Sessional_Paper_1939 — Page 103

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6. This argument is a particular aspect of point 1 and might have some force during the early administration of the tax. Careful preliminary investigation and adequate safeguards would be necessary. If the initial stages can be successfully passed there is no reason to believe that the increased agility of the evasive taxpayer will not be more than counter- balanced by the added experience of the income tax officers.

7. If an Income Tax is considered advisable on other grounds, the cost of administration should not be so heavy as to affect the question. In Ceylon, the cost has been about 4% of the yield. This cost would certainly require consideration in any preliminary investigation but it would naturally diminish after the inital years.

8. The experience in the Straits Settlements was too short, the powers given to the Revenue authorities too limited, and the circumstances during its operation too exceptional to enable any useful conclusion to be drawn from it.

9. The possible discouragement of factories is a sound economic objection, but factories could be compensated in other ways, e.g. either by an adjustment of rates as under the English Industrial Derating System, or by a general reduction in the assessment. Factories might well prefer an Income Tax, which would affect their profits only, to an increase in assessed rates which would be payable even when no profits could be shewn.

10. This point has not been felt as an objection in other Colonies or Dominions, the general view being that the Government of the country where an income arises has the first right to tax it. This Colony has, in the past, assisted the Imperial Government to a relatively greater extent than have other Colonies, particularly with regard to the Defence Con- tribution, and this objection should not carry much weight if the tax be considered advisable on other grounds. If it is the general wish that the Colony should assist the Home Government more generously, that can be done better, and under greater public control, by the voting of additional funds for the purpose in the annual Budget.

11. It cannot be denied that private charity may be less generous if the wealthy have already paid an Income Tax, but it is regretfully noted that the stream of private charity is already showing a marked falling off; and the necessity of supplementing it by increasing Government subventions to private charitable institutions is one of the reasons why Government may have to raise further revenue.

12. The whole question turns on the possibility of administering the tax so successfully as to make it acceptable. The introduction of an In- come Tax has never originated in a theoretical effort to perfect the system of taxation, but in a stern need for revenue. If, therefore, additional revenue of considerable proportions is required, and if it is considered that an Income Tax will produce that additional revenue, the possibility of extensive evasion in the early years should not, of itself, suffice to withhold the imposition.

On a review of these pros and cons we feel, without necessarily regarding all the other objections as completely answered, that the really vital question is the possibility of effective administration under the conditions prevailing in Hong Kong.

Before going further, certain other points arising out of the possible institution of an Income Tax require consideration. Having regard to the necessary minimum cost of an Income Tax Department it would be uneconomic to impose it at a very low rate; and it would probably be found that the maximum rate should eventually be put at 10%. We consider, however, that the tax would be more easily ac- cepted and less liable to evasion if the maximum rate on its first institution were put at 5%. Even at that low rate, and allowing for reasonably generous personal, family and other allowances, but always assuming effective administration, existing very imperfect statistics of the income of the Colony suggest that the yield might be of the order of $5,000,000 per annum. That is, we hope, a larger sum than the Government is seeking to raise at once as additional revenue.

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