Is Windfall Profits Tax an effective measure to broaden the tax base in Hong Kong?
Statement of the problem(s)
Comparing HK tax base with the international level
Stating the influence of narrow tax base
Specifying the need to broaden tax base
Rationale behind broadening the tax base should be in line with taxation principles. To look at the effectiveness of the windfall profits tax, we should first look at the taxation principles. The principles of taxation have long been mentioned in hopes of creating an excellent system of taxation. Firstly, fairness is an important principle. Adam Smith (1776) who was a pioneer of political economy claims that the subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The British House of Commons further supported his claim. “The two basic principles raised by almost all of our witnesses were the fairness of taxation …” mentioned in the eighth report of session 2010-2011. In 2004, European Commission defined fairness. According to the Common Consolidated Corporate Tax Base (CCCTB), tax base should be vertically and horizontally equity. Vertical equity means that the burden of taxation should be shared in accordance with taxpayers' respective ability to pay, sometimes referred to as 'the ability to pay' principle. While horizontally equity means that taxpayers in the same economic circumstances should receive equivalent treatment. Secondly, generating positive effects on economic performance would be another principle of taxation. “Responsible tax policy means paying attention to incentive effects and maintaining low marginal tax rates (Diamond and Mirrlees 1971; Bankman and Griffith 1987). Organisation for Economic Co-operation and Development (OECD) (2010) explained further that tax system played a crucial role … The level of the taxes that were raised, the tax mix, the quality of the tax administration, the complexity of the tax rules and the tax compliance costs, the certainty and predictability for households and businesses of the taxes that had to be paid, the network of tax treaties as well as the specific design characteristics of individual taxes including the availability of tax incentives and the broadness of the different tax bases could have an impact on the country’s rate of economic growth. While the Chartered Institute of Taxation (2011) suggested that competitiveness meant far more than tax rates that were comparable than our competitors. It meant that the system must deliver the certainty and operate in a business-friendly way. Thus, fairness and competitiveness would be the criteria determining the effectiveness of the windfall profits tax. After looking at the taxation principles, lets look at the concept of windfall. Windfall profit is temporary earnings derived quickly and unexpectedly because of a non-controllable event by an individual or business. It is a one-time occurrence. An example is a sudden surge in the value of real estate held by a company or household. Another example is a huge profit derived by an oil company because of a sudden oil embargo by Middle Eastern countries. A further example is the sudden death of a parent leaving a sizable estate to a daughter. (Dictionary of Economics, Wiley, 1995) Generally, windfall tax is any tax imposed on persons or organizations deemed to have benefited from external events outside the normal course of their economic activities. The justification is generally made on the ground that the taxpayers have benefited unfairly from gains that are due to society as a whole. (The Penguin Dictionary of Economics, 2003) Specifically, in US, windfall profits tax imposed on oil companies following the sudden increase in oil prices by...
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