Getting the message

Henry Tang announced this morning that the government is going to abandon its efforts to persuade Hong Kong people of the benefits of a Goods & Services Tax (GST), at least for the time being.  They will continue the consultation exercise about widening the tax base, but will not push GST as the only solution. 

Is it too much to hope that the the government will follow this up by accepting that people can't be fooled on pollution either?  It's very hard to take Donald Tsang seriously when he comes up with all this nonsense about life expectancy to justify the government doing nothing, and just a bit too weird when I find myself agreeing with James Tien again (Lot of hot air on pollution, claims Tien):

The Liberal Party has joined the chorus of voices demanding a more effective government response to air pollution, questioning the administration's sincerity in tackling a crisis that the party says "transcends party lines and business interests."

"Our pollution crisis may be much more critical than we previously thought because the government is simply not taking it seriously enough," said lawmaker James Tien Pei-chun, the Liberal Party's longtime chairman, warning that failure to address the issue would lead to "dire consequences."

Previous posts on GST: GST | GST and property taxes | On a roll


Great, but also wrong

It was only a few weeks ago that Milton Friedman was commenting on the Education Vouchers for Nursery Schools fiasco, and at the time I was slightly surprised that he was still alive and kicking.  He died on November 16, 2006, aged 94.

The Economist described him as the "most influential economist of the second half of the 20th century" (A heavyweight champ, at five foot two), and I'm sure they're correct.  My problem here is that monetarism, the policy which he persuaded several governments to adopt, simply didn't work.  Instead, central banks have proved far more adept at controlling inflation than he expected - though to be fair, I don't think anyone could have anticipated the way that inflation has been brought under control in recent times. 

He was also wrong about Hong Kong (as most people are):

If Mr Friedman had a favourite economy, it was Hong Kong. Its astonishing economic success convinced him that although economic freedom was necessary for political freedom, the converse was not true: political liberty, though desirable, was not needed for economies to be free. Why, he asked, had Hong Kong thrived when Britain, which controlled it until 1997, was so statist by comparison? He greatly admired Sir John Cowperthwaite, the colony's financial secretary in the 1960s, “a Scotsman...a disciple of Adam Smith, his ancient countryman”. And how much more, Mr Friedman wondered, might America have thrived had it kept its government as small, relative to its economy, as the island entrepot had done?

There was an article last week on Asia Sentinel, explaining some of the ways Friedman got it wrong about Hong Kong:

What Friedman cared not to notice about the Hong Kong of the era of Cowperthwaite and later was that in three key areas of policy affecting the people the government was more socialist than its UK counterpart.

At one time 60 percent of the people lived in subsidized housing, mostly rented cheaply from the government, and some in Home Ownership Scheme flats, provided with cheap land and sold to lower-middle-income households.  Even now that public housing has low priority and the home ownership scheme has ended, some 50 percent of the people still benefit from this massive intervention in the marketplace.

The intervention also partly accounts for the low apparent ratio of spending to gross domestic product. If the cost of the subsidized housing land were accounted for at market prices in the government budget, the ratio would be significantly higher.

Hong Kong people have also enjoyed almost free medical treatment at government clinics and hospitals. Friedman was against “free” medicine elsewhere but failed to notice it in Hong Kong. Likewise, education, at least up to the secondary level has long been almost entirely funded by the government.

Well, I have to disagree about medical treatment.  There certainly are government clinics, but the reality is that most people here pay for their visits to the doctor (or at least their employers pay), whereas in the UK the overwhelming majority rely on the NHS.  However, the point about housing is valid, and I'm afraid that anyone who doesn't understand the implications of this policy simply doesn't understand how the Hong Kong economy works. 

It's not surprising that the simplistic view of Hong Kong (as a place with low taxation and 'small government) is so widely held, but it's puzzling that a brilliant, world-renowned economist should fail to dig a bit deeper and understand the full story. 


Yes, he was talking rubbish

Back in January, I was puzzled when the SCMP reported a government minister as saying that, as part of new anti-discrimination legislation, Permanent Residents would be disqualified from receiving "expat packages" .  Then the government tried to clarify this (and yet I was still confused):

"Those already on expat packages can continue on the existing terms of employment provided they remain in the same group of companies," [Deputy Secretary for Home Affairs Stephen Fisher] said.  "But after the law is in place, anyone recruited on overseas terms must have expertise that is not readily available in Hong Kong and that person must not be a Hong Kong permanent resident. If that person wants to remain on the overseas terms, he or she cannot become a Hong Kong permanent resident."

The legislation has now been published [PDF] and in one respect it actually goes slightly further, by saying that these exceptions only apply to people who are brought from overseas:    

13. Exception for employment of person with special skills, knowledge or experience

(1) Nothing in section 10 renders unlawful any act done by an employer for the benefit of any person in or in connection with employing the
person at an establishment in Hong Kong, where –

(a) the employment requires special skills, knowledge or experience not readily available in Hong Kong;

(b) the person –

(i) possesses those skills, knowledge or experience; and

(ii) is recruited or transferred from a place outside Hong Kong; and

(c) the act is reasonably done for a person so recruited or transferred, having regard to –

(i) the prevailing terms of employment offered to persons with those skills, knowledge or experience in places outside Hong Kong; and

(ii) any other relevant circumstances (other than the race of the person).

However, it then goes on to say that these exceptions continue to apply as long as the individual is employed within the same group of companies, and no mention is made of Permanent Residence.  Which is how it should be, and you have to wonder what Stephen Fisher was thinking about when he made that speech back in January.

Of course, if a Hong Kong company offered favourable terms to a foreigner already living in Hong Kong then they would not be able to get exemption and could be prosecuted.  Which is all very well, but (1) the government has better things to do than pursue companies for paying people too much, and (2) employers can always argue that the person has special skills or responsibilities.  It ain't gonna happen 


Another muddle

In his Policy Address, the Chief Executive announced that parents of children aged 3 - 6 will be given an "education voucher" worth HK$13,000 per child to contribute to kindergarten fees.  The strange thing is that rather than using means-testing to limit the cost, they announced that some kindergartens will not be eligible - either because their fees are too high (there is a maximum of HK$24,000 a year or less for half-day classes, and HK$48,000 for whole day classes) or because they are profit-making. Also, they will only available for children with right of abode in Hong Kong (so tough luck if you pay taxes but aren't a permanent resident).

I don't see why the government should be concerned about whether a kindergarten is making a profit or not - after all, many government handouts end up in the bank accounts of commercial organizations, and some government services are contracted out to profit-making companies.  The government is fully entitled to monitor the quality of kindergartens, but if they are good enough then why does it matter whether they make a profit or not?  There have been some stories in the SCMP recently suggesting that the government was reconsidering this, but today Arthur Li has denied this

Anyway, what's to stop the owner of a kindergarten paying himself a large salary or contracting out some of the services to a profit-making company that he controls? 

I also don't see why there should be a ceiling on fees. Why should parents be denied the choice to use the vouchers on the kindergarten of their choice just because it charges higher fees? 

In addition, it creates another problem for kindergartens - whilst some will carry on regardless charging higher fees and survive because of their reputation, what about the ones at the next level down?  They will have to make a difficult decision - whether to cut fees to the government's figure so that they can accept vouchers, or tough it out.  If they do cut fees, it seems inevitable that they will also cut salaries for teachers.  Which is probably not going to help with the government's aim of improving the quality of nursery education - assuming that is what this is all about.

I think to have to agree with Milton Friedman on this one:

There is nothing wrong with having a voucher scheme but it has got to be universal and without restriction by anyone and by any kindergarten that satisfies the broad criteria, regardless of the income of the parent and the tuition fees of the kindergarten," said Professor Friedman in an interview. 


More misunderstandings

Earlier this week Henry Tang said that the government would consider introducing some exemptions from GST (Tang unveils sales levy concessions - subscription required):

On the public's call for daily necessities to be exempted from a GST, Mr Tang said he would consider exemptions on public transport, medical fees, and primary and secondary school fees. The exemptions would cost the administration a total of HK$1.4 billion.

Today the SCMP has a rather curious editorial on the subject (Rigorous GST debate should be encouraged). 

What is disappointing is that the government has responded primarily to the populist arguments but dodged the intellectual ones. It is difficult to understand why it has opted to do that. One would have thought officials would try to win opinion-makers over to their side, so they could be enlisted to help secure public support for a GST. Instead, officials have chosen to go down the populist route too [by announcing exemptions].

The major thrust of intellectual dissent targets the government's rigid view of how it should manage its finances. Critics have questioned the need to treat land sales proceeds and land premiums as capital revenue that can be used only for infrastructure spending. Given the recurrent nature of such receipts, they wonder if there would still be a need for a GST if all or part of these revenues could be used for recurrent purposes. Arguably, the Hong Kong way of auctioning development rights already amounts to levying a sales tax on everyone, albeit indirectly through high housing costs.

Well, it was OK up until that last sentence, which is just nonsense.  The facts are that a substantial part of the population live in public housing and so do not have to pay this indirect tax.  Well, to be strictly accurate they do pay a small part of it in an even more indirect way (because rents from commercial buildings get passed on to customers as higher prices), but that is insignificant compared to the high housing costs paid by the rest of the population.

Since the government wants to introduce GST to extend the tax base, with the unspoken justification being that many people who benefit from public housing should also pay some tax, one might hope that the SCMP leader writer could get the facts right.  Especially when they are calling for a 'rigorous' debate on the real issues.


GST and property taxes

Christine Loh Kung-wai, writing in today's SCMP (subscription) highlights the curious way that the government says it wants a debate on GST but doesn't seem to want to give us all the facts:

What seems unsatisfactory to those who support a GST is that I want more information, and a public debate, about what options Hong Kong has for securing a steady flow of public revenue. Supporters of the proposed new tax appear on the whole to think it's the best option.

I have written in this column about revenue from land sales and how it can be used only for capital works under the current arrangements. When I ask GST supporters whether they know that land-related incomes cannot be used for general expenditures, most of them admit they had no idea.

Some say they did know. So I ask them how government revenues would be affected if land-related incomes could be spent on things like education, environmental cleanups, health care and social welfare. No one has yet given me a decent answer.

Jake van der Kamp mentioned this yesterday (Great taskmaster Tang fails to do his homework on needless GST):

The Treasury's GST paper, however, conveniently ignores this when arguing that we have a narrow revenue base compared with other governments. It looks only at operating revenues.

It can do this because a previous financial secretary years ago set up something called the capital works reserve fund to hold land sales revenue and then ordained that this revenue could only be used for capital expenditure.  He did it to save face on an embarrassingly inaccurate budget forecast and we are still saving face for him today.

Pointless as this may now be, it suits the Treasury just fine. It can now say that we have a narrow revenue base. Just make one stroke of the pen to exclude land sales revenue and, hey, presto! we can all sing a dirge about how bad life will be if we don't have a GST to give us a wider base.

Christine Loh also (correctly) points out that the current system distorts the property market:

The way Hong Kong calculates land premiums for lease conversions is opaque, and favours large developers. The premium is negotiated between the developer and the Lands Department, based on the estimated value of the finished development.  The agreed premium - which is a tax - then has to be paid up front, thus favouring those with substantial funds.

Developers build up land banks, say, for land with agricultural leases. Then they wait for the best time to negotiate the premiums for conversion to, say, residential or commercial uses - so as to keep the tax to a minimum.

[..]

Changes [to] the way Hong Kong taxes land development must be a part of any debate on tax reform. Indeed, a responsible government would want to bring up the subject rather than hide behind the fiction of a "one-solution-fits-all" GST. Is anyone interested in discussing this?

I think they should be.  I wonder if Henry Tang really wants a debate?


GST

Hong Kong is known for having low taxes.  So why does the government want to introduce Goods & Services Tax (GST)?  It certainly doesn't seem to be popular (take two stories just from today's SCMP, for example, or older stories in The Standard that are freely available).

First of all, are taxes really low in Hong Kong?  Well, yes, up to a point.  What is easily overlooked is that because the government owns all the land in Hong Kong (apart from St Johns Cathedral) and can charge land premiums when developers want to built apartments, offices, shopping malls (or basically anything at all), we are all paying a hidden tax.  Well - you are if you buy a property or if you rent in the private sector, but if you live in public housing you not only avoid paying this tax but also have your rent subsidised by the government.

So at the bottom end you are OK - rents are low and you probably aren't paying income tax either. At the top end, the very rich benefit from the low rates of profits tax and salaries tax - and the fact that capital gains and dividends are not taxed, and nor is anything you earn abroad. The problems come largely for the "middle classes", who struggle to buy property and have difficulty finding somewhere affordable to rent in the private sector.  To a large extent this is because of this hidden tax and the way that development is controlled (in order to maximise government revenues).

Continue reading "GST" »


Listing badly

He's not giving up just yet:

I am writing in response to Alastair Robins of Lights Out Hong Kong. Specifically his request (Talkback, July 15) to explain the principle that man must reshape his environment to survive.

Survival, in this context, does not mean living a hand-to-mouth subsistence level that so many environmentalists advocate. Rather it means thriving in an environment where modern technology has added 50 years to average human life expectancy, and in the case of Hong Kong, an environment that attracts over 20 million visitors a year.
 
The principle of man reshaping his environment to survive means clearing land to build homes, infrastructure and places to work; extracting minerals from the ground for use in bridges, appliances and operating theatres; and taking raw materials, and turning them into food, pharmaceutical products and furniture.

This is what has extended our lives significantly, and what every producer should actively defend. (More details can be found in the book Objectivism: The Philosophy of Ayn Rand, by Leonard Peikoff.)

This principle that man must reshape his environment to survive stands in direct contrast to the typical environmentalist's insistence of preservation and privation at all costs. I believe this includes Mr Robins' plan to plunge Hong Kong into darkness. As such, I call upon him to end the Lights Out campaign.

Simon Patkin, Causeway Bay

Good grief...

Saying "in this context" is like trying to justify using the word "literally" when you mean exactly the opposite.  Why use "survive" when there are other perfectly good words such as "thrive", or phrases such as "have a good life" that would be more appropriate?  Oh, I see...

Gotta love the examples.  Who could argue that we need to extract minerals to use in operating theatres.  Er, well, yes, if you say so.  Totally irrelevant to the argument of course, but never mind.  Oh, and of course these operating theatres full of minerals would be operated in the private sector rather than by the nasty old government.  What's not to like about that?

Still no word on whether Simon believes that it is necessary to fill in the harbour as part of man's relentless struggle to "reshape his environment to survive".  Maybe it would provide more badly-needed pharmaceutical products, bridges, appliances and furniture.  I hope I have understood the argument correctly.


The lights are on, but...

Simon Patkin is not giving up his one-man campaign against Lights Out (from the SCMP):

It is very disappointing that Wellcome, ParknShop, Mannings and Ikea have agreed to support the Lights Out campaign. (Retail chains turn on to lights-off campaign, July 10). I believe this to be representative of a so-called "pragmatic approach" to green groups in general.

Instead of appeasing green groups and fulfilling their desire to plunge Hong Kong into darkness for three minutes, businesses should take a principled approach. They should defend the idea that man must reshape his environment to survive.

They should also identify this Lights Out campaign as part of what can be seen as a larger, systematic attack on modern society by environmentalists.  For example, green groups have previously targeted plastic bag manufacturers, shark fin restaurants, property developers and electricity suppliers.

It's time for businesses to realise that any support for green groups is corporate suicide. They should not only actively band together to oppose Lights Out, but should also stop funding green groups entirely; especially those green groups that threaten their business. Where possible, these businesses should also refuse to deal with any organisation that helps the Lights Out campaigners.

Hong Kong needs progress, not regression to thrive and prosper. Lights Out is one giant leap backwards.

Simon Patkin, Causeway Bay

I can see that pragmatism would not appeal to Simon, but large corporations do not commit suicide by listening to their customers and adapting the way they do business.  Quite the contrary, in fact.

On Saturday, Alastair Robins from Lights Out challenged Simon on one of his favourite phrases

I must ask him to clarify what exactly he means when he states that supporters of the Lights Out Hong Kong 888 campaign should instead, "defend the idea that man must reshape his environment in order to survive".

Does he perhaps mean reshaping the land by dynamite fishing or slope clearance? Or perhaps he is a firm supporter of filling in the harbour so that no one may drown?

I rather fear that he does, Alastair.


2/5

I was slightly puzzled by this story from Associated Press on The Guardian website, headlined Next Hong Kong Leader to Serve Five Years.  The story, of course says "two years rather than five".

Fumier has a long and sensible post complaining that the SCMP and Standard have misrepresented the Law Society's position on whether the government was right to ask Beijing to interpret Article 46 of the Basic Law.  I won't summarize what he has written, so you'll have to read it yourself.

I have only one other thing to say about this fiasco, and it is this.  When the story of Mr Tung's impending resignation first emerged, one of the early concerns was apparently that Beijing would install Donald Tsang for a 5 year term before the existing Election Committee was disbanded.  Tsang bad, 5 year term bad, apparently.  Then it turned out that Tsang was the good guy, and a 5 year term was really what we wanted.  Well, I'm glad we got that one sorted out.