Hong Kong and Singapore demonstrate how simple, low taxes generate growth

March 19, 2013 9:15 AM

A new book by the Adam Smith Institute’s Research Fellow JP Floru assembles a small mountain of anecdotes, statistics and historical analysis to make a powerful case. Tougher regulation, high government spending and the high taxes that are required to pay for it all destroy growth and leave end up making everyone worse off. Heavens on Earth: How to Create Mass Prosperity looks at eight countries in terms of low taxes, free trade, light regulation and how changes in policy have led to dramatic changes in prosperity.

Two countries stand out from the crowd, Hong Kong and Singapore. While Britain has had a government which has consumed and taxed between 35 and 50 per cent of national income, in those two countries the proportion has been between 10 and 25 per cent. With a much smaller government holding back the economy , the results have been remarkable:

In 1960, Hong Kong’s per capita income was a quarter of Britain’s. In 1997 it was a third higher, even though Britain experienced sizable growth over that period.


And it's continued to pull away from us since, widening the gap. The story in Singapore is much the same but, without the political turbulence leading up to the handover from Britain to China in 1997, even more remarkable. The graph below, plotting the World Bank’s per person GDP statistics (expressed in purchasing power parity terms) in France, Singapore and Hong Kong against Britain’s is stark.

GDP as proportion of UK

It’s notable that all the elements of the 2020 Tax Commission’s Single Income Tax proposal have appeared in the countries listed, from reducing consumption taxes to abolishing Capital Gains Tax, from replacing a tax on corporate profits with a tax on distributed earnings to streamlining multiple taxes on labour income into a single tax. In every case where taxes have been cut and simplified, they have led to significant economic results.

Mr Floru’s book entertainingly recounts the case for lower and simpler taxes as part of a broader theme of greater economic freedoms. Politicians should pay attention to the lessons it holds, and then work towards implementing the serious tax reform outlined in the Single Income Tax that our stagnant economy urgently needs. Tomorrow’s budget would be a great place to start.

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