I POINTED OUT WHEN I LAST SPOKE IN THIS COUNCIL ON THIS SUBJECT, THERE ARE PRACTICAL ISSUES WE SHOULD HAVE TO ADDRESS IF WE WERE TO INTRODUCE A CAPITAL GAINS TAX, FOR INSTANCE

—

THE

APPROPRIATE

INFLATION;

TREATMENT OF GAINS

ATTRIBUTABLE TO

WHETHER LOSSES SHOULD BE DEDUCTIBLE AND, IF SO, WHETHER THEY SHOULD ONLY BE OFFSET AGAINST CAPITAL GAINS;

WHETHER GAINS SHOULD BE AVERAGED AND BROUGHT TO CHARGE OVER A NUMBER OF YEARS; AND

WHETHER THE TAX SHOULD APPLY TO TRANSACTIONS IN STOCKS AND SHARES IN PROPERTY-RELATED BUSINESSES.

/IN AN