XN000022-1996-04-03 — Page 18

The Revenue Base and The Tax Net

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Many Members have expressed their concern about what they feel are the potential dangers of the narrowing of the tax base. We must be clear about what are the real issues here. We must make a sharp distinction between two separate concepts: the revenue base and the tax net. They are not the same thing. The revenue base is made up of the profits and salaries tax, the revenue from land sales and the full range of other taxes, duties and charges levied by the Government. We aim to keep this revenue base stable and productive. But the tax net is quite a different concept. It is, in essence, a description of the number of taxpayers. At a time of economic growth and rising real wages, we can maintain revenue while providing salaries tax concessions which may allow some taxpayers to drop out of the tax net. This means that we can reduce the tax net, that is reduce the number of taxpayers, without affecting the revenue base.

Growing prosperity has the effect of expanding the tax net over time. As incomes rise, more individuals find themselves drawn into the tax net. So despite the major concessions made in the past few years, salaries tax contributed 14% of total Government revenue in 1995-96, second only to profits tax. Even after the further concessions proposed in this year's Budget, we still expect the contribution of salaries tax to total revenue to remain at about the same level in 1996-97. Salaries tax has remained a stable source in the revenue base even though the tax net has continued to vary in recent years. Our essential policy goals in this area are to ensure that Hong Kong has a stable and productive revenue base while at the same time adjusting the tax net to take account of economic growth and community aspirations.

I share Members' views about the advantages of broadening the revenue base. Unfortunately, I have not yet found a way to do so without bringing in a large number of new taxpayers. My colleagues and I believe that it would be highly objectionable to Members, never mind the community at large, if we proposed any major revenue- broadening measures at present and expanded the number of taxpayers. Our unpleasant experience in protecting the revenue base of our fees and charges regime has illustrated this point clearly.

I am well aware of the technical or theoretical criticisms which can be made of our tax regime. But we must not let technicalities or theory obscure the basic facts. Our very simple, low-tax regime has been a key element in our economic success. It has enabled us to fund the dramatic improvements in our social services and our infrastructure over the past 30 years. It is the envy of many developing and developed countries. No competing economy can rival it. I will take a lot of convincing that our successful tax system needs systematic review or radical change.