CONFIDENTIAL
Fiscal
4.
the
The most obvious distinction between Hong Kong
and other industrial societies at a comparable level of development is the comparatively low, narrowly based and, at certain levels, regressive nature of direct taxation. (It is of interest that only 86000 out of a total population pay salaries tax and no taxes are levied on income arising from investments abroad.) To some degree it must be accepted that the present system has been conducive to growth; that growth has resulted in a rapid rise in taxation receipts (from&M 1808
813612
in 1970/71 to an estimated in 1975/76); that political uncertainties require a measure of discount for foreign
and domestic investment; and that in the 1950's and 1960's there were non-fiscal constraints on the growth of certain kinds of social expenditure. More recently, however, there has been growing realisation that self-imposed fiscal limitations have unnecessarily restricted implementation of social policies which are essential for the balanced growth of an industrial society; that the argument that investors will cease to invest if direct taxation were more widely based and the 15% limit payable by any individual raised, lacks conviction; and that Hong Kong's strength as a commercial, banking and communications centre would continue to be attractive to investors if tax rates were much higher and the tax burden more fairly spread. A similar argument applies to the objection that higher taxes inevitably entails even greater tax avoidance than at present: while some leakage is doubtless inevitable, the net benefit to the Government revenues can be expected to be substantial.
5. Another dissimilarity between Hong Kong and other industrial societies is the reluctance to resort to deficit financing. This in part has its origins in the requirement to obtain UK approval for borrowing which in the 1950s and 1960s was discouraged. This led to a situation in the past in which an annually high percentage of the Government's capital expenditure was financed from the surplus on current
3
CONFIDENTIAL
UNUSUALLY
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