Generation 40s – 四十世代

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How Hong Kong’s tax regime short-changes residents by encouraging speculation and evading the city’s funding needs

South China Morning Post
CommentInsight & Opinion
2018-03-01

Stefano Mariani says the missing piece in Hong Kong’s budget is tax reform, as Hongkongers have not made the connection between the city’s ‘simple and low’ tax regime and its housing, infrastructure and retirement protection problems

Wednesday’s budget again raised the vexed question on which the future of our city’s public finances depends: whither tax reform?

The usual array of middle-class tax breaks are beginning to assume the character of cynical bribes. They represent a short-termist approach to public expenditure, the fiscal equivalent of bread and circuses. Because tax is not an electoral issue in Hong Kong, inasmuch as most residents pay no tax at all, it has been difficult for the government to formulate a clear understanding of what tax policy should aim to achieve.

Michael Littlewood, a former professor at the University of Hong Kong, dubbed his study on tax law in Hong Kong “the history of Hong Kong’s troublingly successful tax system”, noting that a combination of low rates and simple tax administration made the jurisdiction especially attractive as an investment hub.

The notion of success, however, is relative and must be measured against prevailing social, economic and cultural priorities. A tax system that worked well in the glory days of frenetic growth in the 70s and 80s is not the tax system that will best serve Hong Kong in the three decades or so leading up to 2047.

Society, and its discontents, have changed. The budget surplus, which is not being put to any apparent gainful use, is in stark contrast to the pauperisation of large cross-sections of the population. But money must be spent in order to spend money: if any part of the surplus is to be applied to social programmes, the physical, human, and administrative infrastructure to bring those programmes into existence and sustain them must first be put in place. That requires an extensive capital outlay and long-term funding commitments.

Our Inland Revenue Ordinance is a creature of the early 20th century and was envisaged by the colonial office as appropriate for a bustling entrepôt colony, not a 21st-century metropolis.

It may be important to keep our tax regime simple and low, but our tax laws must be fit for the purpose. Here, the distinction between tax rates and the structure of the tax legislation is important. If setting the tax rate low were sufficient to attract investment, then Somalia and Yemen should be booming centres of entrepreneurship.

Hong Kong has failed to attract high-value-added, knowledge-based industries to the same extent as Singapore and, increasingly, Shenzhen, not because the tax rates are too high but because the tax system tends to create perverse incentives that oppose the government’s stated aim to diversify the economy and improve quality of life.

Why make a high-risk investment in a tech start-up when there are guaranteed tax-free returns to be gained from speculating in the property market? Why think seriously about tax policy when one can fob off the electorate with a few “sweeteners” and kick the can down the road?

Perhaps the main reason for which there is no grass-roots pressure for tax reform is that voters have not correlated inflated property prices, low-quality housing stock, strained infrastructure and low levels of public pension provision with the structural deficiencies of our tax laws. By not taxing capital gains on real estate, speculation is enabled by allowing raw economic gain from property investment to be collected free of tax, while trading gains from the “real” economy are covered at the full rate of profits tax. Similarly, offshore dividends and capital wealth – for example, residential property that is hoarded and left empty purely for investment purposes – are not taxable. Consequently, we tend to attract rent-seekers, not entrepreneurs.

In January, I drafted a law reform project paper arguing for some modest measures.

First, a capital-gains tax should be introduced on the disposal of residential property which is not the principal residence of the vendor.

Second, a flat annual tax should be levied on the holding of vacant residential property to discourage hoarding and to cool down the rental market.

Third, offshore dividends that are remitted or spent in Hong Kong should be taxed, thereby eliminating the indefensible absurdity whereby the salary of a resident employee is chargeable to salaries tax, but a dividend received by a resident investor from an offshore company is not.

The paper was submitted by Dennis Kwok, a Legislative Council member, to the attention of the financial secretary. The Financial Services and Tax Bureau’s response was non-committal, suggesting that the enactment of the proposed reforms would interfere with its policy of a “simple and low” tax system. But that conclusion does not follow: by expanding the tax base, the government could afford to further decrease headline rates of tax in a bid to support both salaried earners and small businesses, which are among the stated priorities of the financial secretary set forth in his budget speech.

For the government’s facile reasoning on tax reform to be challenged, taxation must become a political issue. Both civil society and Legco members interested in a sustainable future for Hong Kong’s economy have a duty to press the government to explain clearly how it envisages tackling the structural imbalances in Hong Kong’s tax laws and ensure that these begin to reflect the funding needs of the city not as it was, but as we wish it to be.

Stefano Mariani is a lawyer and revenue law specialist, who has published widely in the field of taxation. The views expressed in the article are solely those of the author

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A few ‘selfish’ ideas for how to spend Hong Kong’s massive budget surplus

South China Morning Post
CommentInsight & Opinion

Peter Kammerer says free Wi-fi everywhere, electric buses and a more presentable city are some of the meaningful and relatively easy changes that could be made with the budget surplus to improve quality of life

Hong Kong won’t find out until budget day on Wednesday just how much spare cash Financial Secretary Paul Chan Mo-po has to throw around. There are estimates it could be as much as a record HK$180 billion, on top of the trillions already in reserve.

It’s an obscene amount for any government to be sitting on, particularly when it has repeatedly avoided tackling the problems that now have our city veering towards a social crisis. But I’m not about to suggest the funds should be used to provide affordable housing, end poverty, improve the public health and education systems or help the dissatisfied young and elderly; rather, I’m going to put forward some ideas for my own selfish gain.

Mr Chan: I’d like free Wi-fi provided for every corner, nook and cranny of our city. Your boss, Chief Executive Carrie Lam Cheng Yuet-ngor, repeatedly talks about innovation, technology and digital this and that, and this perfectly fits such thinking. Most of us are constantly peering at smartphone screens wherever we go, walking into one another and even putting ourselves in danger at road crossings; with even better connectivity, we could play online games and shop even when in country parks. Maybe all that connectivity would motivate bus companies with poorly developed apps, taxi firms that don’t even have them yet for booking, banks that don’t want to invest in better personal identification systems, and shops reluctant to go online to get their acts together.

I mentioned bus companies; much of our roadside pollution is because of the soot coming from the exhausts of their diesel vehicles. It’s so bad that even though I live on the 10th floor, having a window open for even a few hours leaves a fine layer of black dust coating shelves and, for sure, my lungs. It’s no wonder I get bronchitis and allergies and I know from all the coughing, wheezing and sore throats and dripping noses around me, I’m far from the only one. The number of electric buses on our streets is minuscule and our government isn’t exerting pressure for the early retirement of old fleets. But that budget windfall could instantly improve the air and the health of many, myself included, by ensuring bus firms go fully electric.

Unpolluted air is only part of the problem. I recently visited the Fujian province city of Xiamen and encountered the cleanest and most orderly streets of anywhere I’ve been in China. Even the dingiest back alley sparkled; unlike in our city, not a rat or mouse is to be seen. Trees, bushes and grass thrive and flowers brighten up roadsides; a far cry from the straggling and often dying or dead vegetation on offer here. Buildings are well maintained and kept freshly painted. Why not spend a proportion of our largesse on making Hong Kong more presentable, liveable and, dare I say, even hospitable?

On that Fujian trip, I ventured into a far-flung rural area and encountered garbage collection, backwards China style. Rubbish was left in foul-smelling piles beside roads and was collected by a truck with a shovel-wielding workman. It reminded me of the process in the building I live in and many others like it that don’t have centralised collection; bags are piled onto trolleys each night and dumped on the roadside until collected during the night. Two decades after former chief executive Tung Chee-hwa gave his “green” policy address, we’ve barely moved an inch on recycling, being less wasteful and more responsible towards our environment.

Authorities have known about high housing prices for years. Poverty levels have been creeping up under their noses. Land is as in short supply now as it was last century. Making good jobs for the young available will take time, as will putting in place a genuine pension scheme. All of these matters require huge amounts of investment and years to fix. So, Mr Chan, why not make me happy by picking some of the low-hanging fruit with your spare cash?

Peter Kammerer is a senior writer at the Post


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China’s reunification dream will remain out of reach as long as Taiwanese feel they don’t belong

South China Morning Post
CommentInsight & Opinion
2018-02-23

Chi Wang says Xi Jinping should focus on cultivating friendship and understanding and avoid threats towards Taiwan, to avoid hardening people’s resentment

In early January, the US House of Representatives passed the Taiwan Travel Act “to encourage visits between the United States and Taiwan at all levels”. Though the bill has yet to be signed into law, the Chinese spokesperson for the Ministry of Foreign Affairs, Lu Kang, was quick to criticise it. Lu claims the bill, which is more symbolic than substantive, would violate the “one-China” policy and encourage Taiwan independence.

With tense cross-strait relations and provocative moves like this from the US, Chinese President Xi Jinping is faced with a dilemma: Taiwan does not wish to be part of China, and China’s dreams of reuniting with Taiwan may already be out of reach.

As a Chinese American, I have a long association with people in Taiwan. I have built a connection to Taiwan through family friends, relationships with government officials and even students. Whether Beijing thinks Taiwan is still part of the same country, Taiwan does not consider itself part of mainland China. The time for easy reunification has long since passed.

If the people of Taiwan do not consider themselves part of a unified country, they will never be unified. Beijing and Taipei must take time to understand each other before any true unification is possible. Hopefully my own experiences, at the very least, can provide some understanding among them.

In April 1949, I was preparing to study in America. I had travelled through the countryside from Beijing to China’s eastern coastal Shandong province. There was no public transport then; the roads had been destroyed by the civil war between Mao Zedong’s communists and the Kuomintang government of Chiang Kai-shek. I travelled with seven or eight classmates through the most destitute areas of China, catching rides on the backs of trucks and bicycles and sleeping on the floor. These areas, “liberated” by the victorious communists, could not have been poorer.

 

From Qingdao in Shandong province, I flew to Taipei, where I stayed in my father’s house for about two weeks. Taiwan was in chaos, awaiting Mao and unsure of the future. Chiang had not yet moved the KMT government to Taiwan, and people were unsure whether to stay in their homes or leave. I predicted that Mao would come, and told my friends they had a choice: live under the communists or leave.

In the end, I was wrong: Mao did not “liberate” Taiwan. Looking back, this was a mistake for Mao and a very good thing for the Taiwanese people.

Left alone by the communists, Taiwan prospered under Chiang Kai-shek and his son Chiang Ching-kuo. The island transformed from a hopeless colony into an Asian economic miracle. Its people have been able to live free and democratic lives.

Given the choice between Taiwan and mainland China, I would certainly have preferred to live in Taiwan.

China’s Communist Party has not understood how to address the Taiwanese people. Xi has been doing great things for the future of the mainland, but when it comes to Taiwan, he too has struggled.

In his speech at the 19th National Party Congress in October, Xi reaffirmed his intention to “defeat any form of a Taiwan independence secession plot”. He spoke of Taiwan in broad terms but left little doubt Beijing has no plans to abandon its claim to Taipei.

Indeed, Xi included Taiwan in his picture of the “beautiful future of the great rejuvenation of the Chinese nation”. However, Taiwanese people live free and happy lives in a multi-party democratic system, a rapidly modernising state with a developing economy. Heavy-handed policy and control from the mainland, such as crackdowns and suppression of independence, would only make the Taiwanese more resentful of mainland China. Xi needs to open his eyes.

Xi did state that Beijing would “respect the current social system in Taiwan and the lifestyles of the Taiwan compatriots”, but he cannot respect the people themselves if they do not wish to be part of China’s future. Of course Taiwanese people wish to live freely. Now generations removed from the KMT’s initial migration to the island, many identify more strongly as Taiwanese than Chinese.

Mao did not help them. None of Mao’s successors have helped them. What desire would any of them have to give up their way of life for China’s? Xi must at least acknowledge the people’s wishes to live independently, with all the benefits of a democratic government and without threats.

The way to unify socially as well as legally should not involve provocative policies such as opening disputed air routes in the Taiwan Strait without consulting Taipei, like Beijing did with the M503 air corridor. That will not make people feel more kindly towards the mainland.

A Taiwanese protester holds up a banner calling for independence during a Chinese-organised concert at the National Taiwan University in Taipei. Photo: AP

I want to see China and Taiwan coexist peacefully, but what that will look like remains to be seen. Unfortunately, reunification may not be possible in Xi’s lifetime without the use of force as a last resort – and it should only be a last resort. The Cultural Revolution killed many Chinese decades ago. China cannot find unity through a repeat of such violence.

In the case of a declaration of independence from Taiwan, neither Beijing nor Taipei would benefit. Taiwan cannot stand up to an attack from the mainland. Neither China nor the US wish to risk a war with the other, either. Such a conflict would be devastating both in terms of trade and lives, and would affect the whole Asia-Pacific region as much as it would the two main antagonists.

It is not revolutionary to say the Taiwan issue is a difficult balancing act, or that a solution will not be easy to find. Whether Taiwan is truly part of China, the Taiwanese people do not feel they are. Reunification is unlikely unless Xi takes steps now to change that. Patience, understanding and friendship must be the priority to unify people’s spirits first.

Chi Wang, a former head of the Chinese section of the US Library of Congress and former university librarian at the Chinese University of Hong Kong, is president of the US-China Policy Foundation


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In Hong Kong, animosity towards mainland Chinese can’t be overcome without an open mind

CommentInsight & Opinion
2018-01-30
Peter Kammerer says the fear of mainlandisation, though understandable, unfortunately stops Hongkongers from getting to better understand the mainland Chinese who come for work or a holiday. The continuing spats show not enough Hongkongers are making the effort

How many more times are we going to be pummelled by yet another sorry tale of Hongkongers and mainlanders sniping at one another? To add to the long and sorry list of recent years, in the past week, we’ve had a row over Mandarin language exams at Baptist University and a food fight in a noodle shop at the airport. I also witnessed an argument on a bus and jostling on a street in Causeway Bay.

None of these would have happened had those involved treated each other as equals and taken the time to talk rather than shout.

The Baptist University saga is complex, but at its heart is that same old concern about the creeping mainlandisation of Hong Kong. There are fewer layers to the noodle shop incident, which involved staff losing their cool with two mainland travellers. Both matters quickly found their way onto social media platforms, where the usual mud-slinging ensued. The latter has been settled with an apology from the shop, but the former rumbles on.

Hongkongers feel threatened; I get that. I understand how nationalism is created and manipulated so that the mere suggestion of words like “independence” can have sycophants howling. But there’s also another truth, best illustrated by an observation; two decades ago, people on the mainland complained that Hong Kong visitors were noisy and arrogant, and now the reverse is true. As an outsider to the dispute, I don’t perceive either side is worse and the only significant change is that Hong Kong now gets many times more mainland visitors.

Keep in mind that we’re talking about the same ethnic group and their biggest differences are the dialect they speak and, marginally, the manner in which they’re governed. Culturally, there’s no difference, with both celebrating the moon, with festivals featuring mooncakes and red packets containing money. Not liking the manner in which a person or political party governs can never be a reason to also dislike the people who are subject to such a system. I think United States President Donald Trump is a buffoon, but I would be foolish to suggest all Americans are also clowns.

There’s bound to be indignation when shopping and leisure habits are disrupted by a tourist influx. But Hong Kong has had plenty of time to adjust to that. We should also have had every opportunity to get to better know and understand our visitors. Unfortunately, it’s obvious from the continuing animosity that not enough have tried.

From my perch as a Caucasian with no vested interests, the vast majority of my interactions with mainlanders in Hong Kong have been positive. There have been curious university students, helpful work colleagues, pedestrians in need of guidance and chatty gym-goers and diners in restaurants. The negatives most often relate to being buffeted in the street by a suitcase-wheeling parade or an inconsiderate smoker.

Hong Kong likes to call itself an international city, but the numerous ethnic groups and nationalities who make it so multicultural tend to group together and rarely cross paths. Apart from cross-border marriages, this is also largely true for Hongkongers and mainlanders.

Here’s some common sense: you won’t get to know someone if you intentionally avoid them. If, in an encounter, we are rude and demeaning, expect the same treatment back. And here’s a truth: taking the time to start a conversation with a stranger from the mainland by talking about how the trip is going, if it’s for shopping or business, or even if the weather is meeting expectations, will make a world of difference, with the result bound to be positive.

Peter Kammerer is a senior writer at the Post