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Following is a question by the Hon Emily Lau and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (February 25):

Question:

According to the findings of Population Censuses, the Gini Coefficients (Income) for Hong Kong in 1991, 1996 and 2001 were 0.476, 0.518 and 0.525 respectively, reflecting a growing disparity in household income during the period. In this connection, will the Executive Authorities inform this Council whether:

(a) they have assessed if the above trend has continued after 2001; if so, of the assessment results; if not, the reasons for that;

(b) they plan to compute and publish the Gini Coefficient (Income) more frequently or adopt other indicators, so as to enable an accurate grasp of the trend of disparity in household income; if not, of the reasons for that;

(c) they have assessed the effectiveness of the current tax policy in alleviating the disparity in after-tax household income; if so, of the assessment results; if not, the reasons for that; and

(d) to narrow the disparity in after-tax household income, they have any plan to abolish the standard rate for salaries tax and increase the progressivity for direct taxes; if so, of the details of the plan; if not, the reasons for that and other alternative measures in place?

Reply:

President,

My reply to the question is as follows:-

(a) The Gini Coefficients for Hong Kong in 1991, 1996 and 2001 are compiled on the basis of the data collected from the Population Census/Population By-census in the respective years. As such, the coefficient cannot be updated until the next round of the Population By-census to be conducted in 2006. This notwithstanding, we can still assess in broad terms the income disparity situation in Hong Kong in the past two years, based on the household income data collected from the General Household Survey.

The statistics show that the median monthly household income for all domestic households in Hong Kong continued to decline, from $18,000 in 2001 to $15,500 in 2003, or by 13.9% over this two-year period. When these households are classified into 10 different decile groups according to their monthly household income, it is observed that households in the top three decile groups and in the lowest decile group both recorded a 5 - 6% reduction in median monthly household income between 2001 and 2003. Households in the second and third lowest decile groups, as well as those in the fourth to seventh decile groups however experienced larger decreases in median monthly household income, by 15 - 17% and 11 - 12% respectively.

Thus households at the lower to middle segments of the household income distribution generally had a larger reduction in household income, amidst the economic downturn over the past couple of years.

For households in the lowest decile group, a relatively larger proportion of them received financial assistance under the Comprehensive Social Security Assistance (CSSA) Scheme. Furthermore, the majority of the household members in these households were economically inactive (e.g. older persons and retirees), and their monthly income was thus little affected by the slack labour market conditions. For these reasons, the monthly household income for this particular decile group exhibited a lesser decline between 2001 and 2003.

As to households in the lowest second and third decile groups, a relatively greater proportion of the household members comprised unskilled workers and those with lower secondary education or below. Their household income generally registered the largest decrease over the past two years.

Relatively speaking, households in the fourth to seventh decile groups had a larger proportion of persons engaged in middle-ranking jobs and with educational attainment up to the upper secondary level. Their household income likewise fell noticeably over the past two years. Thus, as a general observation, persons engaged in unskilled and semi-skilled work and with secondary education or below had been harder hit by the recent economic downturn. As a result, these people generally had a larger reduction in income.

As regards households in the eighth to tenth decile groups, their household income showed a smaller decrease. This could be due to the fact that more members in these households comprised persons engaged in management or professional jobs and with post-secondary or tertiary education.

Generally speaking, income disparity between workers at the lower and upper segments of the occupational hierarchy should have widened between 2001 and 2003. This had much to do with the recent restructuring of the Hong Kong economy more towards higher value-added and knowledge-based activities, which in turn led to a further shift in labour demand in favour of better educated and higher-skill workers. Under such circumstances, the lesser educated and lower-skill workers found greater difficulty in seeking or changing jobs. They would be in a worse plight, if the economy happened to be in a downturn, bringing about more corporate downsizing, lay-offs and salary cuts. This is what happened in the second and third quarters of 2003. Fortunately the situation has turned for the better since then.

(b) The Gini Coefficient is a statistical indicator commonly used for measuring the degree of income disparity. As this indicator is heavily affected by the distributive pattern of the highest and lowest income households, its compilation has to be based on the Population Census/By-census, which has a much larger sample size, for ensuring better accuracy.

The Population Census/By-census is conducted at five-year intervals. Accordingly, the Gini Coefficient is compiled in the same frequency. This notwithstanding, we can still carry out a broad and more frequent assessment of the changes in household income disparity, by reference to other statistical indicators. Amongst them, the median monthly household income by decile group and percentage distribution of monthly household income by decile group are the more commonly used indicators. They can be compiled from the data collected through the continuous General Household Survey, for regular assessment purpose.

(c) & (d) At present, the tax revenue of Hong Kong is mainly contributed by people with higher income and enterprises with profits. Government revenue from profits tax and salaries tax accounts for 40% of the overall revenue, or nearly half (48%) of the recurrent revenue. These two kinds of taxes together meet some 37% of the Government's recurrent expenditure, including expenditure on education, health and social welfare services, etc. Compared with other places in the world, Hong Kong relies very heavily on direct tax.

Of the some 3.2 million working population in Hong Kong, only 38% (about 1.2 million) need to pay salaries tax at the moment. A great majority of low income earners do not come into the tax net. This is because our salaries tax system provides many allowances which are set at a high level. As a result, over 60% of our salary earners do not need to pay salaries tax. Even after the implementation of the two-phases of adjustments proposed in the Budget last March, our major allowances such as basic allowance ($100,000 each year), married person's allowance ($200,000 each year), child allowance ($30,000 per child each year) and dependent parent allowance under our salaries tax system remain at a very high level. Take a married person with one child and one dependent parent living with him as an example, he has to earn more than $290,000 a year (or more than $24,167 a month) before he needs to pay salaries tax. As for taxpayers with annual incomes of $200,000 to $300,000 (i.e. monthly incomes of $16,667 to $25,000), the average effective tax rate is merely 3.4%. Take personal allowance (i.e. the basic allowance in Hong Kong) as an example, the level of personal allowance of Hong Kong is obviously higher than that of the following places in the world: Japan (personal allowance is ¥380,000, i.e. about HK$28,000), Singapore (personal allowance is S$20,000, i.e. about HK$92,000), United Kingdom (personal allowance is £4,615, i.e. about HK$68,000) and United States (personal allowance is US$4,750, i.e. about HK$37,000).

For profits tax, as few as 500 corporations, i.e. only about 1% of the total number of profit-making corporations, contribute 60% of the profits tax. Most of the small and medium enterprises only pay a small amount of tax or pay no tax at all.

Hong Kong has been pursuing a simple and low tax policy. Our salaries tax rates (be they marginal tax rates or standard rate) and profits tax rates are in general lower than those of many other places in the world. This is conducive to attracting investors to invest in Hong Kong, which in turn enables our economy to thrive and raises the income level of the community as a whole.

The above information shows that our direct tax system is in fact very progressive. A substantial share of the taxes is borne by people with higher incomes or profit-earning enterprises. We do not consider it appropriate to make fundamental changes to this well-established simple and low tax regime.

Ends/Wednesday, February 25, 2004
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