High income inequality raises contentious issue of tax reform

Arecent survey that shows Hong Kong has the highest Gini Coefficient among developed economies has brought the highly contentious issue of the widening income gap into sharp focus.

Unsurprisingly, anti-establishment politicians and social activists have used the latest data to attack the government for not doing enough to help the swelling ranks of working poor and their families.

Such politically driven accusations have ignored the fact that the government’s recurrent expenditure on social welfare — including education, healthcare and direct subsidies — has increased more than 40 percent in the past five years. During that period, the medium income of the bottom 10 percent of workers has increased nearly 50 percent, official figures show.

But government efforts to narrow the income gap have been frustrated by the rapidly aging society. The Gini Coefficient, or any other measure of social equality, is expected to remain on an uptrend as more and more people retire from work.

Immigrants, mainly from neighboring Guangdong province, will continue to expand the low-income base, contributing to the further widening of the income gap, which has become a major source of social discontent, especially among young people.

The government’s traditional economic policy has practically ruled out the option of massive official intervention in the redistribution of wealth. But in recent years even some of the dedicated defenders of the free-market principle in the government and academia are showing a readiness to accept change.

To be sure, nobody in responsible positions is leaning toward a socialist solution to the issue of glaring income injustice. But some financial officials and many economists have come around to the view that there is a need for a more effective transfer of wealth through tax reform. The taboo subject of raising taxes has even seen support in some quarters of the business sector.

Li Ka-shing, Hong Kong’s richest man who has a finger in almost every business pie, has famously said big businesses shouldn’t mind paying more taxes to help the poor in Hong Kong. Not even the chambers of commerce, the citadel of unbridled capitalism, has raised its objection although it has taken a staunch stand against any suggestion of giving workers a fairer shake. But Law Chi-kwong, a politician and sociologist who is well-known for his poverty alleviation efforts, took much flak from fellow members of the opposition Democratic Party for suggesting that any serious attempt to narrow the income gap through the re-distribution of wealth should start with tax reform. He recommended a review of the tax rates and restarting the study on the introduction of a new sales, or value-add, tax.

Surprisingly, the people who have been the loudest in objecting to Law’s expressed view are from the so-called “democrats” who have branded themselves as champions of the under-privileged, the majority of the population who stand to gain the most from government subsidies.

One argument often cited by opponents to a sales tax is that the levy tends to burden poor families because they have to spend a larger portion of household income on food, clothing and other consumer items than high-income families do. But sales tax is common among developed economies which have introduced various exemptions to make it more palatable to

Some financial officials and many economists have come around to the view that there is a need for a more effective transfer of wealth through tax reform. The taboo subject of raising taxes has even seen support in some quarters of the business sector.

the public. For instance, foodstuffs and children’s clothing are among the items often excluded from sales tax.

Some social analysts have recommended the re-introduction of a capital gains tax on property transactions. That seems like a great idea in the current property boom because it would have the added benefit of helping cool the overheated market. But such a tax would be seen as a curse by bankers, developers and homeowners in a property market down-cycle which is bound to happen sometime.

For years, Hong Kong’s low and simple tax regime is considered by many as sacrosanct because it is considered one of the major advantages that have ensured the city’s status as an international financial center and a regional business hub. Times have changed, requiring Hong Kong people and their government to reconsider their priorities.

The question is this. What’s the point of being a financial center and business hub when only a small minority of the population can benefit from it?

The author is a veteran current affairs commentator.