(10th March 2006)

This article was written before the release of the 2006 Budget.

Budget day has arrived again and all Hong Kong eagerly anticipates the government’s spending plans in 2006-2007. Cries for increased spending by welfare advocates and for tax cuts by politicians reveal a startling fact about political discourse in Hong Kong. A consensus has been reached that the government has the right to anything you earn. In effect, your property is yours so long as the government wishes it so.

Does this sound extreme? Consider these words, from Executive Council Member Ron Arculli on potential tax cuts on taxes payable in 2007: “So why should we pay money back to taxpayers?*” In Mr. Arculli’s mind, this money is the government’s to dispose of at will – and it hasn’t even been earned it yet.

Even those favoring tax cuts have fallen into the trap. Recent quotes from both Sin Chung Kai of the Democratic Party and Anthony Cheung Bing Leung (also ExCo) using the term “returning wealth” to the taxpayers**. Professor K.C. Chan (HKUST) refers to “giving sweeties to people in good times.” The assumption is that the government already has a legitimate claim to what you earn, even before you have even earned it. If taxes are cut, you as a taxpayer should be grateful for this ‘handout’ – a gift paid from money you haven’t even earned yet.

Some commentators get it completely backwards. Ivan Choy (a political scientist at Chinese University) claims of “the underprivileged people…Cuts in Comprehensive Social Security Assistance payments have dug into their pockets.” Correction Mr. Choy – the government’s CSSA puts money into their pockets, it does not take it out. It takes the money from the taxpayers to put it there.

Indeed, those who believe that the government has rights to the product of our labour have dominated the language of taxation in Hong Kong. Government benevolence gives it the right to retain and redistribute wealth to serve the interests of an increasing number of impromptu lobby groups that seem to arise daily in Hong Kong. The new politics of Hong Kong are those of wealth redistribution – and taxpayers are expected to foot the bill.

Some do understand. Professor Tang Shu-hung (an economist) of Baptist University seems to understand what is happening through the subtext of his comments: [the government] “digs into the pockets of the people.” To his credit, Sin Chung Kai, along with Richard Chow Yeung-tuen of the Institute of Taxation, also uses the term “burden” to describe taxation.

In many modern economies, years of overbearing government have prompted the formation of politically potent anti-tax groups. The World Taxpayers Associations, a global umbrella group for national organizations, has 37 members in 32 countries. These organizations arose and are fuelled by taxpayer anger, often at the cavalier attitude taken by government towards the collection and disbursement of hard-earned dollars.

The generation under the Lion Rock, largely Chinese immigrants in the fifties and sixties didn’t have much, but they had a reasonable expectation that they would be able to keep the vast majority of their earnings. The Hong Kong dream was that hard work would be rewarded. A high threshold for qualifying for taxation made that dream real for many who knew that their struggle out of poverty and liberation from the welfare state would not be punished.

That dream is now under assault. On one side, taxpayers, the minority of Hong Kong, citizens, witness daily verbal assaults on rights to retain the fruits of their labours by non-taxpayers saying, in effect, “Gimmee”. Earlier generations saw public housing as a gift from the people of Hong Kong. Their children consider it an entitlement, to be retained even after their improved earnings fill the housing estate parking lots with new cars. The rise of applications from young single people has alarmed officials who are realizing that a stopgap measure has become a way of life for the next generation.

Taxpayers are beginning to resent the imposition on their aspirations. What was once charity and appreciated is quick becoming welfare and demanded. The drive for a GST may be about budget stabilization for policy wonks at the IMF, but the term ‘broadening the tax base‿ is all about making the poor pay for services currently borne by an increasingly resentful middle class. The resultant politics threaten to create a political culture where the shell game of taxation and wealth distribution drives exemptions and benefits and what economists call perverse benefits. What has arisen in almost every OECD country is a welfare system where the grants and benefits accorded to the less well off actually penalizes them for seeking work. Simply put, in these countries not working pays better than working and being taxed.

The mindset that the earnings of taxpayers are rightfully those of the government, to be used to mollify various lobby groups, threatens to destroy the things that make Hong Kong great. The simplicity of our tax system, minimal benefits and high threshold to become a taxpayer provides the incentive to work to escape welfare, not fight to enlarge it. The recently deceased Sir John Cowperthwaite, Hong Kong’s Financial Secretary, set this structure in the Sixties. Over the ten years of his administration, poverty in Hong Kong was reduced by two-thirds. Wealth was generated and retained by the immigrants who populated Hong Kong. We can keep that dream alive today by making it clear that those who toil will reap the rewards.

* Restore Funding before cutting taxes, Arculli urges, SCMP, Feb. 16,2006. pA2.

**A taxing situation, SCMP, Feb. 22, 2006.

The Role of Language in Taxation (By Andrew Work)
Cries for increased spending by welfare advocates and for tax cuts by politicians reveal a startling fact about political discourse in Hong Kong. A consensus has been reached that the government has the right to anything you earn. In effect, your property is yours so long as the government wishes it so.

HK’s GST: Don’t Shackle Our Competitive Edge (The End of the Free Port) (By Hans Mahncke)
Hans Mahncke draws attention to a little noticed threat to Hong Kong’s competitve advantage: the discarding of our free port status. The ‘Me Too!’ arguement for the GST falls apart when it destroys our unique competitive edge.

HK’s GST: 稅收應順從基本法的智慧

http://www.wenweipo.com/news.phtml?news_id=PL0608090005&no_combo=1                           

(By Wallace Chan)                                                        

Wallace Chan hits back at detractors, explaining how our simple low tax base is not only good economics – it’s the Law.

The Beginning of the End

http://www.lionrockinstitute.org/index.php?content=the_beginning_of_the_end_2006-07-19            (By Andrew Work)
I’m surprised it lasted this long,” said one friend of Hong Kong’s uniqueness as a beacon of free market practices. While never perfect, Hong Kong set the standard for openness to foreign trade and minimal government. While the ports remain open and the capital flows freely, the regulatory noose is tightening and the taxman cometh for the people of Hong Kong.
 

Budget 2006-2007 Special: Focus on Cutting Spending and Taxes

http://www.wenweipo.com/news.phtml?news_id=PL0602220007&no_combo=1
(By Wallace Chan)
While some see an improving economy as an opportunity to increase government spending, it is misguided approach to improving Hong Kong’s strength. The Basic Law mandates a minimal expense and tax rate ought to be the direction of HK. The strong economic growth of 2005, expected to continue into 2006-7, creates a golden opportunity for Henry Tang to cut taxes and reduce expenses for HK people.

A Taxing Situation

http://www.lionrockinstitute.org/index.php?content=a_taxing_situation_2006-07-04  (By Andrew Work)
Hong Kong is abuzz with tax talk. Fees, road and tunnel tolls, levies, green taxes, capital gains taxes, a goods and services tax (GST), higher or lower salary taxes, estate taxes, corporate taxes, overseas income taxes, alcohol taxes and more are all on the books.

We brought foreign experts into the debate to lend their voices to the issue (of GST).                     
          

GST Hong Kong: The World Weighs In – Widely quoted in English and Chinese press.
Economic Freedom: Is Hong Kong in Danger of Losing Number One Status?”
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