How reviving Hong Kong’s inheritance tax could help restore equality and social mobility
Philip Marcovici and Stefano Mariani say returning the duty on inheritance to 8 per cent – instead of its current zero – would be an important step in reversing the concentration of wealth into fewer hands
Wealth can be understood as accumulated capital. Assets such as property, investments, collections of antiques, etc accumulate in value, and in Hong Kong wealth is concentrated in the hands of a small minority.
Wealth, in itself, is good – desire for wealth and drive to improve one’s conditions were crucial in enabling Hong Kong’s post-war economic miracle.
The popular television drama Below the Lion Rock framed Hong Kong in terms of mobility and ambition, portraying the spirit of an age of apparently boundless potential.
What has become of the Lion Rock spirit when the young can scarcely dream of acquiring property, and the elderly feel compelled to work long into their twilight years?
The broader socioeconomic implications of extreme inequality are that it stifles dynamic capitalism and economic growth. It gives rise, in sum, to a grave misallocation of resources. It is not Marx and Engels who say this, but arch-free marketeer and International Monetary Fund managing director Christine Lagarde.
Reducing inequality is not just morally right and good politics, but good economics. Qualitative growth measured in terms of sustainability and diversification necessarily means more inclusive, better distributed growth.
Hong Kong has thrived under a particularly liberal brand of capitalism, but if the creative and destructive forces of the market are to be properly harnessed, we cannot fall into the trap of descending into crony capitalism or neo-feudalism and tacitly accept it as legitimate and desirable that a few control access to and enjoyment of capital.
Consider an ambitious university graduate of modest means: he would like to marry and start a family, but does not have the means to acquire property. He would like to launch his own innovative business, but is deterred by high start-up costs and the dearth of qualified labour, which still prefers to seek jobs in mainland China and abroad.
Our intrepid entrepreneur is therefore not in a position to either improve our sub-replacement birth rate – further exacerbating our demographic time bomb – or answer the government’s call to diversify Hong Kong’s economy with high-value-added industries.
As with most pathologies, the first step in solving the problem is recognising that it exists.
It may seem strange now, but for almost a century Hong Kong had a fully fledged inheritance tax on all Hong Kong-situated property passing on death. Received wisdom would have it that estate duty has been abolished. Strictly speaking, however, the rate is merely set at zero.
We propose resurrecting and modernising estate duty to help meet the social and economic challenges of contemporary Hong Kong.
A proposal recently submitted to the finance secretary suggests that estate duty could be charged at a low rate on the worldwide estates of Hong Kong residents – indicatively 8 per cent – exceeding a net value of HK$10 million, plus a total exemption for the deceased’s principal home, and that there also be a gift tax to prevent avoidance of estate duty by way of lifetime transfers.
Most importantly, estate duty would also be charged on the Hong Kong assets of a non-resident at a higher rate, with limited exemptions.
It seems both fair and reasonable that only the very largest Hong Kong resident estates should pay estate duty, but non-residents should pay their fair share for benefiting from our efficient bureaucracy, rule of law and sound financial institutions.
Estate duty would also help banish some of the loopholes in our tax laws: shares in an offshore company holding Hong Kong real estate could be bought and sold free of stamp duty, but would not escape estate duty upon the death of the shareholder.
It would ensure that a modest portion of wealth accumulated in Hong Kong be re-injected into the city’s economy, rather than rolled up in ever-fewer hands.
There would, of course, be objections from vested interests, but there is no reason to believe that reintroducing estate duty would chill the development of Hong Kong as a wealth management centre or investment destination.
There are more important factors that other successful wealth management locations have showed are key – and here the United States, the UK and Switzerland (which all have much higher rates than 8 per cent) would be but three examples.
Much has been said about wealth inequality and the discontent in Hong Kong. It is now time for words to give way to action.
Residents and their representatives in the Legislative Council should call for a serious debate on whether the current gulfs in wealth in Hong Kong are fair or desirable in the long term.
“Fair” should not be understood in terms of equality of outcome. Hong Kong society has long prized daring and ambition as a means to success.
Fairness as it is understood in our city is, we believe, a reasonable expectation that each individual be able to access opportunities similar to those enjoyed by his parents and grandparents and, with sufficient skill and determination, prosper.
Philip Marcovici is retired from the practise of law, and consults governments, wealth-owning families and financial institutions. Stefano Mariani is an experienced and practising tax lawyer, who has written extensively on Hong Kong tax law and tax reform. The views expressed here are the authors’ own