For the sixth year in a row, Hong Kong has been named the world’s freest economy in the Heritage Foundation’s annual “Index of Economic Freedom.” One of the reasons for this is its low taxes, and what the Hong Kong government boasts on its web site is a “simple and stable” tax system: “Firms pay only 16% profits tax while individuals pay no more than 15% in salaries tax and often effectively less. In addition, there is no value-added or sales tax, or capital gains tax.”
Unfortunately, all that may be changing – Hong Kong’s Governor Tung is “trial ballooning” a plan to introduce a sales tax. During a Q&A session this January, he introduced the subject by suggesting that resistance to more taxes was futile: “I think we all agree that Hong Kong has a rather narrow tax base and there is a need to amend that. This is the reality we are facing.” Rather than get into specifics, he let his underlings go to the media promoting the idea that more taxes, most probably sales taxes, were necessary and inevitable. In addition, the government anonymously leaked announcements like “Well-informed sources said the tax would not be more than 3 per cent and that it would most likely not be introduced in the coming financial year, but in 2001-2002.”
What’s brought this on? Simple – Hong Kong government’s is spending more money. In fact, since the new Chinese-appointed Governor took control, government spending has reached new highs, higher even than during the peak of the new airport’s construction. Those of you familiar with past “outrages” will recall that the governor squandered billions of Hong Kong dollar revenues by giving away prime government land to a politically-connected Hong Kong tycoon, rather than auctioning it as the English did. The governor has committed tens of billions to his grandiose dream of constructing a Disney World in Hong Kong (likely to be an ongoing drain on the budget, based on past experiences). And of course back in 1998, the government spent $15 billion to prop up the stock market.
Despite its spending spree, the Hong Kong government has only generated mild budget deficits, which pale in comparison to their huge financial reserves. And Hong Kong’s government spending relative to GDP is far from Swedish or even U.S. levels. Nonetheless, my concern is that the government has many more spending plans that it’s drooling over. The English in Hong Kong taxed little because they spent little. The new governor clearly wants to become more active in the economy, with more welfare, more industrial policy, more favors for tycoons; stimulate here, invest there, pick winners and losers. Perhaps he thinks money can buy him love.
Hong Kong’s sycophantic Secretary of the Treasury was less than convincing in her attempt to persuade the public to accept Governor Tung’s view of taxes. Rather than feeling sorry for themselves for paying more taxes, she suggested that citizens “Reserve some of your sympathy for the governments which face the unenviable task of trying to satisfy the demand for public services.” In any case, she concluded that “There is no escape” from higher taxes. In other words, “We’re not going to stop spending – so submit to our authority!”
Hong Kong’s economy thrived over the past 30 years due to low taxes and low government spending, and by leaving money in the hands of its citizens and companies. Granted, one small sales tax won’t wreck the Hong Kong economy, but it suggests a dangerous trend, i.e. once a new tax gets established, it’ s much more likely to go up than to go down. Okay, so Hong Kong may still deserve the title of “World’s Freest Economy” for now, but I can assure you – this isn’t the kind of policy which will ever make it a great economic power.
