The Market Center Blog

Center for Freedom and Prosperity Foundation

For Immediate Release
Friday, March 30, 2007
202-285-0244
www.freedomandprosperity.org

The Hong Kong Tax System: A Low-Rate Flat Tax and Modest Burden of Government Combine to Generate Rapid Growth and Widely-Shared Prosperity
CF&P Foundation Issues Its Fourth Tax System Series
Paper in Hong Kong

(Hong Kong, March 30, 2007) -- Today in Hong Kong, the Center for Freedom and Prosperity Foundation released a new study, entitled "The Hong Kong Tax System -- Key Features and Lessons for Policy Makers." Authored by Professor Michael Littlewood, the director of the Postgraduate Programmes at the University of Auckland Law School and formerly a professor at the City University of Hong Kong Law School, the study represents a comprehensive analysis of the Hong Kong tax system.

Hong Kong's tax system is the closest the world has yet come to producing a system of taxation in accordance with the ideas advanced by the advocates of the Hall/Rabushka flat tax. Hong Kong's tax system is remarkable in several important respects. The jurisdiction has a remarkably modest burden of government. The aggregate tax burden is concomitantly low. Tax rates are modest. The system also has been remarkably stable. There has been no basic tax reform in Hong Kong since peacetime income taxes were first established there in 1947. Hong Kong has been a beacon of hope, growth and opportunity for more than 60-years. The only question is whether policy makers will preserve the goose that is producing golden eggs. Some officials have endorsed the imposition of a value-added tax, a step that would undermine Hong Kong's competitive position.

Link: The Hong Kong Tax System -- Key Features and Lessons for Policy Makers
http://www.freedomandprosperity.org/Papers/hongkong/hongkong.shtml

PDF Link:
http://www.freedomandprosperity.org/Papers/hongkong/hongkong.pdf

Below: Executive Summary and Key Observations

Comments on the study:

Andrew Quinlan, CF&P Foundation ~ "Michael Littlewood's clear and concise report on Hong Kong's tax system shows the benefits of low tax rates and limited government. The system also is very simply, as compared to the special interest complexity that has plagued tax systems in America and other nations. The rest of the world should take note and use Hong Kong as a model to improve their tax systems"

Daniel Mitchell, The Cato Institute ~ "Hong Kong's tax system is one of the world's best. The optional flat tax ensures that tax rates never exceed 16 percent for individuals and 17.5 percent for companies. Combined with a relatively small burden of government spending, it is not surprising that Hong Kong has enjoyed rapid growth for six consecutive decades."

Veronique de Rugy, American Enterprise Institute ~ "Hong Kong policy makers have one of the developed world's least destructive tax regimes. So long as they avoid mistakes – such as the imposition of a value-added tax, Hong Kong will remain a free and prosperous economy."

Note: Over the next few months, the CF&P Foundation will release several more papers reviewing the tax systems of selected countries. The next study will examine the tax system of Russia. We also plan on issuing studies on the tax regimes of Ireland, France, and the United Kingdom. The three previous published papers in the series were on the tax systems of Sweden, Slovakia and Switzerland.

Links:
http://www.freedomandprosperity.org/Papers/sweden/sweden.shtml
http://www.freedomandprosperity.org/Papers/slovakia/slzerlandovakia.shtml
http://www.freedomandprosperity.org/Papers/swiss/swiss.shtml

Executive Summary

Hong Kong has been one the world's fastest-growing jurisdictions, rising from poverty at the end of World War II to a beacon of prosperity in the 21st century. Formerly a British colony and now a "Special Administrative Region" of the People's Republic of China, Hong Kong is ranked as the world's freest economy according to both Economic Freedom of the World and the Index of Economic Freedom. A key reason for Hong Kong's success is an optional flat tax system. Tax rates are low by global standards and there is very little double-taxation of income that is saved and invested. Combined with a modest burden of government, Hong Kong is well-positioned to continue its rapid growth. With globalization making it increasingly easy for jobs and investment to cross national borders, other jurisdictions would be wise to follow Hong Kong's model of limited government and non-discriminatory taxation.

Key Observations:

• Hong Kong has been one of the world's fastest growing economies. Per capita income today is about $30,000, up from less than $2,000 after World War II.
• Hong Kong has a very low burden of government of government spending, at least by modern standards. The budget consumes about 20 percent of GDP.
• Hong Kong's tax system comes closer than any other existing tax system to the flat tax proposed by Robert Hall and Alvin Rabushka.
• The wealthy pay most of the tax in Hong Kong. The bottom 60 percent pay no income tax while the richest 100,000 taxpayers (the top 8 percent) pay 57 percent of the total tax burden.
• Hong Kong may be at a crossroads. Even though there is virtually no public debt and surplus revenues, some policy makers have expressed interest in a value-added tax. If Europe's experience is any indication, this could lead to an expansion of government and signal the beginning of an unfortunate decline in Hong Kong's competitive position.

Link to paper:
http://www.freedomandprosperity.org/Papers/hongkong/hongkong.shtml

PDF version of paper:
http://www.freedomandprosperity.org/Papers/hongkong/hongkong.pdf

For additional comments:
Michael Littlewood can be reached at (+64 9) 373 7599 m.littlewood@auckland.ac.nz
Andrew Quinlan can be reached at 202-285-0244, quinlan@freedomandprosperity.org
Dan Mitchell can be reached at 202-218-4615, dmitchell@cato.org
Veronique de Rugy can be reached at 202-862-7165, VdeRugy@aei.org

###

Return Home