Introduction
Taxation is known to be one of the most popular channels of raising money to fund government operations viewed to be of the common good of all citizens. Governments all over the world tax various economic activities depending on the circumstances facing the country. Some of the common areas of taxation include; profits, transfer of properties and individuals incomes. The success of any taxation program is gauged on its ability to ensure there is maximum tax revenue received by the tax authority. Tax compliance thus becomes the key issue here. Tax compliance refers to the level at which a given population has managed to follow the tax stipulations as developed in the tax laws (Wenzel, 2002, p. 56). In planning and developing national tax schemes, government need to consider the willingness of the public to pay the taxes; else enforcing the taxation may be an exercise in futility. This paper assesses the salary taxes in Hong Kong in relation to those in the US giving a close analysis to the willingness of the respective citizens to pay up for the taxes (Adam,& Ginsburgh,1985, p. 34).
Hong Kong Tax System
The personal income taxes in Hong Kong also known as salary taxes are known to be some of the lowest in the world. Individuals are only supposed to pay taxes on annual employment income. Other incomes such as dividends, rental incomes and gains from the sale of shares are not included in determining the taxable incomes (Zhu, 2004, p. 72). Income from employment includes; wages, bonuses, salaries, commissions, pension funds as well as gratuities (Gaertner & Wenig, 1985, p. 442). The Inland Revenue Ordinance governs salaries tax. The progressive tax rates range from a low of only 2% to a maximum of 20% (Wenzel, 2002, p. 59). When the assessable income falls between nil to HKD30000, the tax rate is a dismal 2%. For the range between HKD30000 to HKD30000 to HKD60000, the tax rate is 8%. For incomes above HKD60000 but below HKD90000 the rate stands at 14% while anything above HKD90000 is taxed at a rate of 20% (Zhu, 2004, p78). These low taxes attract people from all over the world who wish take advantage and in the process earn more for themselves by paying less to the government (Andreoni, & Feinstein, 1998, p. 234).
Most importantly tax in Hong Kong is not deducted at source as is the practice in many other countries including the US. Instead, the employees are allowed to assess themselves at the end of each fiscal year. This through an income declaration form provided through the employer (Gaertner & Wenig, 1985, p. 445). For those who are self-employed, there exist provisions for personal assessment. The tax system in China is regarded as very simple in comparison with the rest of the world (Adam, & Ginsburgh, 1985, p. 452).
American Tax system
In the US, the taxation is also progressive for individuals. However there are differences in administration as some states and municipalities impose extra taxes on top of those due to the central government. The tax system in the US is very complicated mainly due to the fact that it serves a much wider variation of people as well as interests. However, the underlying idea is quite simple. It seeks to tax the difference between gross income and exclusions. Gross incomes refer to the combination of all taxable incomes (Gaertner & Wenig, 1985, p. 449). Exclusions refer to any item which Congress expressly states that a taxpayer should not be taxed for. Two main examples for such exemptions are health insurance premiums paid by the employer and interest earned from bonds which are listed as tax exempt. The intention is to boost the level of growth in some of the sectors depending on the goals of the government. The individual’s adjusted gross income is calculated as the gross income less the allowed deductions as stipulated by the different acts enacted by the congress (How America Pays Taxes vs. Other Wealthy Countries, 2010, para.8).
Differences causing taxpayer participation
There are also differences when a person is taxed as a single person, as a couple, a married person filing separately or as a head of the household. All this complexities seek to make the tax system as sensitive as possible to the different circumstances facing the taxpayer. According to the revised figures for 2008, as the minimum tax rate for personal income tax is 10% and the maximum is 35%. A single person earning $0-8025 pays 10% tax same as a married person filling separately but the limit is extended to $16050 for a person filling jointly in marriage or with a qualified widower. For the case of a head of household, the 10% tax applies for someone earning $0-$11450. These different categories are taxed differently progressively. It is however important to note the very high rate of taxation imposed by the American system. The lowest marginal rate of tax is a whooping 10% while the cap is put at 35%. This is unlike the Hong Kong rates which start at a paltry 2% with a maximum of 20% (Thomas, 1992, p. 45).
As has been mentioned above the success of a country in ensuring the compliance of the tax system is of great concern for authorities. The enforcement agencies are charged with the responsibility of ensuring that the citizens comply with the tax laws designed to not only collect revenues from them to fund operations but also to control the economic activities (Wang, 2003, p. 86). Within the stipulations to be followed in the process of paying taxes, there are penalties provided for anyone who flaunts the stipulations (Torgler, & Murphy, 2004, p. 89). The importance of this is to ensure that the people do not go against the provisions. It is however true that the success of any program with social implications is hedged on the ability of the people affected to fully accept the proposals and be willing to cooperate with the relevant agencies to ensure that the program is a success (Andreoni, & Feinstein, 1998, p. 236).
This being the case, the most important determinant for compliance is the willingness of the people to pay the tax. This willingness is also referred to as tax morale. By definition, it is the moral obligation bestowed on an individual to pay taxes as per the regulations or the personal belief in the fact that one should contribute to the society through paying taxes. In countries where the level of tax morale is high, the level of compliance to tax provisions is also very high. Similarly, in countries where the morale is low, the level of tax compliance is also very low (Thomas, 1992, p. 45).
There are numerous factors which contribute to the level of tax morale among nationals in any given country. Generally, western developed countries have high tax morale in comparison to other regions. This enables them to tax their nationals highly to fund expensive government projects while at the same time maintaining social as well as political calm. Therefore, the best way to avoid or minimize cases of tax evasion is understand the level of tax morale and be willing to take measures to boost it in a bid to ensure that it is at par with the tax requirements of the given country. Hong Kong has relatively low tax morale in comparison to the USA (Feige, 1989, p. 12).
The tax morale in a country depends on numerous factors. The first is the level of income in the country. In a country with high incomes, research has proven that the people feel more obliged to pay taxes. This is based on two fundamental issues. First is the fact that people a good percentage of the people have adequate incomes to sustain themselves even after tax deductions (Feige, 1989, p. 12).
They therefore do not see the tax element as one which curtails their life. Secondly, they have an understanding that it is the government which offered the appropriate environment for the activities which led to the incomes to occur. Despite the excellent economic performance Hong Kong is still a lower income country in comparison to the US. This implies that despite the fact that the tax rates are lower in Hong Kong, than the US, citizens in US are still more willing to pay taxes than those in Hong Kong.
The second most important fact is issues involving the performance of the government receiving the taxes (Torgler, 2004, p. 56). Taxes are always better appreciated in countries where the government spends the public money well. When the government is able to prove efficient use of money for the benefit of the people then it gains the moral obligation to justifiable receive the money. The US government is known world over for having some of the best use of public money. Cases of corruption and misuse of funds are minimized in the US (Mars, 1994, p. 45). This history has given confidence to the population hence increasing the level of trust among the people. Hong Kong may be adopting efficient public management but the historical aspects do not favor the country. Issues of freedom and democracy come in here (Torgler, 2004, p. 56). In a country where the basic tenets of democracy and freedom are observed, the people feel obligated to contribute as opposed to cases where the government is bent towards suppression. This is because the people harbor feelings of exploitation by the elite. More importantly countries such as the US understand the enormous responsibilities which face them and thus the need to contribute to fulfill the extra burden faced by the US as a global leader in most of the frontiers (Mars, 1994, p. 45).
Fairness is a fundamental aspect in enhancing the willingness of the citizens to pay tax. A tax system which is perceived to be unfair diminishes the morale of the taxpayers. For example if a married person feels hurt by the tax system due to his marital status, then there are possibilities of him/her pretending not to be married so as to reduce tax liabilities albeit illegally. Indeed people can get extremely sensitive to unfairness within the tax system (Cowell, 1990, pp. 7-10). As has been described above, the US tax system is developed in a much more comprehensive way to ensure that it is fair to all. There are special considerations on whether the person making tax returns is married or not: whether the married person is making returns alone or together with the wife or husband. The implication is that everyone feels catered for in the tax program as opposed to a case whereby the tax authority applies a blanket income tax program. People with special situations are treated differently regarding their circumstances (Wang, 2003, p. 89). The Hong Kong system on the other hand is simple and applies a fairly high level of generalizations in the calculation of the salaries tax. It takes little regard to the different circumstances facing the different people across the country tax (Torgler, & Schneider, 2002, p. 52). There are thus possibilities of some sections of society feeling discriminated against hence opting to take the illegal route of evading taxes.
Tax administration is also an important element of enhancing tax morale. The US tax administration structure is well developed and has limited loopholes for exploitation by people unwilling to pay taxes. Personal income taxes are deducted at source as opposed to the system in Hong Kong where the individual is allowed to personally assess himself and pay the appropriate tax (Torgler, & Schneider, 2002, p. 56). Taxing incomes at source reduces chances of cheating and increases the chances of netting evaders. This acts as a deterrent measure. This is a big contrast to the Hong Kong system where the person is at liberty to make tax returns based on own assessment. Despite the controls in place, there is greater temptation to make false returns in such an open system as opposed to the tight American system (Tanzi, 1982, p. 67).
Still on administration and governance issues, the US has a more efficient legal structure. This ensures quick expedition of disputes relating to tax administration. The fact that the people understand that they are not able to easily get away with tax violations means that they are less tempted to engage in violations of the tax laws (Tanzi, 1982, p. 67). The American legal system is much more independent and competent in comparison to the case of Hong Kong meaning that it may be easier to get away with a violation in Hong Kong than in the US (Simon, & Witte, 1982, p. 34).
Simon and Witte (1982) conducted a study of relationships between tax authorities and the taxpayers. They found out that the way authorities charged with the responsibility of administering taxes treat the taxpayers has direct implications to the tax morale of the citizens. It is akin to the element of customer care in a company (p. 45). If the tax authority treats their clients with a positive attitude and objectively with a human face, then it will be easier for the taxpayer to adopt a positive attitude towards the payment of taxes. Instead of harassing the taxpayers and accusing them of tax evasion it is always better to enquire on the reason for the mistakes done on the tax returns (Posner, 2000, p. 34). Such a mutually respectful relationship makers the customer see the need to improve their morale. The study concluded that cultivating an environment of mutual respect, responsibility and cooperation is the sure way of improving tax morale and tax compliance in any given country. Force and harassment are the least effective enforcement methods (Cowell, 1990, p. 3). They should only be employed as a last option. The American tax authorities cannot be said to be the most respectful authorities but a comparison with the case in most of the eastern countries shows that they are still ahead. The authorities in the US only accuse a person of tax evasion when there is proof that the discrepancies in the tax returns were made intentionally U.S. (Federal Individual Income Tax Rates History, 2010, para. 4). This is usually after a thorough analysis of the relevant entries and possible areas of cheating. The Hong Kong tax authorities may be among the best in the region but still fall way behind the American authorities (Reckers, & Roark, 1994, p. 65).
Conclusion
The above analysis shows that the American tax system is not only superior to that of Hong Kong, but also ensures greater levels of morale among the citizens. Issues of fairness, tax administration and enforcement are better executed in the American system than in the Hong Kong tax system. Again, the US has better socio-political environment which enhance elements of patriotism as opposed to Hong Kong. In fact it is very clear that many of the people working in Hong Kong have left their home countries in search of low taxation. It is this kind of people who are more likely to engage in cheating as they try to make tax remittances even lower.
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