Warren Buffett

Bravo Buffett! It is time to make HK's tycoons pay tax

PUBLISHED : Tuesday, 23 August, 2011, 12:00am
UPDATED : Tuesday, 23 August, 2011, 12:00am

The editorial pages of last Sunday's New York Times carried an extraordinary plea from the world's third richest man.

In a strongly-worded opinion piece, 80-year old multi-billionaire Warren Buffett slammed the iniquities of the United States' tax system.

But unlike most people who fulminate against the taxman, the Sage of Omaha was not complaining that he pays too much to the revenue.

Quite the reverse: in what is surely a first, Buffett was arguing that under current US tax regulations, he, along with the rest of America's obscenely rich, are failing to pay their fair share.

Like other billionaires, Buffet doesn't receive a salary, so he doesn't pay payroll taxes. Instead he earns his income in the form of stock dividends and capital gains, which are taxed at a lower rate.

As a result, last year Buffet paid only 17.4 per cent of his income in tax.

Astonishingly, that's a lower rate than any of his employees, who on average paid 36 per cent.

'Billionaires like me should pay more taxes,' he concluded.

If Buffet is so outraged at how little America's wealthy contribute to the public purse, you have to wonder what he would make of the regime in Hong Kong, where the city's mega-rich tycoons pay even less in tax than their counterparts in the US.

Critics have long complained that Hong Kong's tax base is too narrow. Typically they say it is unfair that only 623,000 people pay the government's salaries tax - just 17 per cent of the city's work force - and that only 21,000 of those pay the full 15 per cent rate.

This, they say, unjustly penalises the well-off while the vast majority of the population pays nothing. Usually they go on to argue that the poor should be required to contribute to the government's revenues too, ideally through some form of sales tax.

What they never point out is that in Hong Kong the very rich don't pay tax either.

As in the US, Hong Kong's billionaires don't pay themselves large salaries, which means they don't pay the salaries tax.

Instead they take their incomes in the form of stock dividends or gains on the sale of assets. And in Hong Kong, neither dividends nor capital gains are taxed. As a result our tycoons pay little or no tax.

This isn't just unfair, it's a major economic handicap.

Because Hong Kong's tax base is so narrow, the government is forced to rely on stamp duty and land premium payments by property developers for a disproportionate amount of its income (see the first chart above).

That means the government has a powerful interest in keeping property prices high, because the higher prices go, the greater its revenues.

Unfortunately, however, high property prices are becoming a political problem. With the downpayment on even a modest new apartment now equal to more than three years' income for the average household, a growing segment of society is understandably aggrieved at being excluded from the housing market by unaffordable prices.

To solve the affordability problem, the government first needs to broaden its revenue base. The answer is not to impose a sales tax, as Donald Tsang tried and failed to do a few years ago. Sales taxes punish the poor disproportionately and add to inflation.

A better solution would be to introduce dividend and capital gains taxes to make sure that the richest members of society pay a fair tax rate on their incomes.

The tycoons and their henchmen would fiercely resist any such proposal, crying that the new taxes would stifle investment.

But that would not be true. Dividend and capital gains taxes are back-loaded - you only pay them once your investment is yielding returns - so they discourage investment far less than stamp duty, which is an up-front cost.

As Warren Buffett wrote in the New York Times: 'I have yet to see anyone - not even when capital gains rates were 39.9 percent in 1976-77 - shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.'

Well said that billionaire. Hong Kong should listen.

Meddling is counterproductive

Only in Hong Kong could the government's one-off measures to ease the impact of price rises add two percentage points to the consumer inflation rate.

But as the second chart above shows, strip out the government's relief measures and the inflation rate last month was only 5.8 per cent, not the 7.9 per cent announced yesterday.

The obvious conclusion is that the government should give up trying to manipulate our inflation rate. It's only making things worse.