Hong Kong's stamp duties are woefully inefficient ways to tax
The argument that revenue raised from taxing share transactions is a pay cheque for Hongkongers for keeping the rule of law is short-sighted
On Sunday, my esteemed colleague Jake van der Kamp duffed me up in print.
I'd provoked his ire by arguing that the Hong Kong government should scrap its stamp duty on share trading.
He accepted my points that the government's 0.2 per cent per round trip tax on trading reduces liquidity, eats into savings and bumps up the cost of capital.
But on balance, Jakes believes the price is worth paying.
"This particular stamp duty is Hong Kong's reward for maintaining rule of law," he declared in his Sunday Morning Post column.
Jake pointed out that when investors buy shares in Hong Kong, they can be confident their ownership rights will be respected. And if anything does go wrong, they have recourse to a judicial system that has a reputation for being both honest and fair.
In a nutshell, he argued that Hong Kong's system works, and that the HK$20 billion in stamp duties investors handed over to the government last year are a fair price to pay for its efficiency and reliability.
Sorry Jake, I don't buy that line. I agree that Hong Kong's system costs money, and accept that the government has to raise revenue to fund it. The trouble is that stamp duties are a woefully inefficient way to raise revenue.
There are plenty of examples to illustrate this.
In 1986, Sweden doubled its stamp duty on share trading. Over the next few years volumes on the Stockholm stock exchange plunged as more than half of the total trading in Swedish equities migrated offshore to London. As a result, the Swedish government was left worse off.
The effect on the fixed-income market was even more pronounced, as bond trading volumes plunged by some 85 per cent.
China, too, has found that stamp duties are a lousy way to raise revenue.
Since 1997, the mainland has tweaked its stamp duties on stock transactions seven times with a marked impact on trading volumes.
For example, in 2007, when the authorities raised the duty per round trip from 0.2 per cent to 0.6 per cent, onshore trading volumes in the shares of companies with both mainland and Hong Kong listings collapsed relative to their offshore counterparts.
According to one study, the mainland experience indicates that a 0.22 percentage point increase in stamp duty tends to trigger a 28 per cent fall in trading volumes.
But you don't even need to go as far as the mainland to see that stamp duties are an ineffective way to raise tax revenues.
In February, the Hong Kong government doubled the stamp duty it charges on the sale and purchase of a typical apartment in the city from 3 per cent to 6 per cent. We don't yet have the official data to show what effect the increase had on stamp duty revenues.
But we can make a pretty fair guess.
As the first chart shows, since the stamp duty rise, the volume of residential transactions has slumped from about 8,000 a month to 4,000.
With prices remaining stable, that means the value of taxable transactions has fallen from about HK$40 billion a month to HK$20 billion. So the doubling of stamp duties has halved transaction values, which means at best the government's move won't have raised any extra revenue at all.
And if you factor in the higher rates on more expensive properties, and punitive duties on quick sales and on buyers who are not permanent residents, then it is likely overall revenues from stamp duties on residential property transactions have actually fallen as a result of the government's rate increases.
So, sorry, Jake, if it's a matter of raising revenue to pay for the rule of law in Hong Kong, stamp duties are a lousy way to go about it.