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  • Jul 23, 2014
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Jake's View
PUBLISHED : Thursday, 01 May, 2014, 1:18am
UPDATED : Thursday, 01 May, 2014, 1:18am

Rich are easy target but tax offensive won't help the poor

As the wealthy can flee, real efforts to lift those at bottom should start with smart government

[Thomas] Piketty's 700-page blockbuster details how wealth has become more concentrated this century and how the gap between rich and poor has widened to an extent that it can only, in his view, be redressed by significantly increased taxation of the rich.

Stephen Vines column,
SCMP, April 30

I haven't read Mr Piketty's book and I have to confess that the prospect of ploughing through 700 pages of the world's oldest complaint somewhat deters me from doing so.

I can also cite one good reason, readily apparent in this town, as to why his remedy does not work. It has been tried in his homeland, France, and the result has been that in Hong Kong you can now hear French around you at every turn. The French middle classes have fled.

That's the middle classes, not the rich. There are not many of the rich left in France. They left long ago, even if only to Monaco. Squeezing them to satisfy dreams of egalitarianism would be like wringing out a dish cloth to water the Sahara desert, gone before it hits the sand.

The fact is that taxing the rich works out in practice to mean underinvesting

It is French working-class people who really carry the burden. They cannot find jobs abroad as easily as their educated English-speaking middle-class compatriots can do and so they stay home to be embraced by their taxman. Walk through the suburbs of any French city and you will be struck by how poorly the working people live for the wealth of their country.

Their president, aided by the likes of Mr Piketty, tell them ceaselessly that their problem is the rich, that the rich will now be made to pay and the money will then go back to the poor.

Except, of course, that it doesn't. French bureaucrats take twice as much of the pie for themselves in remuneration as they give the downtrodden in social transfers. And rather than paying for it by taxing anyone, they like to fund it with debt. The French government has not turned in a fiscal surplus in 40 years and its debt load now stands at an eye-popping 94 per cent of gross domestic product. What is your advice here, Mr Piketty? Shall your country default on debt payments?

But it is not only because the rich flee that this simplistic hit-the-rich remedy does not work. The value of financial assets is a function of how much future income they can generate. A block of flats has wealth value because it generates rental income. An equivalent volume of sea water has no wealth value as you cannot drink it and anyone can go boating on it.

Change the income that the asset generates and you change its wealth value. Tax the rental income of the block of flats and its value goes down. Do it too heavily and fewer rental flats will be built. Soon you have a housing shortage.

This states it simplistically, of course, but I am working here with 700 words, not 700 pages. The fact is that taxing the rich works out in practice to mean underinvesting. Sooner or later your economy has to make up for it by enticing money back again and then you risk a truly shocking Russia-style scale of wealth polarity. I shall put it another way. The bottom stones of the pyramid always carry the greatest weight. The greatest burdens in any economy are always carried by the working poor. Others may seem to carry them but the weight of them is always passed further down to rest on the bottom layer.

Don't fool yourself, as Mr Piketty does, that you can make the rich carry the greatest weight by building the pyramid upside down so that it stands on its capstone. That would be wonderful but it's magic. It belongs in the world of fantasy.

If you want to relieve the burdens on the working poor then don't place those burdens there in the first place. For government that means keeping expenditures down and making sure that the wheels of the economy turn smoothly by upholding rule of law and getting in the way of those wheels as little as possible.

I shall read myself to sleep on Captain Hornblower tonight. In fiction, derring-do on the high seas appeals to me more than landfill.

jake.vanderkamp@scmp.com

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53606ade-5bfc-4e3d-babd-34f80a320969
Sainthood for Van Der Kamp NOW!
virokick
Yes , given by the Heritage foundation.
ecswsk
It is ridiculous at the utmost to comment a book without reading it. You may not agree with Piketty's policy recommendation but no one can deny the hard empirical evidences provided in this book. Economists tended to focus on the inequality between high-earning and low-earning groups but the data in the book shows that income inequality comes mainly from inequality in inherited wealth. Like it or not, all economists take this book seriously.
micheleab
Jake, excellent article and don't be deterred by the comments below. In a nutshell, although a simple one you summed up what's wrong with some of Piketty's thinking. The facts are that HIGH tax countries with HIGH government expenditure create MASSIVE disincentives for wealth creation. Germany excluded. But then, there is only one Germany. Contrary to what some people think Krugman and Stieglitz HAVE NOT endorsed Piketty's recipe wholesale! What I would say is that in many European countries income has been taxed excessively and that this has created massive disincentives to work hard and create wealth. As Piketty says, partially correctly, is that wealth should also be taxed and infact one could argue that in Europe the taxation of income and wealth are unbalanced especially one could argue that inherited wealth should be taxed more heavily than it is but one should not tax newly created wealth to the same extent to avoid disincentives for wealth creation.
virokick
Comments from another resident - from a high tax country , working in low tax HK - than later retiring back in a high tax country. Ok I get it.
Germany does well because they produce what China needs ; Audi , Volkswagen , Mercedes Benz , BMW , Siemens , heavy machinery etc. Germans are also higher savers and indeed productive.
Mark Zuckerberg , Warren Buffet , Bill Gates all came from high tax paying countries. I don't see high taxes as a disincentive to work.
So in HK making an elderly dishwasher work for a min wage of $30Hkd per is incentive? It's basically slavery and they work just to stay alive.
Both Krugman and especially Stiglitz are strongly against inequality and also suggest higher taxes.
virokick
JVDK, Most foreigners like you in HK would support low taxes and applaud our system of scant social security - but than retire in their homeland with all the benefits -their tax payers created. They will also sent their children to Oxford or Harvard. Foundations created by a cultured high tax paying society.
The poor in EU don't work for a min wage of 30HKD per hour nor live in subdivided cubicles. Social safety nets there are better than HK.
The middle class although pay higher taxes - get requites in the form of better education, healthcare and retirement. Also compare the Gini coefficient.
I won't move to a high tax country yet, will do it 'only' after I retire so I can enjoy the benefits of low taxes now while I'm still earning and only later retire in a country with high taxes but good benefits( like most foreigners in HK do). I think that settles the point.
kongshan2047
But high taxes in these countries have not led to cheaper university tuition. In England, it now costs GBP 9000 a year to send children to universities (approx. HK$110,000) and almost all top universities in the US are private institutions and you are talking about at least US$20,000-25,000 a year. Whereas here in HK, despite low taxes, a local HK resident only needs to pay around HK$50,000 a year to attend university because the govt. heavily subsidizes higher education in HK. As for the minimum wage, yes poor in EU don't work for HK$30 per hour, but you haven't mentioned that the unemployment rate in many EU countries are three times that of HK and youth unemployment rate in crisis hit countries such as Greece and Spain is somewhere around 50%.
syracuse37
I agree that taxing rich individual is a tough thing to do with all the fiscalist working for them. What is really needed is two things: improve the tax on companies to prevent fiscal evasion ( ie paying rights to there Liechtenstein based company) 2- tax on the stock markets - gold market- private equity market transactions 1cent per transaction since they have to invest somewhere.
virokick
JVDK, this just shows how ignorant you are, when two economic Nobel price winners ; Krugman and Stiglitz praised this as a great book.
The book is nearly 700 pages yet you take issue only on taxation. You should than condemn the rest of the western / civilised world that majority has high progressive taxes. How much did the relic Heritage foundation pay you to say this?
Now you yourself a Dutch , could escape to HK to avoid high taxes in your domicile country. How well are HK's poor doing with low taxes; championed by people like you.
kongshan2047
But how well are the poor in EU doing with high taxes? Income tax in the UK for example is as high as 40% but the wealth gap in London is just as wide or perhaps even wider than in HK. Those who work in London for example have to face both high taxes and high property prices. In the UK if someone earns more than GBP 40000 per annum, it would already put them in the 40% tax bracket. That is just around HK$500,000 a year. Well if you prefer this system so much then I would strongly recommend you to do the reverse of JVDK and move from low tax HK to high tax EU and experience for yourself how "egalitarian" the society is.

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