Over the period 2002/2003 to 2011/2012, and particularly during the period of John Tsang’s stewardship of the Government’s finances, there has become an increasing reliance on revenue from land premium, stamp duty, profits tax and salaries tax. Revenue from these sources currently accounts for approximately two thirds of the Government’s total revenue. Indeed, it can be seen from table (1) below that the Government’s budget surplus is very sensitive to the collections from stamp duty and land premium.
Table (1) also illustrates the substantial increase in revenue collected from stamp duty and land premium, and how these collections have outpaced the collection of profits tax in the period from 2005/2006 to 2011/2012. The Government’s dependence on such a narrow basis of revenue is further evident when it is appreciated that the increase in revenue from profits tax over the period 2002/2003 to 2011/2012 is more than 2½ times that from salaries tax or any other form of direct taxation – see table (2) below.
The Government’s dependence on revenue from profits tax, land premium and stamp duty underlines just how important the property development sector is to the Government’s ability to manage its finances. Hong Kong’s property companies are a major contributor to the profits tax collected. They are the principal payers of land premium and provide the residential and commercial units of which the transfers attract significant rates of stamp duty.
Since John Tsang became Financial Secretary, there has been little relief for people paying profits tax. Other than reducing the standard rate from 17.5% to 16.5% in his first year of office, and despite calls for a reduction in the standard rate of profits tax to 15%, a reduced rate of tax applicable to lower earnings, the ability to carry back losses and group relief, the Financial Secretary has done little for a corporate sector that has consistently funded the Government’s coffers. By comparison, the managers of a successful division of a corporation would have expected a reasonable bonus for exceeding their budget targets.
We have heard a great deal from the Government about the rapid growth in property prices, the limited supply of land for development purposes, etc. Indeed, it is near to becoming an obsession. The Government has sought to control the increase in property prices, and I suspect certain individuals within Government see this as a confrontation with property developers, by increasing the rate of stamp duty. No doubt this will have the desired effect in that the vendor of a property will receive less from the sale of his/her asset, but of course the Government will see an increase in stamp duty revenue from each sale/transfer of property. However, let it not be forgotten that it is the Government that collects the land premium from developers. The land premium forms a substantial part of the developers’ construction costs, and hence influences the ultimate sale price of new flats and housing. The payment of the land premium is also indirectly responsible for the high rents payable in respect of residential and commercial property, as the owners of such properties seek a meaningful yield on their invested capital. I would also like to add that many Hong Kong residents, in the absence of any constructive and meaningful pension arrangement provided by the Government, purchase property as part of their retirement planning for either rental income or long-term capital growth. This behaviour is very far from the property speculation that the Government believes is rampant.
While on the subject of the need to increase the supply of property to manage the demand for flats, what is happening to the proposed development of Kai Tak (which ceased to be used as an airport 15 years ago) and the West Kowloon peninsula?
I look forward to John Tsang’s sixth budget this Wednesday, not so much in anticipation of any relief for corporate taxpayers, but rather in anticipation of assessing his ability to satisfy Hong Kong’s expectations as to whether the Government is wisely using the money it remorselessly collects from its residents.