In Hong Kong the rich are getting richer, and wealth inequality continues to increase. Nobody doubts this is true, but will our leaders ever take action to reverse this trend? Will the special administrative region government or Legislative Council push for the changes required?
There was little evidence in the recent LegCo elections that any pressure will come from the newly elected members. Like the government, most newly elected LegCo members pay lip service to reducing inequality but offer no solutions.
Much of this reluctance can be put down to the “sacred cow” status of low taxation in Hong Kong. The specific problem is that Hong Kong does not tax its richest and most influential citizens commensurately. Any serious proposal to reduce inequality must include a plan to tax our richest citizens and that plan would involve taxing income other than salary income. Is anyone in the government or ExCo or LegCo proposing this?
We must reverse the trend of ever-increasing inequality in Hong Kong and, like the Chinese mainland
The Forbes list indicates that there are 50 families in Hong Kong with a net worth greater than $1 billion. These families have a combined net worth greater than $330 billion. Another estimate is that there are 24,000 Hong Kong residents with a net worth greater than $10 million. Their combined net worth is about $1 trillion.
Using the Forbes data, we calculate that over the last 10 years the combined net worth of our richest citizens has increased on average by 7 percent per year. Over the same period the economy of Hong Kong grew on average by about 4 percent per year. Every year the rich are getting richer and are enjoying an ever-increasing share of the Hong Kong pie. This demonstrates what we all know intuitively — inequality in Hong Kong is increasing every year.
The Hong Kong tax system is designed to achieve the above. We do not tax the source of rich peoples’ income e.g., interest income, stock dividends, capital gains, overseas income etc. In other rich jurisdictions the rich hire legions of tax accountants to minimize their tax bills but in Hong Kong there is no such need. If Hong Kong maintains its current tax system, it is inevitable that inequality will increase indefinitely.
The $1 trillion of assets owned by our richest 24,000 people (3 percent of the population), if increasing by 7 percent per year, is generating an income of over HK$500 billion ($64.1 billion) per year. This consists primarily of stock dividends, capital gains both realized and not realized, interest income and overseas income. None of this is taxable in Hong Kong. All these people would be in the highest tax bracket in any jurisdiction. After careful tax planning in other jurisdictions, they might pay 20 percent of this in tax, at least HK$100 billion per year. In Hong Kong they pay nothing. Note that if Hong Kong introduced taxes that only generated 10 percent, that would be HK$50 billion per year on these 24,000 only. Note also that these people would still be very rich and still be taxed very lightly by international standards. HK$50 billion per year could do much to help the poor of Hong Kong.
All of the above is well known to the Hong Kong SAR government but it does nothing. Is this inertia or is it because so many of their advisers have a vested interest in the current system?
In contrast, the Chinese mainland authority, like most of the world, levies appropriate taxes on the rich. They are focused on “common prosperity”, with the objective of curbing increasing wealth inequality.
Hong Kong needs to start taxing its richest residents and using the proceeds to improve the lot of its poorer residents. Much needs to be done for the poor — the minimum wage is disgracefully low and those on or close to it need their incomes enhanced. Comprehensive Social Security Assistance payments are too low; funds need to be added to the Mandatory Provident Fund accounts of our poorer residents etc. These are some of the changes that could be made with only a modest tax on our richest residents. To lower inequality you must take something from the rich and give it to the poor. This is the way that they do it in the Chinese mainland and this is what we need to do in Hong Kong.
This is all painfully obvious. No one can doubt that inequality will increase if you do not tax the rich.
Why is it therefore that these ideas sound so extreme in a Hong Kong context? If mentioned in a social context most people will think you naive and say that “they will never let it happen in Hong Kong” or that “the low tax policy has been crucial to the development of Hong Kong, and it would be catastrophic to change it”. Any specific ideas such as a tax on Hong Kong dividends or a capital gains tax are dismissed as “double taxation” or “unworkable” even though the Chinese mainland and many others have these taxes.
There is also a belief in Hong Kong that the rich will always find a way to avoid taxes. This argument ignores the reality that the rich pay considerable taxes in the United States, the Chinese mainland, the United Kingdom and many other jurisdictions. It is true that inequality is also increasing in those jurisdictions but to a much lesser degree than in Hong Kong. Hong Kong leads the rich world in inequality and our lead is lengthening.
We must reverse the trend of ever-increasing inequality in Hong Kong and, like the Chinese mainland, strive to be in tune with President Xi Jinping’s exhortation for “common prosperity”. This is impossible with Hong Kong’s current taxation policy.
The author is the chairman of the Business and Professionals Federation, a think tank focusing on Hong Kong policy issues. He has lived in Hong Kong for 32 years and is a past chairman of the Employers’ Federation of Hong Kong.
The views do not necessarily reflect those of China Daily.