Ordinary Gweilo

Christine Loh Kung-wai, writing in today’s SCMP (subscription) highlights the curious way that the government says it wants a debate on GST but doesn’t seem to want to give us all the facts:

What seems unsatisfactory to those who support a GST is that I want more information, and a public debate, about what options Hong Kong has for securing a steady flow of public revenue. Supporters of the proposed new tax appear on the whole to think it’s the best option.

I have written in this column about revenue from land sales and how it can be used only for capital works under the current arrangements. When I ask GST supporters whether they know that land-related incomes cannot be used for general expenditures, most of them admit they had no idea.

Some say they did know. So I ask them how government revenues would be affected if land-related incomes could be spent on things like education, environmental cleanups, health care and social welfare. No one has yet given me a decent answer.

Jake van der Kamp mentioned this yesterday (Great taskmaster Tang fails to do his homework on needless GST):

The Treasury’s GST paper, however, conveniently ignores this when arguing that we have a narrow revenue base compared with other governments. It looks only at operating revenues.

It can do this because a previous financial secretary years ago set up something called the capital works reserve fund to hold land sales revenue and then ordained that this revenue could only be used for capital expenditure.  He did it to save face on an embarrassingly inaccurate budget forecast and we are still saving face for him today.

Pointless as this may now be, it suits the Treasury just fine. It can now say that we have a narrow revenue base. Just make one stroke of the pen to exclude land sales revenue and, hey, presto! we can all sing a dirge about how bad life will be if we don’t have a GST to give us a wider base.

Christine Loh also (correctly) points out that the current system distorts the property market:

The way Hong Kong calculates land premiums for lease conversions is opaque, and favours large developers. The premium is negotiated between the developer and the Lands Department, based on the estimated value of the finished development.  The agreed premium – which is a tax – then has to be paid up front, thus favouring those with substantial funds.

Developers build up land banks, say, for land with agricultural leases. Then they wait for the best time to negotiate the premiums for conversion to, say, residential or commercial uses – so as to keep the tax to a minimum.

[..]

Changes [to] the way Hong Kong taxes land development must be a part of any debate on tax reform. Indeed, a responsible government would want to bring up the subject rather than hide behind the fiction of a “one-solution-fits-all” GST. Is anyone interested in discussing this?

I think they should be.  I wonder if Henry Tang really wants a debate?