What are the characteristics of a good tax system? Discuss the advantages and disadvantages of the introduction of a broad-based consumption tax in Hong Kong.

Authors Avatar

Q: What are the characteristics of a good tax system? Discuss the advantages and disadvantages of the introduction of a broad-based consumption tax in Hong Kong.

Introduction

From the fiscal year 1998 to 2002, Hong Kong recorded deficit budgets. The former Financial Secretary, Mr. Donald Tsang, projected that the deficit will continue for the next three years (ACNBT, 2001). To alleviate the situation, the Advisor Committee on New Broad-based Taxes (ACNBT) was established to consider and recommend new taxes for Hong Kong so that it can widen the tax base to increase its sources of tax revenue and fiscal incomes. In August 2001, the ACNBT distributed a consultative document titled “A Broader-Based Tax System for Hong Kong”. The ACNBT raised nine options for the new taxes. Among all of them, the “General Consumption Tax” was being highlighted as it could yield $18 billion tax revenue by imposing a 3% tax rate.

In this essay, I would like to first discuss the major characteristics of a good tax system. Then I will define what ‘broad-based consumption tax’ is. Finally, I will assess both the advantages and disadvantages of introducing this new tax in Hong Kong. In fact, in the essay, I am not intend to create any new idea, but just to argue against the introduction of the consumption tax in Hong Kong

Criterions of a Good Tax System

The basis upon which we judge whether or not a tax system can be considered desirable must include several factors. It is essential if a particular tax is capable of raising sufficient or required amount of revenue. A very narrowly based tax, such as one that applied only to Coca-Cola, would very likely to be ineffective.  By consuming Pepsi, people could easily avoid the tax. In this case, the revenues collected by the government might actually fall to zero even if the tax rate per each can of Coca-Cola were set quite high. Government, therefore, tend to rely on broad-based taxes to generate their needed income.

Another criteria of a good tax system lies on its fairness or equity. A tax system viewed by people as unfair, or evil, will be resented. Such a situation will not only make the job of government difficult, it can even lead to rebellion. Yet, it is better to have a flexible and dynamic tax system so as to ensure that they keep pace with technological and commercial development. For instance, taxpayers in Hong Kong can choose either pay by credit card, cheuqe or telephone.

Join now!

For a tax system judged be good, compliance costs for taxpayers and administrative costs for the tax authorities should be kept minimal. Meanwhile, The tax rules should be clear and simple to understand so that the taxpayers can anticipate the tax consequences in advance and knowing when, where and how tax is to be accounted.

There is much concern on equity in the tax system. A tax system, basically, is a major means of effecting redistribution. This occurs first by ensuring that taxes are raised in an equitable manner, and second by using the tax revenues on the ...

This is a preview of the whole essay