Hong Kong is renowned worldwide for its simple tax system, yet its former colonial power, the United Kingdom, has taken a completely opposite path. The Institute for Fiscal Studies (IFS) criticizes that the latest budget not only failed to simplify the tax system but instead made it more fragmented, harder to understand, and more challenging to determine who ultimately bears the tax burden.
First, consider income tax. The current tax rates in the UK are clearly divided into three brackets: 20%, 40%, and 45%. For many years, salaries, rents, and interest have all been taxed progressively at the same rates. While this system is not ideal, at least the calculations were straightforward. The new system, however, imposes an additional 2% tax on rents, interest, and dividends, while salaries and pensions remain unaffected, and capital gains tax (CGT) retains its original two-tier structure. This appears to be a mere adjustment, but income tax in the UK is calculated not by type of income but by ‘total income’ filling the tax brackets progressively. Once a certain type of income is taxed, the entire structure shifts, making calculations increasingly convoluted.
Take an example to illustrate this confusion: an individual earns a salary of £40,000 and has an additional £20,000 from rents, interest, and dividends. With a total income of £60,000, the salary fills the basic tax bracket first, meaning that the £20,000 must be split into two segments: the portion within the basic tax bracket is taxed at 20% + 2%, while the portion within the higher tax bracket is taxed at 40% + 2%. Interest adds further complexity, as the tax-free allowance depends on total income, which could be £1,000, £500, or even £0. When income reaches £60,000, only £500 remains, which must first be deducted as exempt before recalculating within the tax brackets. Dividends already have their own tax rates (8.75%, 33.75%, 39.35%), and now face an additional uniform 2% tax, intertwining with other income taxes; CGT is calculated separately at either 20% or 24%. The result is that the same sum of money may traverse multiple tax brackets, apply various rates, and deduct different allowances. Even local taxpayers find this bewildering, let alone foreign investors.
Next, consider the mansion tax. The UK originally had only one local property tax, the council tax, which, while based on outdated valuations from 1991, at least constituted a single system. The government has now introduced an additional mansion tax alongside the old system, effectively operating two separate logics: the old system based on outdated valuations and the new system based on current market value. This has significantly increased administrative costs and further complicated the system, yet it does not address the real issues. Why not take this opportunity to conduct a comprehensive revaluation and modernize the council tax into a clear property tax that reflects current property prices?
The tax system becomes increasingly fragmented, and the root cause is not technical but political. Politicians lack vision and courage, fearing to confront entrenched interests and offend voters, opting instead for seemingly light measures that complicate the system further. As a result, direction is lost, principles are abandoned, and the system becomes more chaotic. Even basic tax matters require expert decoding, making discussions about attracting foreign investment and promoting growth seem futile.
