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4 The Governor Goes Native: 1947–1952 Introduction The Hong Kong government had originally intended the Inland Revenue Ordinance 1947 as a temporary measure, to remain in force for only a year or two pending the introduction of a normal income tax. By the time the Ordinance was enacted, however, it was already clear that it would have to remain in force for rather longer and by 1952 it had become evident that it would remain in force indefinitely. The stalling of reform was due to a combination of factors. First, for all its flaws, the Ordinance had one great redeeming virtue: its yield was greater than the government had expected. Consequently, the government almost immediately found itself operating at a surplus and continued to do so, almost every year, for the rest of the colonial period. As a result, it speedily paid off its alleged debt to Britain and went on to accumulate enormous reserves. The size of these varied considerably, but they frequently exceeded the government’s total annual spending. Thus, although the Colony’s financial secretaries continued to worry about the lack of a normal income tax for another thirty years, there was never any pressing financial need to establish one. Secondly, the British government did not insist on the establishment of a normal income tax. As soon as it became apparent that the Ordinance would easily enable Hong Kong to discharge its indebtedness to Britain, the British government lost interest in the Colony’s tax system. The British government was also, in the immediate post-war period, preoccupied with more pressing matters than the technicalities of tax reform in Hong Kong. Further, those in London tended, when they turned their minds to tax reform in Hong Kong at all, to focus simplistically on the rates of tax and to overlook the fact that a radical overhaul of the system’s basic structure would be necessary before it would be possible to effect substantial increases in the rates of tax. Moreover, Arthur Creech Jones, the Secretary of State for the Colonies, lost his seat in Parliament in 1950 and his successor, James Griffiths, was a less effectual politician. In 106 Taxation Without Representation 1951 the Labour government itself lost office, and its Conservative successor was even less interested in colonial tax reform. Thirdly, Hong Kong’s business interests continued to oppose reform and the Chinese business community remained unrelentingly hostile to anything resembling a normal income tax. Last but not least, Sir Alexander Grantham, who succeeded Sir MarkYoung as Governor in 1947 and served until 1957, was opposed also, and made no attempt to carry out London’s instructions. Administrative Difficulties Eric Pudney, who had been appointed Commissioner of Inland Revenue, had immediately encountered enormous difficulties in the administration of the Ordinance. This was largely due to an acute lack of staff. Some of the staff of the former War Revenue Department had transferred to the new Inland Revenue Department and there had been some new recruits, but Pudney seems still to have had only about half the staff he needed, and the shortage was most acute at the more senior levels.1 As a result, the assessment and collection of tax fell immediately and seriously into arrears. In 1947, the Financial Secretary, Sir Geoffrey Follows, had estimated that in its first year of operation the Inland Revenue Ordinance would produce $16 million.2 By early 1948, Pudney had raised the estimate to $30 million. Or, at least, that was the amount of tax he thought due; because of the shortage of staff, however, he expected to collect only about $14 million of it.3 Pudney’s problems were exacerbated by the Inland Revenue Ordinance’s peculiar schedular structure. The basis upon which a normal income tax is administered is the collation of data, in the form of a series of files, about every person known to be liable for tax. Each file records the person’s name, his address, and the amount and sources of his income. But Hong Kong’s schedular tax system did not permit this approach to its administration. Indeed, it had been designed specifically to preclude it. Corporation profits tax was collected from companies, without any inquiry as to the identity of their shareholders. Likewise business profits tax was collected from firms, without inquiry as to their owners. Similarly, property tax was assessed separately in respect of each unit of property; and interest tax was collected not from the lender at all...

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