Course : CAES1906-G Name : Chan Ting Hong (Isaac) UID : 2010213837 Title : The Implementation of Goods and Services Tax : Destructive Effects Outweigh Benefits

The issue of whether the government should implement Goods and Services Tax (GST) has been a hot debate in Hong Kong. The government stress that the tax will help broaden the tax base and secure the sustainability of tax revenue (Mak, 2006). They have also cited some examples from countries all over the world which have already imposed GST such as most of the Organization for Economic Cooperation and Development (OECD) countries and Pacific Asian countries (Yu, 2002). In spite of these, after considering the social context and environmental factors, the tax should not be imposed in Hong Kong since it will cause social discontent, hurt the economy and have low cost-effectiveness.

First, social discontent will arise as a result of the implementation of GST. The GST is renowned for its regressivity, which is attributed to a widening effect on income disparity (Kato, 2003). Income disparity, which can be measured by Gini Coefficient,

is an important social issue in modern cities (Callig, 2007). High degree of income gap is a serious socioeconomic problem, which will eventually lead to social discontent as the underprivileged cannot get their deserved treatment in society and may become highly unsatisfied. In extreme cases, social upheaval will break out. Currently Hong Kong is a place where Gini Coefficient measured in 2006 stood a record high of 0.533 (Economic Analysis Division, 2007). When compared internationally, it is among the highest, even as high as those in third world countries (Pang & Lau, 2007), therefore we cannot tolerate further increase in the figure. The government, who are aware of the problem of regressivity of GST, claims that they will offer offset packages to alleviate the grass-root population by transferring income from the rich to the poor, but it will only induce a series of problems regarding how they can receive the benefit. For example, when the government set up social welfare, they are obliged to direct the assistance to those in need only but not the others. However, mechanisms to guarantee this will get very complicated and contribute to loss of efficiency (Robert, 2005). Failure to handle these well will result in adverse effects or even public outcry.

Apart from social aspect, the implementation of GST will have negative effect on the economy by causing inflation. Internally, such inflation will decrease domestic

consumption (Koskela & Virén, 2007). This is because local citizens who have their real income decreased will spend less. Consumption, which is one big factor in determining the gross domestic products (GDP), will affect the business sector greatly because it supports their normal operations and gives lives to them (Liu, 2008). If low consumption lasts for a long time, many companies cannot stand the decline in profits and may resort to closure (Schwartz, 2009). The long economic recession in Japan is an illustrative example showing the consequence of the tax levy (Amadeo, 2009). Externally, inflation has the negative effect on tourism. The apparent drawback will be the loss of the reputation of "shopping paradise" where tourists can find cheap and quality goods. If products and services become more expensive in Hong Kong, it will be much less attractive for tourists to come and spend (Belsley, 1976). Although the government may offer refund of tourist spending, the procedure is complicated and inconvenient for them. Therefore, it is foreseeable that GST will impair the economy internally and externally.

Low cost-effectiveness is another important criterion. Although GST provides the government with extra income, the costs in implementation and administration outweigh the benefits (Tran-Nam, 2001). GST is rather a new concept in Hong Kong and most local businesses are unfamiliar with it. Thus, the government has to explain

to the public about the implementation details of the GST. Not only does the government require resources to carry out this new policy, but the companies also need time and efforts to comply with it (Lang, 2008). Also, an ethical issue concerning equality will be created from the evasion of tax. How the government can analyze millions of transactions completely and make correct taxations is a difficult question. Some people doing business will find their way to evade the tax by going underground (Pyle, 1989). To achieve the principle of equality, the government should impose stricter measures to ensure every taxable company is being taxed. Therefore, the government will have to face the tradeoff between tax evasion and administrative cost (Berhan & Jenkins, 2005). Furthermore, the aforementioned offset packages are yet heavy costs. While their efficiency and effectiveness are still questionable, the launching cost has already been too high.

All in all, the legistration of GST will only do more harm than good. The regressivity of the tax will widen income disparity and put more pressure on low-income population. The local economy will suffer internally and externally by the effects of anticipated inflation. The low cost-effectiveness should signal the government the involved costs and burden for both themselves and society. Nonetheless, the government should not stop searching for a better way to broaden the tax base. More

innovative answers, such as the feasibility of an environmental tax (Kay, 1979), should be further studied for the sake of a facilitated taxation system and a better future in Hong Kong.

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