Last night I watched a documentary lamenting the UKs large deficit and how the bloated public sector was to blame, and then it exampled Hong Kong as a model of how great society and the economy would be if we just didn’t tax the poor, but made rich people pay 20% tax, and also, kept the government as small as possible and out of the way of business. Now I know the economy of Hong Kong is the most liberal in the world, the last part of the programme was devoted to how great it was there.
So is this true? Is the Hong Kong model something the UK could emulate or is it due to Hong Kongs position and circumstances of history the reason as to why it works.
I’ve been to HK a few times, and while I am no expert on their economy, I think people vastly overstate how uninvolved the government is. About half of the residents live in public housing. Also, the government has invested tons in public infrastructure, tightly controls urban development, and supports a relatively large public education system. They also have the benefit of not really having to support a military, or a large population.
Many of the things the government does there, in terms of the climate they create, would be unacceptable here, or in England. Plus, people there have a great respect for government, and public officials. In short, I think some of what they do is replicable, but much of it is unique to the time, geography, and culture.
Hong Kong is an interesting case. The corporation tax is low, and the income - “salaries” - tax is almost flat-rate (well it is progressive, but only at the really low end of income, where it starts at 2% after the tax-free allowance) at 17%.
But the really interesting thing is that there is no Capital Gains Tax. This is fantastic for investors and definitely encourages people to get a bit more daring with their money, resulting in much more fluid capital. But also bubbles around things like property.
A lot of infrastructure is public/private (e.g. the MTR subway system, which is both brilliant and profitable), but there is high government regulation in many fields, and there are many other government programs, including housing as mentioned, and state-funded healthcare. The government tends to control the supply of land, too, which keeps its value artificially high.
The payoff is that there is no dole, and no state pension scheme. People can and do fall through the cracks, especially the elderly. I don’t think the UK would countenance that.
[Rant] It’s Hong Kong**'**s. It belongs to Hong Kong, so it needs an apostrophe. Not using the apostrophe indicates that there’s more than one Hong Kong. [/Rant]
Yes, but that have a stamp duty which applies to the transfer of stock, basically achieving the same thing. It made up 16.8% of their revenue in 2008-09.
In looking into the issue a little bit more, I have become even more convinced that they climate that exists in HK would not work in most Western countries for several reasons. My wife’s family lived in HK for many years. In visiting them a few times, I got to personally see what HK was like to some extent. It’s a nice place, but they seem to have very unique circumstances that allowed much of their success.
First, the low-tax structure that exists there is “importing” government revenue rather than “creating” it. Essentially, the tax “leakage” that you see in high-tax countries often finds its way into HK government coffers. That’s why the US, among others, are targeting them in the search for lost tax revenue. It doesn’t seem to be the case that low-taxation is encouraging enough growth to replace the revenue lost to tax cuts. It’s what we have seen in the US: tax cuts rarely pay for themselves despite conservative dogma. Seeing that is the case, HK has coasted somewhat on being a place where you can pay less in taxes, but if everyone lowers their taxes, their relative advantage disappears. A less capable and effective government will naturally follow a race to the bottom in terms of taxation.
Furthermore, being a relative outlier has attracted high-income people to HK. With a fairly open immigration policy (for workers), expats can come there during the peak earning years to avoid taxes elsewhere. Since they have small population to begin with, the (lower) taxation from high-income expats represents a larger proportion of government revenue, and is of greater utility. A country of 300 million such as the US cannot support its population in a similar way. You can only have so large a banking/business sector.
To that end, you have HK’s geographical position. They have been willing and able to exploit cheap labor in a way most developed countries cannot. There, you have a small country surrounded by other far less developed countries with low-wage, low-skilled workers. People from the mainland (China), the Philippines, etc. have often immigrated there as workers. This gives HK a permanent underclass they can exploit. Almost every “rich” person there has a maid/cook and/or a driver. Something that would not work in the UK or the US for several reasons. In fact, if you ever visit HK on a Sunday, when the maids have their day off, you can see how crowded the streets become as the gather to go to church. There are roughly 140k Filipino maids there. One for roughly every 50 residents, ten of whom live in poverty. I am not sure we would be ok with that kind of income inequality coupled with such poverty. Most Western countries are largely governed by social norms. Hong Kong is basically business norms personified.
Also, HK has always been a major port destination for things into and out of China and other countries in Asia. “It’s the largest container port servicing southern China, and one of the busiest in the world.” Being in a position to receive goods, but not having the burden of consuming/utilizing them is beneficial. They can basically act as a middleman to China, charging a fee every time something comes through. While the US has lots of ports, we also have the burden of having the necessary internal demand to justify the imports. HK doesn’t have the problem; they have a billion Chinese waiting on the mainland to use those goods.
As I said in my first post, roughly half of the population lives in subsidized housing. These apartments and others range from really small to basically a cage (pictures). How you may ask is the government able to subsidize all this without high taxation? It’s because the government owned most of the land to begin with, and constantly adds new land via reclamation. They restrict the supply to raise prices, then lease/sell the land as needed. They just sold 7.46 acres for $1.3 billion US. That’s not to say the government makes all its money from land sales, just that they can leverage that in a way that less-dense countries cannot. Also, it hides the fact that government-leveraged scarcity of land raises prices, representing an invisible tax to anyone doing business there.
HK is not, and has not been, a free place. As a British colony, they were controlled from afar, and now China controls them. Having complete government control means, under competent leadership, you can create and change the economic climate in ways you cannot in a democracy. As such, the culture has adapted to care less about ideals (freedom, democracy), and more about competence. Even so, the only people whose opinions matter are people in the business class. Most Western countries are not like that. Additionally, being a SAR (now), and a colony (pre-handover) meant they didnt have to pay for things like defense. For example, in the US defense budget accounted for about 19% of the United States federal budgeted expenditures, and 28% of estimated tax revenues. Theoretically, if the US could cut its defense budget to 0, and makes a few other minor tweaks, we could probably hit HK taxation rates (at least on the federal level not including the deficits).
Also, HK doesn’t have direct elections for many government positions.
China has upheld the direct election ban. HK has tried to do it anyway, but it likely will not work. China says they will not allow direct election of the chief executive before 2017 at the earliest, and Legco by 2020. When universal suffrage is not guaranteed, you can make decisions you could not make in the UK (for example).
That being said, I think there are a few things the West can learn from HK. First, an open guest worker policy can benefit everyone. Particularly as birthrates decline, we will need workers of all sorts here. In the US in particular, our immigration policies for skilled workers is far too restrictive. Microsoft and others have opened offices in Canada near the border because our laws are so stupid. A policy that allows skilled workers and entrepreneurs with capital to come here indefinitely would benefit everyone. We have to recognize that sheer demographics will mean that a larger majority of the great ideas and companies will come from those outside our countries. Just as most of the smart people will never work at any one company, increasingly, most of them will not be born in the West. You have to have create a climate that gives these people a reason to settle down here.
Second, our tax policy should be less opaque. Capital gains taxes should differentiate between institutional investors and those whose primary income is derived elsewhere. We should also favor sin taxes on certain behaviors instead of allowing black markets to thrive. HK derives 6.6% of its income from betting duties. Their collective vice is gambling, so they tax it. Things like drugs and prostitution (our main vices) should be legal and regulated here. There is no point futilely trying to stop something rather than taxing it.
In HK, having a car is a luxury that many well off people don’t enjoy. That’s possible because they invest a lot in infrastructure and public transportation, and because gas is expensive and cars are taxed. While the US is not densely populated enough to justify that in many areas, cities must provide better infrastructure and transportation. The federal government needs to be more concerned with making cities more livable and sustainable since that’s where the money and jobs are.
Lastly, I think the US populace could learn to be less concerned with ideals and more concerned with competence. Competent people should not be kicked out of the military for being gay, kicked out of office for tapping someone’s foot in a bathroom stall, or forced to resign because they cheat on their spouse. We are too obsessed with what the person doing the job is actually like as opposed to how well they are doing the job.
HK has a lot of cartels. The most unholy alliance is between the government and the property developers. Supermarkets and drugstor es are also cartels.
The stamp duty is peanuts compared to short term capital gains tax in the US. I forget what it is for stock trading but it’s low.
HK is a small city state, and still (although) declining entreport for China.
I lived there for about 5 years. Sure, income taxes were low at 20% but you have to pay an ungodly amount of money to live in a shitty apartment. And public housing is ahem spartan to say the least and that’s if you qualify. I’ve got relatives in public housing and spent time in several different housing estates.
yep, 香港。 Although literally “stinky harbour” would be more appropriate. I think it was one of those wishful names, as in if you name it maybe one day it will come true.