Thursday, October 11, 2007

The CE announces tax cuts.... big deal

Just yesterday, the Chief Executive announced that tax rates in Hong Kong are coming down.
From the news story today in the SCMP:

"Donald Tsang Yam-kuen announced that the standard tax rates for salaries and profits tax would be cut by 1 percentage point respectively to 15 per cent and 16.5 per cent from the 2008-09 financial year, which would cost the Treasury about HK$5 billion a year."

The standard tax rate discussed here has little effect on the taxes that most of us pay, since it is effectively the maximum average tax rate that a person may have to pay. Given the mildly progressive nature of HK's tax system (2% on the first 35,000 after exemptions, 7% on the next 35,000, 12% on the next 35,000, and 17% on the remainder) and the basic $100,000 exemption, the standard tax rate directly affects only those people earning more than $2,750,000 per year. The calculation is as follows:

Taxes paid under the progressive system on an income of Y are:
T(progressive) = 0.02x35,000 + 0.07x35,000 + 0.12x35,000 + 0.17x(Y-105,000-100,000)

Taxes paid under the standard rate are:
T(standard) = 0.16xY

Actual taxes paid are the minimum of these two equations; the former is lower for all incomes below 2.75 million. With only about 5,000 people in Hong Kong earning more than this threshhold, this tax cut alone will have no effect on most tax payers. So the announced cuts themselves are no big deal.

But the expectation is that there will be additional tax cuts- not yet announced- that will apply to the progressive tax system that affects a far larger number of residents. This can occur in one of two ways: reductions in the tax rates and/or increases in the threshholds at which the tax rates apply.

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