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 Tax Freedom
 
Hong Kong Veers Toward a Tax Trap
The Wall Street Journal, United States Thursday, December 02, 2010


Hong Kong's new tax policy is significant not as of the specifics, but because of the change in the approach of the state in regulating its market economy. The tax plan to impose an extra stamp duty for "short-term" transactions is simple and straight forward, but the extent to which quick sales are driving Hong Kong's property market is in dispute. The fact that the Government has put forward this proposal shows that the government wants to use tax law to influence market behavior, writes Joseph Sternberg in The Wall Street Journal.

Hong Kong's recent debate over a new tax regime to deter real-estate speculation has drawn attention owing to its implications for a major industry: property development and trading. But the plan ought to worry other businesses in the Fragrant Harbour, too. The basic issue at stake is not the specifics of the tax proposal so much as the marker it lays down about the government's changing approach to regulating its vibrant market economy.

The tax plan itself is straightforward. The government will impose an extra stamp duty for "short-term" transactions, on top of the current progressive stamp tax, which is calculated as a percentage of the sale price. The additional tax would be as high as 15% on properties that are resold within six months of the initial purchase, and would cover, albeit at lower rates, most re-sales within two years of purchase.

...

Most debate on this issue has focused on the merits of the plan. Especially in dispute is the extent to which quick sales actually are driving Hong Kong's property market, as compared to the influence of factors like cheap credit in mainland China that leaves Chinese looking for as many investment outlets as possible.

...

But the bigger cause for concern is that the government has proposed such an idea at all. This marks an unusually broad attempt by Hong Kong's government to use tax law to influence market behavior.

One of Hong Kong's biggest advantages over other jurisdictions is the simplicity of its tax code. Top marginal rates are low, at 15% and 16.5% for personal salaries and corporate profits, respectively. Stamp duties on property and stock transactions are transparent. And crucially, there are very few loopholes.

...

Contrast that with the U.S., Europe or almost any other economy, where a web of credits and deductions hopelessly muddle tax codes. This complexity is a product of frequent efforts to use the tax code for social and economic engineering, ranging from attempts to aid low-income families via refundable tax credits, to plans to incentivize certain kinds of research and development by companies.

The economic consequences can be severe. In America, the pre-ObamaCare health-care market was built largely on a tax policy: a decision during World War II to allow employers to deduct employee health-insurance costs from the corporate tax bill, creating a system where insurance became inextricably linked with employment.

...

Hong Kong should count itself lucky that it hasn't suffered such distortions. True, the territory has never completely resisted the temptation to remake society via the tax code—witness sin taxes on hard liquor and cigarettes, an "environmental levy" on plastic shopping bags, and stiff duties on luxury car imports.

...

That the government is using its tax power now should make businesses nervous. To put the special stamp duty in capital-allocation terms: Once an individual has decided to invest in the purchase of a new property, the government wants to keep him from re-allocating that capital elsewhere "too quickly," no matter what inspires his desire or need to do so. Among other consequences, this could make it harder for the market to find its bottom when the next downturn comes, if recent buyers are discouraged from putting apartments up for sale.

This is bad for the property market, which will now suffer an added layer of distortion on top of the easy monetary policies elsewhere that are already fueling the bubble. But the signal the special stamp duty sends is worse for business. If the government now appears willing to exploit its power to tax—which is also the power to destroy—to "fix" one market, what market will it tamper with next?

This article was published in the The Wall Street Journal on Thursday, December 02, 2010. Please read the original article here.
Tags- Find more articles on - hong kong | sales price | tax code | tax policy

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