Far more than fiscal incentives, Hong Kong deserves a system of public finance founded on 21st century values

The government’s 2018 budget address has generally been positively received. Paul Chan, the Financial Secretary, glows in an almost embarrassment of riches.

Last year the economy grew by 3.7 per cent, whilst inflation fell to 1.7 per cent. Government revenues continue to grow, and a record surplus of HK$138 billion was recorded for the last financial year.

Hong Kong now has HK$1.1 trillion in reserves, and another HK$3.6 trillion in the Exchange Fund. For any city in the world — indeed for most sovereign states — these would be outstanding figures.

And yet for a city that prides itself on a mix of financial acumen and professional civil service, the best that Financial Secretary Paul Chan and his team of assistants, advisors and under-secretaries could muster for the coming year’s budgets have, in short, been yet another round of small change policies. How very predictable this has all become.

Even in the two areas Chan identified as critical to the future economy, in start-up tech businesses and continuing education, public investment will in effect amount to a one-off HK$2000 grant for poor students and yet another round of investment in the white elephants that are our science and technology parks.

For those impressed by the incubation programmes offered by Cyberport, it is worth considering this: Cyberport was built, promoted and supposedly a “technology hub” at least 5 years before tech companies began to cluster around London’s Silicon Roundabout or Berlin’s Silicon Allee. Even nationally, Beijing and Shanghai have long overtaken Hong Kong in this regard, and have successfully established genuine centres of technological excellence with a global reputation.

Chan can at least be credited with ignoring the embarrassingly self-serving and unsophisticated calls among many of our greying elite for a cash rebate.

What this administration, like others before it, fails to understand is that government finances, and the system of taxation on which it is founded, is not purely an economic issue. It is also social and philosophical.

Late last year I was privileged to be asked to provide feedback on a draft positioning paper on tax reform prepared by Stefano Mariani, a friend and a leading Hong Kong based revenue lawyer. Mariani is no ordinary practicing lawyer, but understands the law with a philosophical pedigree worthy of his academic background.

The point on which we agree is that the success of a system of taxation is not just to be measured in numbers. Beyond the level of taxation and how government finances are spent, we must also ask whether the system of taxation itself is representative of the society we have become and, more importantly, the type of society we wish to be.

It is also clear that around the world change is afoot. From the global public outcry following the release of the Panama and Paradise Papers to the resurgence and relative political success of old-school Marxists like Bernie Sanders and Jeremy Corbyn, any discussion of the end of the liberal world order clearly has little to do with the foundations of liberal, humanist values.

This is especially true among the young, an increasing number of whom are educated, and for whom deference to the more mercenary interests of the past have been replaced by a more philosophical notion of “value”.

As Steven Pinker has seemingly made a career propounding, the developed world is a far more humane place than we give it credit. The young people of today, he writes in his new book, Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, are the most “enlightened” in history; the most considerate generation if not necessary the most considered. Money may still be important, but so too is how it is earned. For them, taxation is increasingly understood as being as much a moral as economic issue; and development defined less by the size of an economy as by the values on which this understanding is based.

In Hong Kong, where a democratic deficit is coupled with rising Chinese nationalism, such social and value-based issues are also political. However, it is a connection if not completely overlooked then yet to be articulated, much to the detriment of society as a whole.

As Mariani wrote recently in the South China Morning Post:

[…] 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.

Hong Kong may now be a Chinese city, but we are also a city founded on international connections. These connections are not only economic.

Hong Kong values may once have been centred around the pragmatism and flexibility of a refugee society. But values, like people and circumstances, change — and as Hong Kong people began to take root and society prosper, so too have our values matured. More so than in any other Chinese city, the people of Hong Kong, having benefitted from the relative freedom of a liberal government, have now what E.M. Forster once described as “that grown up look in their eyes.”

Hong Kong is also now an advanced and developed economy, with much of its inherent potential developed. Our society suffers increasingly from first-world problems, including wage stagnation, rising job-insecurity and limited career prospects. Social and economic stratification has set in particularly hard in this city, due in part to our colonial history, inept leadership and the unusual situation of our post-colonial political castration.

All of these factors disproportionately affect the young, who share, as the protests of 2014 demonstrated, much of the same idealism and many of the same core values of their generation.

Regardless of one’s political persuasion, any reasonable visitor to the Occupy Central site in Admiralty would have noted, as the world’s press did, its peaceful ideological foundations. Beside the knights of Manga and Marvel were the images and quotes of Gandhi and Martin Luther King.

In fact, the protest organisers made no secret that they drew as inspiration on the precedent and ideals of the American civil rights movement  — a peculiar choice and one very different to democrats of a generation before, who looked more naturally towards their own history and the national pro-democracy student movements of the late 1980s.

The actions of our youthful idealist may be judged, with hindsight, to have been counter-productive. It may prove to be unwise to have deliberately shaken the hornet’s nest by belittling oaths and failing to respect protocols — especially when holding the moral high ground and with the argument in your favour. And yet it has been their politics that has so completely overshadowed the more moderate politics of reason and respect that had been our inheritance.

If in action questions remain, surely though not in ideals. Even within the establishment, both in the party and among our own elites, there is at least public recognition that ideals of justice, fairness and of representation must be central to their own political message. Therefore, since those in power are eager to protect their advantage, such liberal ideals must be presented not in spirit but under the scrutiny of our own motivations. Otherwise they will cleanse their conscience in their usual way: the tyrant always perceives himself as epitomising enlightenment.

Plato, the least sentimental of classical minds, wrote:

When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

For there exists an intrinsic connection between systems of power and taxation; between taxation and what we by our nature understand as justice. This is regardless of law, and is central to the philosophical underpinning of civil disobedience. It is why those who legally evade paying their fair dues, and those who assist them, may not be criminals but may still be cheats.

It is interesting to consider what Plato, or indeed any reasonable person, would make of a system that allows there to be loop-holes and grey areas by which the more fortunate may “reduce” paying tax on their own good fortune.

That there is something deeply unfair about Hong Kong’s tax system is obvious to most. So it might be said that our system of public finances is out of balance in both ideal and in need with the society from which it draws. Hong Kong is deeply divided on many levels, and these divisions, whether social, political or economic, cannot be wished away throwing coins into a wishing well.

Mariani suggests three amendments that are simple and yet represent an important shift in emphasis. What he proposes is not to increase taxation, but to increase the tax base in line with existing levels of taxation, and targeting potentially taxable assets that would go some way to alleviating genuine social problems faced by many in our city.

His proposals are:

Firstly, 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 speculation and to cool down the rental market.

Third, offshore dividends that are remitted or spent in Hong Kong should be taxed, thereby eliminating the currently absurd situation 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.

A proposition paper outlining the arguments for reforming the tax system in line with thenew social conditions and values of Hong Kong today, and suggesting these three

measures, was put to Financial Secretary Paul Chan last month by Civic Party Legislator Dennis Kwok.

In response the Financial Services and Tax Bureau have been non-committal.

Let us hope that the case for tax reform is taken up by more of our legislators, of all parties and political positions, including those representing our national government. If the differing tax regimes of Hong Kong and the Mainland are to be streamlined, let us now begin discussing by what process might this be best achieved. As measures are taken nationally to restore public confidence in a corrupt party, let us symbolically do the same by ending a tax system that is imbalanced and that contributes significantly to the breakdown in social mobility and hope within our city. Let this be the start of the conversation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s