Concerning today’s discussion motion on an overall tax cut to restore wealth to Hong Kong people, I very much support this proposal. I think that a tax cut will not only restore wealth to the people, but will also achieve another purpose: stimulating the economy. Earlier, on suggestions on the Policy Address, I made an important proposal, which is to reduce taxes to stimulate the economy.
In fact, I have all along supported reducing taxes and making rebates to restore wealth to the people. However, to maintain a long-term policy of keeping the tax rate low, the Government has to think of ways to broaden the tax base to compensate for the reduced tax monies and to pay for the large public expenditures. Otherwise, if we cut taxes this year then, after two years, increase them again, there is going to be no point and is not a real way of restoring wealth to the people.
Today, some councilors have suggested raising taxes on corporations, which proposal I think is like killing a chicken to get its eggs. It would, in the short term, increase government revenue, but result in a slow siphoning off of investment monies and talent. We all know that our competitors are always on the lookout to wrest our investment funds and talents from us. If we target our tax increases at our corporations, it’s like handing over to our competitors a goose that would hatch golden eggs. Therefore, I think that the best way is for us to fight for others’ such geese. In order to raise the competitiveness of Hong Kong and to attract international investors to Hong Kong, the simplest and most direct method is to cut profits taxes.
Introducing tax cuts to stimulate the economy has been a method employed by public finance authorities often. At present Hong Kong needs to employ this means to rebuild its competitive clout. Recently we have already here in Legco discussed Hong Kong’s shriveling of its competitiveness. What I want to point out now is that our first priority is to raise our city’s overall competitiveness. If we continue to stagnate, our status as an international finance center will repeat the example of the loss of our former status as the first container port in the world. It will be wrested from our hands. Therefore we have to raise our clout in the shortest possible time. Moreover, with the intensification of economic reforms on the mainland, the competition Hong Kong will face is going to intensify. Shanghai has launched the China (Shanghai) Pilot Free Trade Zone. According to mainland reports, the Central Government is likely to pass a motion to establish Guangdong province as another free-trade zone soon. We should therefore fight for further collaborating with the mainland to increase the pool of Hong Kong businesses. That would entail cooperation from many sides, one of which is to improve the local business environment.
Also, apart from the need to cut taxes in Hong Kong, the question arose as to whether Hong Kong is capable of cutting taxes. Right now, there is more than HK$700 billion fiscal reserve in Hong Kong, as well as our huge Exchange Fund surplus. We have more than HK$10,000 billion financial reserve in our hands, and these funds are enough to enable us to cut our taxes. However, tax-cut measures take time to have their effects. In the short term, a reduction in our tax revenues is inevitable. Therefore, the Government can definitely introduce tax-cut plans with the backing of a huge financial reserve.
Many people are of the opinion that tax cuts will only benefit the large corporations. This is a short-sighted view and ignores the long-term benefits to Hong Kong. An example will clarify matters. Singapore has experienced rapid economic growth in the last few years and has edged out Hong Kong in many areas. Its successes, of course, are due to coordination of many sides. But Singapore government and other analyses indicate that tax reduction played a leading role in their economic growth. In 1997, Singapore’s corporate income tax rate stood at a high of 26%. However, with the changes in its economic environment, it has, on five occasions, reduced its corporate income tax rate. Now it stands at 17%, which is very close to our 16.5%. While Singapore has introduced large tax cuts, its revenue growth is also astounding. Its GDP in that period recorded a rapid rise – from S$146 billion to more than the recent over S$300 billion. In other words, it has doubled. The success of Singapore is due to many factors, one of which is its measure to cut taxes. I believe that if we cut our profits tax and receive coordination from other sides, Hong Kong will stand to benefit, not lose.
In fact, cutting profit taxes has become a worldwide trend. Many Asian and Western countries in recent years have, one after another, reduced its corporation taxes. For example, in 2008 the UK’s corporation tax stood at a high of 30%, which it has cut to 23% this year. Taiwan and Singapore also trimmed their tax to 17%. Our advantage of having a low tax rate is being threatened by others, and we should have earlier trimmed our tax rates to maintain our competitive clout. Instead we didn’t do that. It is clear that so far Hong Kong has attracted investments from many international investors mainly because of our low tax rates. If we “let go of”, albeit slowly, of this advantage, our ability to keep these international investors is called into question.
What is also worth a mention is that in recent years rentals for residential homes and offices have been at a high level. This means that investors have had to pay high taxes on the usage of land. Coupled with a lack of places in international schools, this has eaten away at our clout. Reducing taxes therefore will lessen the burden on corporations and also reclaim our competitiveness.
Moreover, some local examples are sufficient to illustrate the effectiveness of tax cuts in raising our competitiveness. In 2006, we did away with the estate duty. As a result, combined fund-management business jumped from HK$6 trillion then to over HK$12 trillion last year. Hong Kong became, gradually, an asset management center. Another example is that in 2008, Hong Kong abolished wine duty, propelling the value of imported wines from about HK$2.8 billion to last year’s HK$8 billion. In that way, Hong Kong has become a trade and distribution center for wines.
Although the Hong Kong administration has made efforts to promote the territory as an offshore captive insurance and reinsurance center, its relevant tax advantages are worse than those of Singapore. I hope that the Government will review its policies to upgrade Hong Kong’s competitiveness.
I understand that when we mention tax cuts, especially profits-tax cuts, many people have doubts. However, we can follow the example of Singapore by adopting a step-by-step approach. We can adjust our plans in accordance with changes in economic situation. We can even make it a three-year pilot and keep up our reviews. If our plans fail to stimulate the economy, or benefit only the corporations, we can make further adjustments or even cancel our plans to “clear the air.” As to how much we should reduce our taxes, we should leave it to the experts to study and come up with their predictions.
Today, I have spent most of my time explaining why Hong Kong needs to reduce its profits tax. But as I suggested before, I also support salaries-tax cuts. Because the community and more Legco members support salaries-tax cuts, I would rather spend more time talking about profits taxes. I hope the Government and society will understand that cutting profits tax will be very important in raising Hong Kong’s competitiveness.