Calls for government to cut wealth gap ignore reality

PUBLISHED : Sunday, 04 December, 2011, 12:00am
UPDATED : Sunday, 04 December, 2011, 12:00am


Most Hongkongers see the city's wealth gap as a serious problem and believe the government is doing little to tackle it, according to a Chinese University survey.

SCMP, December 2

But how can government tackle it?

The obvious response, of course, is to take from the rich and give to the poor and, yes, someone in our report on this survey recommended doing so. Someone always does.

This general prescription for solving the problem is of such great value that it will get you a ride on the MTR, if you also bring your Octopus card. The basic question remains unanswered. Just how will government do it?

Tax them, you say. Very well, but salaries tax last year brought in only 12 per cent of fiscal revenue and almost all of it was already paid by people in the very highest income brackets. If we raised their tax rate to, let's say, 30 per cent, we might get a tiny bit more revenue but mostly we would get the rich taking their income in non-salary form or leaving Hong Kong.

Alternatively, we could try it through the profits tax, which brings in about 25 per cent of total revenue. Once again, however, there is a problem. When corporations face a tax hike that applies to them all they don't need to collude to raise their prices. The government has done their collusion for them. Raising prices becomes a simple matter then and the burden falls on the poor once more. Profits don't change much.

In fact this happens with every tax measure aimed at the rich. The average percentage return on invested capital in any economy is determined by such things as political risk, currency risk, underlying inflation, yields in competing economies and other commercial considerations.

You look in vain among them for social justice. It comes under the heading of political risk and enters into the equation only if social disturbance threatens production. Raise the profits tax rate and all you do is raise prices. The percentage return on invested capital stays where it was. Fiscal revenue measures will never produce income equality.

The alternative is to do it through fiscal expenditure methods. Let's redistribute the wealth through government grants to the poor.

The difficulty is that when you do it on any meaningful scale the rich soon make their adjustments again.

An example is the recent government measure to grant all working people HK$600 a month in travel allowances. It simply gives employers an opportunity to hold wages down by HK$600 a month. This supposed magic wand to raise the incomes of working people produces illusion only.

The public housing programme is much the same. When 35 per cent of the population lives in flats that rent at an average of only HK$1,200 a month, employers are grateful. It means they can pay these people less. A social programme thus becomes an employer subsidy.

It's actually worse than that. The income ceiling of HK$10,000 a month for the travel allowance effectively creates a wage barrier. Any increase above of it of less than 6 per cent is not worth the recipient's while. And people in public housing find it very difficult ever to move out. The soft rents have them hooked. This is not to mention that these people pay the full economic cost of their concessions anyway. Government has to find the money somewhere and if return on invested capital remains constant then it is the working people who will have to pay.

They don't always know it, as it happens through a long and complicated chain of cause and effect, which makes their living circumstances harder in many ways, but taxing the rich to feed the poor is a prescription that does not work. The bottom stones of the pyramid always carry the greatest weight.

There is in fact little that government can do directly to narrow a wealth gap. Its best ways of doing it are all indirect and mostly they have to do with how it spends rather than raises money.

They consist of such things as maintaining public order efficiently, providing only those services that are truly necessary and doing so at the lowest possible cost.

I now present to you, among others, the Hong Kong/Zhuhai bridge, the Stonecutters Bridge and high-speed-rail line to the border, all hugely expensive and pointless projects. In this matter of wealth gap our government is more cause than solution.