16 October 2019
Financial Secretary Paul Chan is very cautious about making any change to Hong Kong’s tax regime, and rightly so. Photo: HKEJ
Financial Secretary Paul Chan is very cautious about making any change to Hong Kong’s tax regime, and rightly so. Photo: HKEJ

Hong Kong must keep a cool head in face of US tax overhaul

Recently the US Senate passed a sweeping tax reform plan proposed by the Donald Trump administration, a move that could encourage capital worldwide to flow back to the United States.

Given that, there is growing concern that the US tax reform might have a “spillover effect” on other economies and trigger a stampede of tax cuts around the world in order to avoid massive capital outflows.

As to how Hong Kong should respond to the US tax reform and its implications for the global economy, Financial Secretary Paul Chan Mo-po wrote on his blog earlier this week that we should no doubt be paying close attention to it, but in the meantime we should also keep a cool head, making appropriate judgments.

As he put it, Hong Kong already has a highly competitive tax regime, given the fact that our corporate income tax rate only stands at 16.5 percent, and we don’t impose any tariff on imported goods except for cars, booze, cosmetics and cigarettes, not to mention we also don’t have any capital gains tax.

Reading between the lines, we can tell that our finance chief is very cautious about making any change to Hong Kong’s tax regime at this point.

We agree with his stance. Over the years there have been calls among society for the government to expand the city’s narrow tax base through measures such as introducing capital gains tax and sales tax, as well as raising the current 15 percent standard tax rate in order to boost government revenues.

However, imposing new taxes is always a highly sensitive issue, and may entail huge administrative costs. Besides, as the ripple effect of the US tax reforms is still continuing to unfold, we agree with Chan that it would be in our best interests to stay put over Hong Kong’s tax system, at least in the short run.

Meanwhile, as the Hong Kong government is flooded with surplus, there are also calls among the populists for the administration to offer cash handouts.

We believe the current administration is unlikely to meet that demand for juicy cash handouts. We agree that cash handouts are nothing more than quick fix, and can hardly serve as a long-term solution to Hong Kong’s social problems such as the widening poverty gap.

Instead, we believe the government should spend the money on education and ensure that social welfare benefits are directed to those who are truly in need. It should also spend the money on innovation and technology, creating jobs and promoting an innovation and technology driven economy.

An old Chinese saying goes: teaching one how to fish is better than just giving him a fish. We believe investing in policy initiatives that can benefit society in the long run, like diminishing the poverty gap, is always better than just handing out cash to people.

This article appeared in the Hong Kong Economic Journal on Dec 11

Translation by Alan Lee

[Chinese version 中文版]

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Hong Kong Economic Journal