Feb 2008 28

Hong Kong's tax cuts1

Hongkong Hong Kong is to implement massive tax cuts:

"Hong Kong’s financial chief said Wednesday he will cut salary and corporate taxes and abolish duty on beer and wine after a booming economy pushed the city’s budget surplus to a record high.  In his maiden budget speech, Financial Secretary John Tsang said he would increase spending on health services and introduce measures to bridge the widening wealth gap and reduce air pollution.

Duty on beer and wine — currently at 40 percent — will be cut with immediate effect.

Tsang estimated the budget surplus would reach a record 115.6 billion dollars (14.8 billion US) in the fiscal year to March, four and a half times the government’s forecast and nearly twice as much as last year’s figure.  The territory’s fiscal reserves will reach 484.9 billion dollars, he said.  Tsang attributed the surplus to higher-than-expected tax revenues from the city’s booming stock and property markets as well as company profits and salaries."

This combination of swelling reserves and surpluses and hefty tax cuts is possible thanks to the dynamic returns to Hong Kong’s already low taxes and the returns of broader economic liberalism.  Over many years the territory has had low taxes and rapid economic growth has left it with an income per person higher than that in Western Europe or Japan.  It places first, year after year, in the Index of Economic Freedom.  For more on Hong Kong’s liberal economic order see the first 1980 episode of the late Milton Friedman’s classic Free to Choose.  That commitment to low taxes and free-market economics creates growth which brings with it revenues that can fund future tax cuts in an incredible virtuous circle.

Britain, unfortunately, is going in the opposite direction with increased taxes hurting the economic growth that builds prosperity for the future.  That’s quite a price to pay for little result in the public services.

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  • Adrian Wrigley

    Many people attribute Hong Kong’s economic success to the collection of the economic rent of land for public purposes, and not simply “low taxes” or “economic liberalism”.
    Private appropriation of land rent destabilizes the real-estate and credit markets and is linked to a high wealth disparity. Denmark is the “happiest nation” on the planet, and uses high land taxes.
    Wikipedia : “Hong Kong is perhaps the best modern example of the successful implementation of a high LVT. The Hong Kong government generates more than 35% of its revenue from land taxes.[38] Because of this, they can keep their other taxes rates low or non-existent and still generate a budget surplus.”
    http://en.wikipedia.org/wiki/Land_value_tax
    Land Value Tax the best alternative to burdensome taxes on production.
    You speak of economic liberalism and mention Friedman’s contribution. But neglect to mention his analysis of tax policy:
    “In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.” Milton Friedman.
    We have seen “free market” policies tried in places like Iceland, but it has all ended in tears:
    As a professor at London School of Economics said, “No Western country in peacetime has crashed so quickly and so badly.”
    So surely the conclusion must be that taxes on production should be reduced but taxes on unearned economic rents can be retained (or increased)?
    Rather surprisingly, the TPA is largely silent on the types of tax a state collects. Evidence from the real world shows that taxing unearned economic rent brings economic *benefits*, while income and sales taxes are harmful. When is the world going to wake up the the deep harm inflicted by government tax and welfare policy – what one might call “iatrogenic fiscal policy”?
    Fred Foldvary explains that Land Value Taxation (LVT) is the right way forward for freedom, efficiency and prosperity:
    http://www.foldvary.net/works/policystudy.pdf
    Let’s hear something on this crucial topic from the TPA!