Land value tax system can propel Hong Kong into the 21st century
In the book, she [Alice Poon Wai-han] says weak government and the dominance of Hong Kong tycoons contributed to the formation of cartels in the real estate market as well as in telecoms, retailing and utilities that affect the livelihood of everyone in Hong Kong.
Among the suggestions that have sparked debate, Poon urges the government to consider implementing land value taxation to target property lying idle in developers' land banks.
SCMP, July 23
The roots of this story go all the way back to 1776 when a bunch of perennial whiners in Boston adopted the slogan 'No taxation without representation'.
They actually had plenty of representation in their own colonial government, which is where the proceeds of the taxation went, mostly for defence against natives whose land had been stolen. But they conveniently ignored all this and started a successful rebellion that is now graced as the American War of Independence.
How do we now prevent this from happening again in our other colonies, asked the British mandarins in Whitehall? They scratched their heads about it and one of them finally came up with the bright idea - we shall put all land in our colonies under long leases and then sell the leases, thus raising money for local public expenditure without any taxation.
It was a brilliant solution and adopted widely, including, most notably for us, in Hong Kong. That's right, in a roundabout way we have George Washington to thank for our system of land tenure.
No, I shall not make this another denunciation of Americans. It was the fault of the Brits alone and fault it truly is because Hong Kong indeed suffers from it at present.
The trouble is that it turns land acquisition, either purchase at auction or lease conversion to more lucrative uses, into a matter of paying billions of dollars up front and then paying interest charges on that money for up to three years before the project is completed, hoping all that time that the property market will go up and there will be a profit.
It is a huge risk. Those who have had the confidence in Hong Kong to take that risk over the past 50 years have generally done very well by it. But increasingly only a few companies can afford it. The sums involved are just too great and the payback times too long. Only a handful of developers can now do it.
This is where I differ from Alice Poon. It is not weak government that has created this property economy in which only a few tycoons dominate. It is rather the inheritance of a more than 200-year-old system of land tenure, which was devised for purposes having nothing to do with economic efficiency in Hong Kong today.
If weak government is to blame then it is so only in its reluctance to introduce reform, not in any craven submission to developers. It is no good blaming Li Ka-shing for the system. He didn't create it. He only took advantage of it.
But where I think Ms Poon is right is in the reform she proposes, a land value tax.
It is actually very simple. Along with zoning land for different uses (or adopting lease terms where these take precedence) we shall assess a tax based on the economic usage.
We might say, for instance, that the annual value tax to be assessed on industrial property in Kowloon is HK$50 annually per square foot of site area and, for high-rise residential, HK$500 annually per square foot of site area. If we change the permitted usage, we change the tax accordingly.
Any owner of an empty or rezoned piece of land will have a decided incentive to develop his land quickly if his annual land tax suddenly jumps tenfold. We won't have much vacant property around any longer.
There are other big plus points to moving to this sort of system from our present antiquated arrangement. For one, we would soon have a much more broadly based development industry.
A developer would no longer have to put up billions of dollars to get into the game and then cross his fingers on the outcome for several years. More companies would enter the industry.
The government's land revenues would also become much steadier, no more of this cyclical up and down from boom to bust with the money coming only from non-recurrent sources.
Additionally, we could expect to see a large number of moribund buildings in older districts torn down or properly renovated. Their hard-to-locate owners would be found pretty soon with real money at stake for them in decisions about the future of their properties.
Ms Poon is not the first person to come up with this proposal but it has not been discussed much recently and it ought to be. It's a great idea.