How Hong Kong’s tax regime short-changes residents by encouraging speculation and evading the city’s funding needs

Stefano Mariani says the missing piece in Hong Kong’s budget is tax reform, as Hongkongers have not made the connection between the city’s ‘simple and low’ tax regime and its housing, infrastructure and retirement protection problems

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A woman and a child watch the live broadcast of Financial Secretary Paul Chan Mo-po delivering the 2018-2019 budget, in Kowloon Bay. The budget offered tax breaks to the middle-class, but no substantial overhaul of the tax structure. Photo: Winson Wong

Published: 12:01pm, 1 Mar 2018Updated: 7:07pm, 1 Mar 2018

Wednesday’s budget again raised the vexed question on which the future of our city’s public finances depends: whither tax reform?

The usual array of middle-class tax breaks are beginning to assume the character of cynical bribes. They represent a short-termist approach to public expenditure, the fiscal equivalent of bread and circuses. Because tax is not an electoral issue in Hong Kong, inasmuch as most residents pay no tax at all, it has been difficult for the government to formulate a clear understanding of what tax policy should aim to achieve.

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Michael Littlewood, a former professor at the University of Hong Kong, dubbed his study on tax law in Hong Kong “the history of Hong Kong’s troublingly successful tax system”, noting that a combination of low rates and simple tax administration made the jurisdiction especially attractive as an investment hub.

The notion of success, however, is relative and must be measured against prevailing social, economic and cultural priorities. A tax system that worked well in the glory days of frenetic growth in the 70s and 80s is not the tax system that will best serve Hong Kong in the three decades or so leading up to 2047.

Society, and its discontents, have changed. The budget surplus, which is not being put to any apparent gainful use, is in stark contrast to the pauperisation of large cross-sections of the population. But money must be spent in order to spend money: if any part of the surplus is to be applied to social programmes, the physical, human, and administrative infrastructure to bring those programmes into existence and sustain them must first be put in place. That requires an extensive capital outlay and long-term funding commitments.

If setting the tax rate low were sufficient to attract investment, then Somalia and Yemen should be booming centres of entrepreneurship

Our Inland Revenue Ordinance is a creature of the early 20th century and was envisaged by the colonial office as appropriate for a bustling entrepôt colony, not a 21st-century metropolis.