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Hong Kong’s Tax System: The Backbone of a Free Market

The Hong Kong protests ended in mid-December, but the protestors vowed that they would be back. The protests in Hong Kong in 2014 were in reaction to China’s move to reign in on democracy in the region by mandating that candidates for future elections of the Chief Executive (Hong Kong’s top leader) be vetted first by China.

The protestors asked fellow Hong Kong citizens to support them in making life more difficult for the Hong Kong government by delaying tax payments to the last day possible and other activities that will prevent the government from having another surplus year. Already, the government is complaining that the protests cost the region much in cleanup expenses.

The protests, which made world headlines in 2014, did not stop commerce from taking place in the world’s top financial center and the country named tops in the 2014 Index of Economic Freedom produced by the Wall Street Journal and the Heritage Foundation. Hong Kong is known for its fiscal soundness, small government size and sound tax regime.

When one compares Hong Kong to the US in its tax regime only, one can see that Hong Kong is going to make it fiscally through any challenges the protests caused in 2014. Hong Kong has a total corporate tax rate which is amongst the lowest in the world and is well known for its simple tax system. Hong Kong’s total tax rate on corporations is 23%, with numerous incentives for corporations to reduce their tax rates further. Out of more than 170 economies researched and included in the World Bank/PWC’s 2012 study of corporate and business taxes, the average total tax rate was 44.8% of profits. The total tax rate includes all taxes imposed on a business. Hong Kong is well below the global average at 23%. The US on the other hand, has a reported total tax rate of 131%, well above the world average and Hong Kong’s 23% rate. This study shows that the total taxes the US places on corporations (e.g. payroll, property, income, etc.) are 131% of the net income reported by these same entities.

In addition, Hong Kong tax system is administratively simple, while the US tax system is complex and costs individuals and companies millions, if not billions, every year in compliance. As tax systems become more complex, they become more costly for governments as well. The comparison between the administrative costs of the US IRS and Hong Kong’s IRD for collecting tax revenues is staggering. The US IRS employed 94,000 individuals and incurred US$12.3 billion in costs in 2011. The Hong Kong IRD employed 2,818 individuals in fiscal year 2011, which was the same number of employees as the prior four years in a row, and incurred HK$1.2 billion (US$156 million) in costs in 2011. The US has a population of 310 million and Hong Kong has a population of 7 million. Based on these numbers the cost per capita for collections of revenues in the US is US$40 and the costs in Hong Kong for tax revenue collections is US$22. The cost of collecting tax revenue in Hong Kong is half as much as the cost for tax revenue collections in the US on a per capita basis. Note that this calculation doesn’t include the additional costs incurred as a result of the more than 16,500 new IRS agents being hired for the implementation of Obamacare.

Based on these numbers, the country that may be challenged fiscally by protests, and will certainly be challenged by its tax regime in 2015, will be the US, and not Hong Kong.

For more information on Hong Kong and US tax regimes and other challenges facing the US, get the book Falling Eagle – Rising Tigers. See www.joehoft.com for information about the author and how to order your own copy of Falling Eagle – Rising Tigers.

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