A Singapore tax increase would be nectar for Hong Kong

Asia’s two rival financial centres are starting to look very different, and the gap is going to widen.

The divergence of Singapore and Hong Kong is already evident in the quality of their transportation networks. MTR Corp’s main rail lines in Hong Kong have been glitch-free for 5.6 million kilometers of passenger journeys on average this year, while Singapore’s subway operator SMRT Corp, plagued by delays and chaos for six years, plumbed the depth of its despair last week when two trains collided, injuring 36 people.

Taxation levels, the other area where the cities have used one another as benchmarks, are becoming increasingly dissimilar.

Singapore Prime Minister Lee Hsien Loong reiterated his finance minister’s call for higher tax rates, telling the annual convention of the ruling People’s Action Party on Sunday that it’s “not a matter of whether, but when.”

With that, analysts started to foresee an increase in the island’s 7% goods and services tax, perhaps as soon as next year.

Hong Kong toyed with the idea of a GST in 2006, but popular opinion was against it. Although there will be another go at solving the “problem of a narrow tax base,” it’s unclear that a sales tax will ever materialise.

Singapore’s GST, introduced in 1994, now accounts for almost one-quarter of the city’s tax collection. It has proved a remarkably stable source of revenue, even during sharp downturns. That has its own rewards.

Ten years after the global financial crisis, only 10 sovereigns still enjoy a triple-A debt ranking from all three major rating companies. Singapore is one of them.

Although any increase would be unpopular, there are several reasons Lee may want to bump up the levy. Combine a median age of 40 with a low fertility rate, and aging is a serious challenge.

At 65, Singaporeans have 19 to 22 years of life expectancy.

Retaining people longer in the workforce to keep social-security costs well-funded is one option, but it has limits.

The robots that are busy cleaning Changi Airport’s new Terminal 4 are managed by humans – for now. Once artificial intelligence stops getting confused between cats and guacamole, it will also be able to tell trash from a mislaid Rolex. Taxes on incomes will become an unreliable source globally.

Meanwhile, if the US does lower its levy on corporate profits to 20%, and Japan takes its 30% rate to 25% or below, there’ll be little leeway for a small economy like Singapore’s to increase its 17% rate, especially with Hong Kong at 16.5%.

It makes sense to raise the level of GST now. Leaving the problem to a future leader who may not have the benefit of a strong economy risks repeating Japan’s folly with consumption charges. Where’s Hong Kong in all this? As much as 46% of the Chinese territory’s tax revenue comes from two sources: corporate profits and land premiums.

If Hong Kong shies away from a sales tax, the administration may become even more dependent on land revenue. In the world’s least affordable property market, that could fuel speculative mania around Beijing’s vision of a Greater Bay Area, connecting Hong Kong and Macau with China’s Guangdong province.

Other options are closed. The top 5% of Hong Kong taxpayers account for more than 60% of the government’s take from salaries. Squeeze them harder, and rich professionals might up and leave – for Singapore. Since these are people who can avoid the trains, a crumbling SMRT won’t bother them much.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.