My preference is to finance universal pensions from a tax on consumption (goods & services tax), because that is a tax that everyone pays. In fiscal 2009-2010, of the working population of 3.5 million, only 1.4 million paid any Salaries Tax. My previous suggestion for surtaxes on these returns implies that the vast majority of Hong Kong workers would contribute nothing the pension scheme. This makes it less popular for those who pay the taxes that finance the benefit.
So, here is another idea: a direct tax that mimics a consumption tax. Suppose we collect the necessary revenue from the standard deduction for individuals and dependent spouses, which is HK$120,000 each. Allowances for children and other deductions will not be affected.
Recall that option #3 ? a universal Old Age Living Allowance (OALA) of HK$2,200 (US$284) a month for those 65 and older ? requires HK$8.4 billion a year of additional tax revenue. Option #4 ? a universal OALAA of HK$3,000 (US$387) a month ? requires an additional HK$17.8 billion of tax revenue.
What rate of tax is required, then, from the previously zero-rated HK$120,000 band to generate this amount of revenue? I do not have access to recent, full data, so my estimates will be very conservative. The actual required rates of tax (contribution) will be lower.
All wage earners, no matter how low their income, will have to file and pay Salaries Tax, at least that part that is earmarked for finance of the Old Age Living Allowance. From the 2009-2010 figures, we can assume that at least 1.4 million workers earn salary income in excess of the standard allowance of 120,000 Hong Kong dollars (HK$240,000 for those with dependent wives). Another 2.1 million earn some income but less than the standard deduction. Let us ignore dependent wives, since we have no information on their number, and assume also that the 2.1 million who do not pay any Salaries Tax have incomes that average only HK$60,000, slightly more than a minimum wage.
With these conservative assumptions, the tax rate needed for option #3 (universal pension of HK$2,200) is less than 3%. The tax rate for option #4 is 6%. The maximum tax (contribution to the OALA fund) for an individual would then be HK$3,600 a month for option#3, and HK$7,200 a month for option #4. Those with salary incomes lower than HK$120,000 would pay less. Those with dependent spouses would pay more, but dependent spouses are also entitled to a universal pension when they reach age 65, even if they have never worked in paid employment.
This a broad tax, payable on the very first dollar of salary, so adds to the political appeal and sustainability of a universal pension. Because of its broad base, it mimics a tax on consumption. For political reasons, this tax (contribution) should required even of taxpayers with large salaries who pay a flat 15% tax in lieu of deductions.
Tags: China
Source: http://larrywillmore.net/blog/2012/11/14/financing-hk-pensions-a-final-suggestion/
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