CONFIDENTIAL
6. I am particularly concerned at present about the need to establish a more productive and equitable system of taxation in Hong Kong. There is no direct tax on some unearned incomes and the maximum rate of income tax is 15%. It is true that the great majority of the population do not have to pay tax and that the Hong Kong Government seem at present to have suffident resources to finance increased social welfare and development. Nevertheless, there is in our view a case for increasing the yield from taxation in order to ensure that, in what is manifestly a wealthy society, there is no risk of social programmes being cut back, as happened in 1973-74, through lack of financial resources. A recent review of Hong Kong's inland revenue system has not offered a way forward - the Review Committee have even rejected a modest proposal by the Financial Secretary that there should be a dividend withholding tax - and I have written to the Governor to express my concern that we seem to be no nearer to achieving a thorough-- going reform of the tax system and to ask for his views.
1 July 1977
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CONFIDENTIAL
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