Category: Hong Kong

Hong Kong is one of the countries which actively involved in social demonstrations or protests. The protesters are young and old alike with a diverse mix of families in Hong Kong. Based on a crowd survey by three scholars, almost a fifth of the population were 45 years old and older, whereas about 60% of the people involved were under 30. Journalists stated that many shopkeepers, drivers and others helped the demonstrators with their water supplies and financial support. It stated that about 1.7 million people protested in the rain. About 15% of the population in Hong Kong will be interested in involving protests. There were sporadic incidents of violence, for an example when protesters vandalized or interrupted the activities of the Legislative Council. Hong Kong social movement have impacted the nation in many ways. In terms of economically, months of anti-government protests hit Hong Kong’s economy hard because demonstrators were being forced to shut down police on the streets, schools, and businesses on the streets for some days and the transport was disrupted. There have been tourist’s dollars entry was the economically significant for the city. The trade tensions between China and the US have taken toll, and many experts expect a worsening of the economic unease. The city’s first yearly recession since the 2009 global financial crisis is expected to occur by policy. There is little indication of a decline in pro-democracy demonstrations, as pro-democracy parties received a slant as the evidence of widespread support for the protest movement and repudiation of government and Beijing’s handling of the monthly political crisis. Hong Kong had the impact for the first time in a decade in the third quarter in a recession. According to Iris Pang, an ING economist, the recession is likely to deteriorate in the final quarter of the year. Hong Kong now is expected to face the most extreme decline in any advanced economy this year. The economy of Hong Kong is still struck by the double whammy of internal political instability and trade tensions between China and the US. It was stated by Tommy Wu, the supreme economist for Oxford Economics.

The economic impact of social movement in Hong Kong can be seen various segment. Firstly, it is focused on tourist entries to the country as an impact from social movements in Hong Kong. Hong Kong, a state with a large population abroad which is very significant to foreign visitors. According to World Bank data, 28 million people visited the country in 2018 with already 7.4 million people in the city. The value of Hong Kong exports of goods and services including tourism expenditure is almost twice that of their sheer domestic product. It makes the economy especially susceptible to the visitors’ slowdown. Tourist arrivals in Hong Kong decreased by 26% over the same time frame in 2018, the second largest fall since the records began in the early 90s, in the three months to September. Chinese tourists usually represent 70% of Hong Kong’s visitors, but over the same time their numbers dropped by 29%. Based on the most recent data from the Hong Kong tourist board, in September of 2019 the hotel occupancy rate fell to 63%.

Next, the impact of social movement is focused on the products sold in Hong Kong. Products sold in Hong Kong is primarily from Chinese reexport goods which were impacted by conflicts in trade between United States and China and the global perspective that has deteriorated. Imports dropped by 11% over the same duration of the 2018 whilst in 2019, three months to October exports fell by 8%. In September, China’s exports representing almost half of exports to the territory decreased by 5% compared with 2018 in the same month. Exports from Hong Kong to the United States which is the its second biggest trading partner, have been even worse. In the same month, it fell by 24%. It is expected that in 2019 and 2020 the export impetus will remain weak, hampered by a global demand decline and strained trade between the United States and China. While China and the United States have reached some relief from the last mini deal, which delayed further US tariffs in October as intended, following the dramatic escalation of the trade war in August, much uncertainty continues and tariffs are not expected to be routed soon. Tax concessions and incentives have been made by the Hong Kong government, which will help businesses cope with the crisis. However, it that will not have significant effect until the political unrest ends. Economists are rising dim with the country’s outlook, with average growth projections revised to 0.7% in November 2020 compared to previous estimates of 2.4% by Consensus Economics. Some analysts say that this is actually also hopeful. Tommy Wu, the supreme economist for Oxford Economics, stated that Hong Kong GDP prediction for 2019 is down 1.4%, with a further 1.3% fall end of 2019. He also added that the downside risk to the fourth quarter and 2019’s growth forecasts is high.

Moreover, the economic impact can be seen different range of economy situation of the country. There were short term and long-term impact on Hong Kong’s economy situation due to the social demonstration in Hong Kong. Firstly, in term of short-term it is as the demonstrations continue to hurry, the short-term economic effects on Hong Kong’s people start to intensify. Among the most obvious signs of its effect is a decline in consumer spending on non-essential goods. Summer retail sales are estimated to decline by more than 10% from the year of 2018 from July to August. The demonstrations had made that closed down Hong Kong International Airport for around two days also took a toll. Aircraft experts estimate that Hong Kong has been hit by a flight cancellation of 76 million dollars. As Hong Kong’s GDP accounts for around 5% of the airport, any delays are expected to affect the economic growth of the special administrative region for the year. There is further evidence, in particular thanks to travel experts from at least 22 nations, that disruption have kept away visitors and commercial travelers to Hong Kong. More than 75% of all people arriving in Hong Kong have delayed tourists from mainland China.

Next, the impact has been shown in long-term impact to the economic situation of the nation from the growth of social movements. It is much harder to quantify the long-term consequences of the demonstrations and Chinese reaction to them. One of them is that Hong Kong is a center for companies in China or the country that are internationally involved. Around 1,530 multinational corporations were established their regional headquarters in the town and it was found by the government of Hong Kong in 2018. Out of that, 290 companies were American companies. Historically, businesses in Hong Kong have preferred to build shops because of their desirable location and because of their belief that they represent a sanctuary where the rule of law is robust having that in comparison with China. It changed as more multinational companies decided to move their headquarters onto the continent as their economic power increased. By attempting to address the demonstrations by gaining further control of Hong Kong, China would be a reason to hold Hong Kong as its global base if its legal environment were to be disrupted by the multinationals. The trickle from Hong Kong companies may be well become a flood with withdrawal of high-paid jobs. The other long-term issue is how China’s ties with the rest of the world will impact the Hong Kong protest. United States President Donald Trump informed China that if it is to sign an agreement to end the trade war, China will deal ‘humanly’ with the demonstrations. It was also added that if Beijing takes a heavy-handed strategy, other world leaders will change the way they communicate with China and also Hong Kong.

The social movements in Hong Kong are vastly known between the nation and other countries. Mass anti-government rallies in Hong Kong recently have caught the attention of the world. The protesters, armed with modern communication technology, have centered their frustration on the military, police and signs of Beijing’s rule in Hong Kong. The increasingly leaderless demonstrations imply that they are a move away from a political movement’s conventional structure. Alternatively, demonstrators from Hong Kong organize each rally through a hierarchical system of organization. In order to facilitate smooth sharing of information, Hong Kong civilians relied on messaging apps such as Telegram and a live map that helps protesters instantly notice the police location. Hong Kong people have tactics which become ‘textbook examples’ of demonstrators in other countries, from street blockades to air traffic disturbances. Mass protests against the state have lately occurred in countries like Indonesia and the Catalan region of Spain. In Indonesia, after mass protests overturned the regime of Suharto in 1998, the demonstrators were among the largest student rallies. The demonstration cause is outrage over a statute that the students say weakens the war on shooting and other controversial new legislation, including a criminal code that outlaws sex outside marriage. Often the demonstrations turned violent, with protesters rallying at security forces in front of government buildings, burning tires and throwing stones as well as petrol bombs. The police responded by shooting the demonstrators with tear gas and water cannons.

The vast known about Hong Kong social movement have spread to many countries with high increase technology usage and social media platforms. Data about the demonstrations was disseminated through social media and messaging apps, according to the students who engaged in the protests. Several students translated videos and articles about the strategies of Hong Kong demonstrators to extinguish tear gas into Bahasa Indonesia to help demonstrators learn several basic knowledge about how to handle tear gas. Even through WhatsApp groups, Line groups, Twitter and Instagram, the students shared information on how to handle with tear gas. The students also arranged discussion groups to address the other strategies of Hong Kong demonstrators and the history to their campaign. The students also followed a strategy that during the demonstrations many protesters in Indonesia covered their faces, which have been a strategy which Hong Kong demonstrators unanimously followed. Hong Kong people’s persistence throughout the recent months was truly inspiring.

Meanwhile, in Catalonia, separatists demonstrating against the incarceration of nine of their members were blatantly following Hong Kong’s crafted methods. Soon after Spain’s Supreme Court sentenced nine Catalan politicians to prison terms of up to 13 years for their role in a failed 2017 secession attempt, 240,000 Russian designed the Telegram chat app users received a message telling them to travel to Barcelona’s second busiest El Prat airport in Spain. The message-sent by a new online separatist group ‘Tsunami Democratic’, which is related aim was to ‘paralyze’ the airport like protests did in September in Hong Kong. Tsunami Democratic uses communication apps such as Telegram and created its own software to issue orders for its members by an unknown leader to perform acts of what it calls passive civil disobedience. The region’s massive protests often spiraled into violent police clashes. Protesters destroyed hundreds of trash bins and used petrol grenades, acid, asphalt fragments and other weapons of police attack. With the aid of 130 boarding passes distributed by Tsunami Democratic through an app, Catalan demonstrators stormed the airport to interrupt air traffic.

Hong Kong protesters used a similar tactic, buying tickets for low-cost flights to enter the airport and organizing a mass demonstration there. The regional police force of Catalonia stated that demonstrators sometimes used laser pointers against police in Barcelona, a popular tactic in Hong Kong. Many Catalan protesters quote the Hong Kong demonstrations as a source of inspiration.

Although Catalan demonstrators in Hong Kong have benefited a great deal from their counterparts, some analysts point to fundamental differences between the two protest movements. People have different requests in Hong Kong and Catalonia. That the five demands of Hong Kong demonstrators do not include seeking independence for the special administrative region of China, while Catalan protesters hope to achieve the separation of the city from Spain.

Reference

1. Cheng, J. Y. S. (2014). The Emergence of Radical Politics in Hong Kong: Causes and Impact. China Review, 14(1), 199-232.

Simplest Representation Model

First, there are three concepts involved in the simplest representation model. There are principal, agent and third party. There are principal, agent and third party. The principal is hiring other one to do something for them that they cannot do for themselves. So, the agent performs certain actions on behalf of the principal.

In reality, voters are the principal, while legislator is the agency. In the electoral regulations, voters clearly know the functions of legislators and can monitor through official job reports or websites. The legislators must be clear about their functions. Even if they break the law, they still have to bear personal consequences, which has nothing to do with voters. In addition to legal issues, in daily life, for example, a legislator passed a bad law, but because this legislator is elected by the citizen and represents the citizens, do you think that citizens must bear responsibility for passing bad laws? Of course, it should bear the responsibility. At the time of the election, the citizens still made choices based on the candidate’s political platform. Therefore, in this case, the citizens did not express their personal opinions, and both parties should bear responsibility.

And the third concept is the third party. It is between agent or principal and third party with whom the agent is dealing on the principal’s behalf. The main function is to understand the respective interests, responsibilities, and independence of the two parties being dealt with. Continuing the above example, the Legislative Council is a third party between citizens and legislators. According to the powers and functions of the Legislative Council are specified in Article 73 of the Basic Law, the Legislative Council is the Legislature of the Hong Kong Special Administrative Region. The main functions of the Legislative Council include enacting laws, approving public expenditure and monitoring the work of the Government. This shows that the Legislative Council is an independent department that balances the powers of citizens and legislators.

Trustee and Mandate

The types of representative theories are briefly divided into two major models. Among the two models, one is a trustee that advocates that members can judge according to their opinion. On the other side, it is mandate which advocates that must follow the lead and act in accordance with the will of voters.

The trustee’s characteristic is flexible and can be extended to cover the representation of individuals who incapability. At the same time, it is advocated to consider the general well-being of the citizen, rather than focusing only on local interests. Mandate’s characteristic is mechanical and understands the preferences of the citizen in its constituency and makes choices based on the opinions of the voter.

Self-reflection

Hong Kong’s representative democracy has existed during the England colonial period, and in the past, it was mainly elitist democracy. The former Hong Kong officials were mainly British officials but failed to listen directly to public opinion, resulting in riots among the citizens. So, the British government found local elite representatives to express opinions on behalf of Hong Kong people. So before 1997, the trustee representative model was adopted. However, I think that before 1997, the level of knowledge and living standards of Hong Kong citizens had not been well developed. Therefore, it would be acceptable to have social elites representing the public.

Andeweg, R. B., & Thomassen, J. J. A. said that if the behavior of the representative is followed from the bottom up, all the logic based on popular opinion will be criticized and reduced to a populist; and if the representative follows the logic of the top-down, the wisdom of political figures is judged as The Lord will again be said to be an elitist.

But I do not agree with the above description populist. I think a government is just an employee who works for the citizen. It is the responsibility of the government to collect the voices of different citizens to make changes and manage the country. In the Anti-Extradition Law Amendment Bill (or Anti-ELAB) movement, it is clear that the government has not heard the voice of the citizens, which has increased the power of the government. Therefore, even if there is no perfect representation system, it is still important to consider the voice of citizens.

Hong Kong has been relying on its simple and low tax system for several years to attract talent and capital in order to maintain competitiveness. Are there any flaws in our tax regime? In order to investigate the strength and weakness of our taxation system, we have explored seven key criteria of a good taxation system. The purpose is to identify critical issues confronting Hong Kong economy which is related to the weakness of our taxation system so as to investigate possible measures to improve current situations. Narrow tax base and wealth inequality are the two concerns that have been identified, we are going to look into these two problems and discuss how to improve these situations.

Good Taxation System

There are 7 characteristics of good taxation system:

1. A good taxation system should achieve both horizontal and vertical equity. Horizontal equity is preserved when individuals and businesses with the same ability-to-pay are taxed equally. Vertical equity is preserved by taxing in proportion to taxpayers’ ability to pay. Vertical equity is concerned with redistribution of income by adoption of progressive taxes to achieve a more equitable distribution of wealth in society.
2. An effective taxation system must be revenue-productive to yield sufficient revenue to finance public services and development. It should be stable, sustainable and less sensitive to economic cycles and thus enhance overall fiscal system to achieve stabilization of economy.
3. Good taxation system should have high transparency. It should be clear who are being taxed, how much are being taxed and how the money is used.
4. A good taxation system must be operationally efficient to minimize compliance costs for taxpayers and administration costs for government.
5. An effective taxation system should be simple and intelligible. The rules are clear, simple to understand and easy for calculation.
6. In a good taxation system, certainty regarding the time and amount to be paid to government is important.
7. A good taxation system should be flexible and capable of adapting to technological changes, commercial developments and other changes of the economy.

Before we go into Hong Kong taxation system, we need to understand the importance of fairness to a society in order to justify whether we have a fair tax regime. According to the ‘Second Principle’ of John Rawls in his book ‘Justice as Fairness’ concerning about social and economic inequalities, all people should have equality of opportunity which indicates people with the same talents and willingness should be offered same educational and economic opportunities regardless of whether they were born rich or poor. Furthermore, any inequalities such as wealth and income are only allowed when it is good for all, especially for those who are advantaged least. A fair taxation system is important because it ensures all people share the equality of opportunity and regulates inequalities of wealth and income to achieve social harmony.

Two Sides of the Hong Kong Taxation System

Hong Kong is famous at its simple, low and competitive tax system. Only three direct taxes are imposed: profits tax (16.5%), salaries tax (15%), property tax (15%). As Hong Kong depends heavily upon overseas investment for its continued economic growth, such a simple and efficient tax system helps maintain an attractive investment environment for Hong Kong. Furthermore, Carrie Lam, the Chief Executive of Hong Kong, announced in her ‘2017 Policy Address’ the two-tiered profits tax rates which has been implemented on April 1, 2018. The profits tax rate is lowered to 8.25% for the first two million of corporation profits. This will reduce the tax burden on enterprises, especially SMEs and startup companies. Besides, Hong Kong is a free port and levying no tariffs on imports while the tax regime remains high transparency, certainly, flexibility and efficiency. All these advantages come to a favorable business environment and economic growth, enhance the competitiveness for Hong Kong as an international city.

Although current tax regime contributes to fiscal balance for Hong Kong for years, it hides uncertainties that may affect the future economic growth and prosperity. One of the issues confronting Hong Kong economy is the narrow tax base which is regarded as being inconsistent with equity because the overall tax burden is born by relatively few taxpayers. According to 2018-2019 Budget Consultation, profits tax is our largest operating revenue, however, about 86% of our profits tax is contributed by the top 5% taxpaying corporations (i.e., about 5 200 corporations) in the year of assessment 2015-16, around 1 072 000 registered companies (about 91% of the total registered corporations) do not pay any profits tax. For salaries tax, it has been our second or third largest operating revenue. Of the 3.77 million working population, about 1.92 million or 51% of the working population need not pay any salaries tax. Of the 1.85 million who paid salaries tax, the top 5% taxpayers (i.e., about 93 000 taxpayers) contributed 63% of the revenue from salaries tax. The 2018-2019 Budget Consultation also showed that profits tax and salaries tax contribute almost 40% of the total government revenue. It is unhealthy that around 40% of total government revenue is mainly taxed from few percentages of taxpayers. Hong Kong as a small and open economy relies upon only a narrow range of taxes that is sensitive to economic fluctuations, has been limited the ability to manage public finances, especially in times of downturns in economic cycles and adversity such as finances crisis in 1997 and SARS in 2003.

Another issue confronting Hong Kong is the uneven distribution of wealth which does not obey the equity of a good taxation system. The extent of wealth inequality is reflected by Gini coefficient showing how evenly income is distributed on a scale from zero to one. Gini coefficient above 0.5 indicates large income disparity. According to the Hong Kong Inequality Reported released by Oxfam in Sep 25, 2018 examining data from the Census and Statistics Department’s 2001-2016 Population Census, Hong Kong’s Gini coefficient (based on original monthly household income) is 0.539 which is the highest in 45 years. Although the Gini coefficient based on post-tax post-social transfer monthly household income was 0.473 in 2016, the wealth gap is still one of the most extreme among developed economies, including the Canada – 0.318, United Kingdom – 0.351, United States – 0.391, Singapore – 0.356 and Australia – 0.337. Wealth inequality imposes a negative effect on economic growth. According to the OECD report ‘Focus on Inequality and Growth’ in 2014, a long-term trend increase in income inequality has curbed economic growth significantly by hindering human capital accumulation because it undermines education opportunities for disadvantaged individuals, lowering social mobility and hampering skills development.

Improvements

There are two possible ways to improve the narrow tax base situation. The first method is to introduce new tax on current narrow tax base. Goods and services tax (GST) has been a long argument in society, however in short term it looks like the most appropriate treatment for narrow tax base. In fact, most of the developed countries have implemented GST such as Singapore, Australia and Canada. GST is an indirect tax which provides a stable and predictable income because private consumption is relatively stable in economic fluctuations. It contributes a considerable income even at low rate because tax base is very broad that all people who produce or purchase goods and services are taxed. This also minimizes tax evasion and avoidance problem. It is a fair tax because people who consume more would need to pay more tax. With the adoption of sales tax, Hong Kong can keep its low and simple tax system as usual to attract foreign investors and manpower to maintain our competitiveness. New tax income provides more resources on treating critical issues such as aging population and poverty issue. However, there are obstacles for GST implementation in Hong Kong. Sales tax is a recessive tax because lower income people must spend a larger share of their income than higher income people for buying the same product. Thus, implementation of GST should come along with tax refund or other compensation to low-income people and welfare policies to offset the negative effect of GST on poverty problem. The second one is to dilute concentrated income sources by new industries. Currently tax revenue is heavily relying on a few key industries. ‘Distribution’, ‘Property, Investment and Finance’ and ‘Banking’ that account for over 65% of profits tax, most of the top 5% taxpayers are in these key industries and majority of them belong to service sector. In long term, it is necessary to well develop emerging industries such as ‘cultural and creative industries’ and ‘innovation and technology’. Among the ‘Four Asian Tigers’, the GDP percentage occupied by industry sector in 2017 for South Korean – 39.3, Taiwan – 35.5, Singapore – 24.8, Hong Kong is 7.6 while service industry shared 92% of GDP by economic activities. It implies that government has to allocate more resources on other industries in order to diverse the industries so as to broaden income source.

The extreme high Gini coefficient reflects that current tax regime does not help improve wealth disparity efficiently. There are two possible ways to shorten the wealth gap. Raising 1 to 2 % on profits tax rate is a quick and direct method to obtain more tax from high profit-generating corporations. It will help achieve a fairer society as current wealth inequality is not good for everyone’s advantage, especially for the poverty groups. New profits tax raised the flexibility for government to transfer more resources from the rich to the poor. This helps improve their education, health care, livelihood issues so as to increase social mobility, cultivate talents, promote social harmony. Some people concern about increasing profits tax will decrease Hong Kong’s competitiveness. According to ‘The Global Competitiveness Report 2018’ conducted by World Economic Forum (WEF), Germany and Japan ranked the third and fifth of global competitiveness respectively while Germany has a total tax rate of 48.9% and that of Japan is 47.4%. Hong Kong ranked the seventh of global competitiveness. This indicates tax rate is not the only criteria to maintain one’s competitiveness. The small tax increase will not affect SMEs a lot because of the two-tiered profits tax. To precisely allocate resources to decrease the wealth gap, we need to identify who are in the poverty group. The Oxfam report found out there are six groups of people affected by poverty are residents of subdivided flats, low-income workers, women, children, the elderly and ethnic minorities. Government should wisely allocate resources to decrease the poverty population. For example, resources can be allocated to provide labor protection and flexible job types for household women that encourage them to work and increase income, more financial support for children to ensure they have equal opportunity for education.

Conclusion

We have accessed the effectiveness of Hong Kong taxation system by comparing it with standard hallmarks of an effective taxation system. Hong Kong maintains a simple and low taxation system to attract talents and capital to increase global competitiveness. However, we have identified two critical issues confronting Hong Kong economy which are related to weakness of our taxation system. First, Hong Kong has a narrow tax base which is sensitive to economic fluctuations, the situation can be improved by broadening current tax base through adding GST as new tax. In long term, developing new industries provides more income sources for government and thus diluting current concentrated income sources from only few industries. Second, the wealth disparity is extreme large in Hong Kong due to uneven distribution of wealth, the situation can be improved by increasing profits tax in 1 to 2% together with two-tiered profits tax. It is a direct way to withdraw more resource from the rich to the poor while not imposing much influence on SMEs. In order to reduce wealth gap, government resources should be precisely and wisely allocated to identified poverty groups.

Hong Kong has been relying on its simple and low tax system for several years to attract talent and capital in order to maintain competitiveness. Are there any flaws in our tax regime? In order to investigate the strength and weakness of our taxation system, we have explored seven key criteria of a good taxation system. The purpose is to identify critical issues confronting Hong Kong economy which is related to the weakness of our taxation system so as to investigate possible measures to improve current situations. Narrow tax base and wealth inequality are the two concerns that have been identified, we are going to look into these two problems and discuss how to improve these situations.

Good Taxation System

There are 7 characteristics of good taxation system:

1. A good taxation system should achieve both horizontal and vertical equity. Horizontal equity is preserved when individuals and businesses with the same ability-to-pay are taxed equally. Vertical equity is preserved by taxing in proportion to taxpayers’ ability to pay. Vertical equity is concerned with redistribution of income by adoption of progressive taxes to achieve a more equitable distribution of wealth in society.
2. An effective taxation system must be revenue-productive to yield sufficient revenue to finance public services and development. It should be stable, sustainable and less sensitive to economic cycles and thus enhance overall fiscal system to achieve stabilization of economy.
3. Good taxation system should have high transparency. It should be clear who are being taxed, how much are being taxed and how the money is used.
4. A good taxation system must be operationally efficient to minimize compliance costs for taxpayers and administration costs for government.
5. An effective taxation system should be simple and intelligible. The rules are clear, simple to understand and easy for calculation.
6. In a good taxation system, certainty regarding the time and amount to be paid to government is important.
7. A good taxation system should be flexible and capable of adapting to technological changes, commercial developments and other changes of the economy.

Before we go into Hong Kong taxation system, we need to understand the importance of fairness to a society in order to justify whether we have a fair tax regime. According to the ‘Second Principle’ of John Rawls in his book ‘Justice as Fairness’ concerning about social and economic inequalities, all people should have equality of opportunity which indicates people with the same talents and willingness should be offered same educational and economic opportunities regardless of whether they were born rich or poor. Furthermore, any inequalities such as wealth and income are only allowed when it is good for all, especially for those who are advantaged least. A fair taxation system is important because it ensures all people share the equality of opportunity and regulates inequalities of wealth and income to achieve social harmony.

Two Sides of the Hong Kong Taxation System

Hong Kong is famous at its simple, low and competitive tax system. Only three direct taxes are imposed: profits tax (16.5%), salaries tax (15%), property tax (15%). As Hong Kong depends heavily upon overseas investment for its continued economic growth, such a simple and efficient tax system helps maintain an attractive investment environment for Hong Kong. Furthermore, Carrie Lam, the Chief Executive of Hong Kong, announced in her ‘2017 Policy Address’ the two-tiered profits tax rates which has been implemented on April 1, 2018. The profits tax rate is lowered to 8.25% for the first two million of corporation profits. This will reduce the tax burden on enterprises, especially SMEs and startup companies. Besides, Hong Kong is a free port and levying no tariffs on imports while the tax regime remains high transparency, certainly, flexibility and efficiency. All these advantages come to a favorable business environment and economic growth, enhance the competitiveness for Hong Kong as an international city.

Although current tax regime contributes to fiscal balance for Hong Kong for years, it hides uncertainties that may affect the future economic growth and prosperity. One of the issues confronting Hong Kong economy is the narrow tax base which is regarded as being inconsistent with equity because the overall tax burden is born by relatively few taxpayers. According to 2018-2019 Budget Consultation, profits tax is our largest operating revenue, however, about 86% of our profits tax is contributed by the top 5% taxpaying corporations (i.e., about 5 200 corporations) in the year of assessment 2015-16, around 1 072 000 registered companies (about 91% of the total registered corporations) do not pay any profits tax. For salaries tax, it has been our second or third largest operating revenue. Of the 3.77 million working population, about 1.92 million or 51% of the working population need not pay any salaries tax. Of the 1.85 million who paid salaries tax, the top 5% taxpayers (i.e., about 93 000 taxpayers) contributed 63% of the revenue from salaries tax. The 2018-2019 Budget Consultation also showed that profits tax and salaries tax contribute almost 40% of the total government revenue. It is unhealthy that around 40% of total government revenue is mainly taxed from few percentages of taxpayers. Hong Kong as a small and open economy relies upon only a narrow range of taxes that is sensitive to economic fluctuations, has been limited the ability to manage public finances, especially in times of downturns in economic cycles and adversity such as finances crisis in 1997 and SARS in 2003.

Another issue confronting Hong Kong is the uneven distribution of wealth which does not obey the equity of a good taxation system. The extent of wealth inequality is reflected by Gini coefficient showing how evenly income is distributed on a scale from zero to one. Gini coefficient above 0.5 indicates large income disparity. According to the Hong Kong Inequality Reported released by Oxfam in Sep 25, 2018 examining data from the Census and Statistics Department’s 2001-2016 Population Census, Hong Kong’s Gini coefficient (based on original monthly household income) is 0.539 which is the highest in 45 years. Although the Gini coefficient based on post-tax post-social transfer monthly household income was 0.473 in 2016, the wealth gap is still one of the most extreme among developed economies, including the Canada – 0.318, United Kingdom – 0.351, United States – 0.391, Singapore – 0.356 and Australia – 0.337. Wealth inequality imposes a negative effect on economic growth. According to the OECD report ‘Focus on Inequality and Growth’ in 2014, a long-term trend increase in income inequality has curbed economic growth significantly by hindering human capital accumulation because it undermines education opportunities for disadvantaged individuals, lowering social mobility and hampering skills development.

Improvements

There are two possible ways to improve the narrow tax base situation. The first method is to introduce new tax on current narrow tax base. Goods and services tax (GST) has been a long argument in society, however in short term it looks like the most appropriate treatment for narrow tax base. In fact, most of the developed countries have implemented GST such as Singapore, Australia and Canada. GST is an indirect tax which provides a stable and predictable income because private consumption is relatively stable in economic fluctuations. It contributes a considerable income even at low rate because tax base is very broad that all people who produce or purchase goods and services are taxed. This also minimizes tax evasion and avoidance problem. It is a fair tax because people who consume more would need to pay more tax. With the adoption of sales tax, Hong Kong can keep its low and simple tax system as usual to attract foreign investors and manpower to maintain our competitiveness. New tax income provides more resources on treating critical issues such as aging population and poverty issue. However, there are obstacles for GST implementation in Hong Kong. Sales tax is a recessive tax because lower income people must spend a larger share of their income than higher income people for buying the same product. Thus, implementation of GST should come along with tax refund or other compensation to low-income people and welfare policies to offset the negative effect of GST on poverty problem. The second one is to dilute concentrated income sources by new industries. Currently tax revenue is heavily relying on a few key industries. ‘Distribution’, ‘Property, Investment and Finance’ and ‘Banking’ that account for over 65% of profits tax, most of the top 5% taxpayers are in these key industries and majority of them belong to service sector. In long term, it is necessary to well develop emerging industries such as ‘cultural and creative industries’ and ‘innovation and technology’. Among the ‘Four Asian Tigers’, the GDP percentage occupied by industry sector in 2017 for South Korean – 39.3, Taiwan – 35.5, Singapore – 24.8, Hong Kong is 7.6 while service industry shared 92% of GDP by economic activities. It implies that government has to allocate more resources on other industries in order to diverse the industries so as to broaden income source.

The extreme high Gini coefficient reflects that current tax regime does not help improve wealth disparity efficiently. There are two possible ways to shorten the wealth gap. Raising 1 to 2 % on profits tax rate is a quick and direct method to obtain more tax from high profit-generating corporations. It will help achieve a fairer society as current wealth inequality is not good for everyone’s advantage, especially for the poverty groups. New profits tax raised the flexibility for government to transfer more resources from the rich to the poor. This helps improve their education, health care, livelihood issues so as to increase social mobility, cultivate talents, promote social harmony. Some people concern about increasing profits tax will decrease Hong Kong’s competitiveness. According to ‘The Global Competitiveness Report 2018’ conducted by World Economic Forum (WEF), Germany and Japan ranked the third and fifth of global competitiveness respectively while Germany has a total tax rate of 48.9% and that of Japan is 47.4%. Hong Kong ranked the seventh of global competitiveness. This indicates tax rate is not the only criteria to maintain one’s competitiveness. The small tax increase will not affect SMEs a lot because of the two-tiered profits tax. To precisely allocate resources to decrease the wealth gap, we need to identify who are in the poverty group. The Oxfam report found out there are six groups of people affected by poverty are residents of subdivided flats, low-income workers, women, children, the elderly and ethnic minorities. Government should wisely allocate resources to decrease the poverty population. For example, resources can be allocated to provide labor protection and flexible job types for household women that encourage them to work and increase income, more financial support for children to ensure they have equal opportunity for education.

Conclusion

We have accessed the effectiveness of Hong Kong taxation system by comparing it with standard hallmarks of an effective taxation system. Hong Kong maintains a simple and low taxation system to attract talents and capital to increase global competitiveness. However, we have identified two critical issues confronting Hong Kong economy which are related to weakness of our taxation system. First, Hong Kong has a narrow tax base which is sensitive to economic fluctuations, the situation can be improved by broadening current tax base through adding GST as new tax. In long term, developing new industries provides more income sources for government and thus diluting current concentrated income sources from only few industries. Second, the wealth disparity is extreme large in Hong Kong due to uneven distribution of wealth, the situation can be improved by increasing profits tax in 1 to 2% together with two-tiered profits tax. It is a direct way to withdraw more resource from the rich to the poor while not imposing much influence on SMEs. In order to reduce wealth gap, government resources should be precisely and wisely allocated to identified poverty groups.