The View
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Taxation, Regulation and Confiscation of Private Property Rights

I have never supported a widening of the tax base in Hong Kong.

PUBLISHED : Tuesday, 31 May, 2016, 11:16am
UPDATED : Tuesday, 31 May, 2016, 3:02pm

In a liberal democracy, a property owner has the right to make use of her own assets in any way she chooses so long as she does not interfere with another’s right to use their assets as they choose.

Some moral philosophers, for example, Michael Sandel, believe it is morally unacceptable to charge a fee for using certain assets but not others. For example, it is acceptable to charge a fee for a taxi ride, but not to view a privately-owned Rembrandt and such charges should be disallowed.

If we follow Sandel’s suggestion, then two possible outcomes may result. First, the owner of the Rembrandt will only let her friends view it and the public will not be able to view it. Secondly, the government will confiscate the Rembrandt (with or without compensation to the owner) and allow public viewing free of charge.

Unless the owner is willing to accept the compensation, this would constitute a violation of her private property rights — of her freedom. The owner would have been unjustly treated in the name of a moral principle or social justice.

Property rights were at the heart of the 20th century debate over whether liberal capitalism would deliver a more just society than populist socialism. A clear answer was given — populist socialism left a much worse human rights record and produced a more unjust society, and the reason is that when private property is appropriated by society most assets become less efficiently utilised and more injustice is committed.

Private owners have a strong incentive to deploy their asset in its most productive activity, take good care of that asset and ensure its proper maintenance.

Government agents, on the other hand, do not have such incentives — so a bureaucrat will seek to minimise risk and effort, a politician will seek to maximise publicity and votes, and a public committee will suffer from the idiosyncratic interests of its members. The outcome is not only economically inefficient, but can also be unfair.

Other ways of attacking private property rights are through taxation and regulation, both of which in effect take away private property rights.

Taxation is fine if the tax rate is low and uniform across all asset classes and economic activities. But if tax rates are high, there will be an incentive to move some economic activities underground or overseas to avoid taxation. There will also be an incentive to lobby for tax relief for certain kinds of economic activities.

Once a tax regime becomes very complicated and has high tax rates, the decision of how to utilise one’s assets becomes increasingly driven by tax considerations rather than the value of the activity per se. For this reason, I have never supported a widening of the tax base in Hong Kong.

The effects of regulation on private property rights, which come in many forms, are varied and far more pernicious.

Price controls, for example, restrict the income terms of private contracts, so with rent control a landlord is not allowed to raise rents beyond a set amount. The difference between the market rent and the controlled rent is the diverted income that landlords are unable to collect. Since that diverted income is not exclusively assigned to another individual, it dissipates over time.

This leads to property deterioration, the withdrawal of landlords from maintenance, the neighbourhood deteriorates, landlords abandon the property to avoid paying taxes, and government intervention to take over the property, eventually handing it to tenants who are willing to pay property tax — something that actually took place in New York City. Rent control started a process that ultimately transferred the property from the original landlord to the incumbent tenant.

An asset is “private property” if — and only if — three interrelated rights are associated with its ownership: the exclusive right to use, or to decide how to use, the asset; the exclusive right to receive income generated from its use; and the right to transfer its ownership to any individual the owner sees fit.

There is rising political demand to erode private property rights in liberal democracies through taxation, regulation and confiscation, and transform them into public property. The process would be gradual and conducted in the name of moral principles or social justice. But if acceded to, it would tear at the very foundations of liberal capitalism in favour of populist socialism, leading to the erosion of individual rights and freedoms.

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