» » » Zapping Economic Growth with a Sales Tax

Zapping Economic Growth with a Sales Tax

posted in: Weekly Commentary | 0
Save pagePDF pageEmail pagePrint page

By Lowell L. Kalapa

There is trouble brewing in the shopping paradise of the world, Hong Kong, as political leaders contemplate the imposition of a sales tax.
Rocked by SARS and its impact on its tourism trade as well as a plummet in income from land sales and development, Hong Kong officials are looking for sources to shore up its $27 billion revenue budget. Aside from taxes on land sales, Hong Kong relies on income taxes to pay for its public services. With nearly half of its 6.7 million residents employed, the income tax has been a mainstay for the former British colony.
But Hong Kong is known for its visitors. And some 14 million visitors make that island their destination every year. While many come to do business in this special administrative region, most come for shopping. Adding a sales tax to all those purchases would indeed raise a lot of money. It is estimated that a 3% sales tax would raise just over $2 billion annually.
However, the majority of the residents aren’t happy about the prospect of a sales tax. In fact, a recent poll showed that 45% of the respondents would choose an increase in the income tax while only 34% would be willing to accept a tax on the sales of goods and services. The remaining 21% of the respondents remain undecided.
Much of the financial woes of Hong Kong stem from the fact that a number of major capital improvement projects have been undertaken in recent years at a time when economic fortunes were soaring. Figuring that the turnover of the former British colony to the Chinese, who established Hong Kong as a special administrative region, would spur new investment, government officials forged ahead on major capital projects.
However, instead of the handover being an economic stimulus, just the opposite occurred. The financial markets went into a tailspin while investors moved their capital offshore to what they considered safer political environments. But Hong Kong was left with the burden of completing some major infrastructure improvements, a new and badly needed airport, extension of its mass transit system, and major landfills of Victoria Harbor.
According to a number of observers in the business community, much of the spark that made Hong Kong the greatest capitalist city of the world has gone out of Hong Kong. Whether it is due to the political transition or that much of the national spotlight has shifted from Hong Kong to Shanghai is anyone’s guess. However, it does not help to be saddled with mounting debt while trying to spur the economy.
As one business observer noted, it makes little sense to impose a sales tax on what has been the major attraction for Hong Kong’s visitor industry. Further, given all of the back street vendors that are so common in Hong Kong, administration and compliance would be almost impossible.
A lesson for us here in Hawaii is to make sure that the economy is strong enough to support all of our wish lists. As we have learned over the past decade, there is a bottom to the barrel when it comes to taxes and those taxes run out sooner when the economy is not doing well. Imposing fees and user charges is no different from imposing taxes. Fees and user charges hit a select few rather than the population at large, but the impact hurts all of us, both residents and visitors alike.
More importantly, more government programs do not cure the economic malaise. If the economy is to grow, government must get its meddling fingers out of the pot and let the market dictate when and where the economy will grow. That not only means revising the maze of regulatory hurdles so that they don’t present barriers, but it also means not handing out subsidies in the form of tax credits for select businesses. Those targeted tax credits and exemptions do nothing more than make a financially unfeasible project get off the ground only to fail or leave the state when its owners realize that without the subsidies they cannot survive in the draconian business climate for which Hawaii is so well known.
While the political environment in Hawaii is far more stable than that in Hong Kong, the economic challenges are remarkably similar. Attracting new investment to a region where government meddling has investors wary of putting their limited capital where there is little guarantee of return on investment is the lesson to be learned and remembered. Without a strong and vibrant economy, government will not have the resources it needs to provide the services its people need.

Leave a Reply