Cleve Chan's rebuttal ('Capital gains tax would discourage investors', South China Morning Post, August 26) to C S Au's proposal on imposing a capital gains tax (Post, August 8) is quite scant.
Mr Chan doubted Mr Au's understanding of 'the laws of supply and demand in an open economy'.
If Mr Au really does not know much about economics, neither does Mr Chan.
Mr Chan argued that a capital gains tax would discourage real estate investors as it might 'make future foreign investors ask how the Hong Kong Government will protect the risk of their capital investment, since they need to pay capital gains tax if they make a profit'. How can capital gains tax increase the volatility or risk of an investment? If this is so, the Chinese Government should consider eliminating tax on foreign direct investment to reduce investment risk. Nevertheless, Mr Chan is quite right that capital gains tax would reduce real estate investment, but there is more to it.
There are two mutually-driven property markets in Hong Kong, namely the markets for new units and those for second-hand properties. It is the deregulated second-hand market that makes speculation so lucrative. Thus, it is swamped by speculators rather than investors. Speculators are people paying ridiculously high prices for properties without considering the true worth of the assets. As long as there are greater fools willing to pay more for them, speculators are making good 'investments'.
Investors, on the other hand, evaluate the intrinsic values of properties to give up current incomes for future returns with long-term objectives. Introducing capital gains tax on disposal of any real estate would be far more damaging to speculators, because they carry out more transactions to be taxed. Would investors also pull out? Given that Hong Kong's demographic characteristics make real estate a good investment, prudent real estate investors are likely to stay put.
