MobilIs Windfall Profits Tax an effective measure to broaden the tax base in Hong Kong? Introduction 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 Literature review 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 the Organization of Petroleum Exporting Countries was an a system of excise taxes — on domestically produced oil effective March 1, 1980. It is not a profits tax.
The tax was imposed on the difference between the market price of oil, which was technically referred to as the removal price, and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes. (Salvatore Lazzari, 2006) Besides the windfall profits tax imposed on oil companies by the US government, in 1981, the UK government imposed a special levy on bank deposits, partly on the ground that the banks were largely exempt from valued-added tax. Increases in land prices following the grant of planning permission have also been taxed.
In addition, a once-and-for-all direct tax on privatized utility companies imposed by the UK government in 1997. The companies affected were the water and electricity companies, British Telecommunications, Railtrack, British Gas, Centrica, the British Airports Authority and British Energy. Among different types of windfall profit tax, tax on oil company in US and UK will be focused. In the following passage, discussion about the windfall profit tax on oil company will be examined. Those supporting the imposition of windfall profit tax was mainly due to the reason of fairness.
Carter Administration (1980) proposed to impose windfall profit tax for fear that domestic oil industry would reap enormous revenues and profits as a result of the deregulation of price decontrol. The projected huge redistribution of income from energy consumers to energy producers would not be fair. Barack Obama (2008) called for a windfall profits tax on oil companies for the similar reason, “it isn’t right that oil companies were making record profits at a time when ordinary Americans are going into debt trying to pay rising energy costs. Brendan Barber, Trades Union Congress leader (2008) supported windfall profit tax in hopes of attaining fairness too, “It’s not fair that employees are facing a fall in their living standards while top bosses see their pay packets go up by 20% or even 30%. ” It is unfair not only due to uneven distribution of profit, but also due to unequal rate of tax being paid. The Congress (1980) thought that the oil company were not paying their fair share of federal tax due to the availability of industry tax deductions.
Similar situation happens now with different reasons. “Exxon Mobil’s average effective tax rates are roughly half the 35 percent tax rate that currently stands as the high-water mark for American corporations. Meanwhile, Exxon Mobil and other big oil companies continue to exploit tax loopholes for nearly $4 billion in subsidies each year… ” “More striking still is the discrepancy between Exxon Mobil’s rates and those of most American breadwinners. The company’s effective rate of 17. percent is nearly 16 percent below the average individual federal tax rate, which according to the Congressional Budget Office was 20. 4 percent as of 2007. ” (Seth Hanlon, Daniel J. Weiss, and Tony Carrk, 2011) Although windfall profit tax can attain fairness, there are opposition to it. People believe that oil companies has already paid for high profit tax. “These companies are already highly taxed and they have to make enormous investments if we are going to have a secure supply of energy over the next 10 years. said Confederation of British Industry (CBI) director, Richard Lambert (2008). Also, opposers believe that it will harm the competitiveness of the country. The WPT had the effect of reducing the domestic supply of crude oil below what the supply would have been without the tax. This increased the demand for imported oil and made the United States more dependent upon foreign oil as compared with dependence without a WPT. Nevertheless, oil price decontrol, by increasing prices should have increased domestic production and made the U.
S. less import dependent. (Salvatore Lazzari, 2006) Apart from weakening the local oil industry domestically, it also worsen the investment environment. Laura Schmidt (2008), a spokeswoman for the Association of Electricity Producers, which represents the energy companies, told BBC Radio 4’s The World at One, “A windfall tax would be a very bad way of addressing the fuel poverty issue because it’s a very short term measure that risks really damaging the relationship between government and businesses. “And [it] would also send a bad signal to companies that are contemplating about ? 100bn investment in the energy industry in the UK. ” Richard Lambert (2008) said windfall taxes were “almost always the wrong thing to do”. “The one thing not to do would be to make these companies think the UK is not a stable, predictable and fair investment climate. ” From all of the above literature, we can see that windfall profit tax is effective if it is fair and it can enhance competitiveness of the country.
By examining the situation in US and UK, to a large extent, windfall profit tax can attain fairness. Yet, it seems not to enhance the competitiveness of the country. Objectives of the study To explore the effectiveness of raising Windfall Statement of hypotheses Assumption for Hong Kong: e. g. open economy… Procedures/ methodology Time schedule/ action plan Reference 1.