Don’t fall for the fallacy – HK needs a NARROWER tax base

In view of recent reports of HK fiscal deficits, the pundits are yet again out in force, staging the tired chorus (including the organisation never engaged in any profitable enterprise, the IMF) of how HK’s tax take is too volatile and we should reform to ‘broaden the tax base’ and so on and so forth, to the point that even the HKSAR govt has been hypnotised into starting its own initiative looking into this most unsuitable direction to take for an open economy which survives on being a ‘super connector’ (this is the HKSAR’s own term!) of people, goods, capital, and ideas:

Figure 1: resist the temptation Chief Executive Lee, stay narrow and stay competitive

To illustrate the point more explicitly, we have compiled the total number of levies in the key subcategories of taxation for a number of jurisdictions (HK vs Singapore and Switzerland as small open regions, and Australia and UK as traditional OECD large economies). What is clear from the exercise is that the fewer taxes levied in an economy, the higher the economic growth, and vice versa:

We further collected all the government revenue information of the same jurisdictions and put them in the same general groupings but shown in proportion of total revenues.

It is worth quickly explaining what the tax groupings are:

a)     direct taxation on people’s economic activities – ie tax on income, profits & capital gains;

b)     indirect taxes, in the following activity groupings:

1.  taxes levied on labour market activities (eg payroll taxes, royalties);
2.  taxes on property transactions (mostly stamp duty and rates);
3.  taxes on consumption (ie GST, VAT, plus vehicle and insurance taxes);
4. traditional social engineering levies (the so called sin taxes on gambling, alcohol, tobacco);
5. new social engineering levies (all the woke and communistic charges that became so popular in recent years, such as climate change tax, carbon credits); and
6. border related tariffs/duties (besides traditional tariffs we also include airport taxes – essentially a charge on foreign people crossing borders).

We argue below how careful design of tax regimes can serve as important factors in promoting the competitiveness and economic vibrancy of an economy, and how the proportions need to be adjusted as policy priorities that all governments should pay attention to.

Open free economies tax less on income

What jumps out from the charts below are that Hong Kong and Singapore rely on significant land sale revenues (dark red in Charts 1 and 2) as their fiscal income, which helps when both are amongst the most expensive property markets in the world!

Further, HK’s simple and low tax regime as an advantage is also clear – 4 of the tax categories had nil, or near zero incomes, making it low friction for commerce, and less cumbersome administration of the same taxes as would be the case in other countries. Singapore is less simple but still has one near-zero intake category (thankfully the ‘new social engineering’ group).

Finally, both city economies have much lower direct tax takes – with HK at 49% and Singapore an even lower 42% (dark blue area) – thus rewarding work and enterprise more than their bigger competitors:

Chart 1: HK govt income – low on direct taxation

Chart 2: Singapore GST helps reduce other tax burden

In the other extreme, UK’s takes more out of income (66% of tax revenue is from income/profit taxes) than all the jurisdictions in our study; of what is left in the tax payer’s pocket, the UK takes a larger slice through consumption taxes (19.8% of tax take vs Australia’s 11.1%, light green in Chart 4) than the other countries. Besides higher tax on income and consumption, the UK also has the most number of headings under which it taxes its people, making it even more unpalatable for the average wage earning tax payer:

Chart 3: Percentage of Tax Revenue Breakdown in Australia

Chart 4: Percentage of Tax Revenue Breakdown in UK

Isn’t it ironic therefore that the proponents of ‘broader tax base’ are heeding the preachings coming from largely high tax jurisdictions?

Can HK cancel income/profit tax and levy sales tax instead?

The USA did not have income tax until the 16^th Amendment was passed in 1913, before that Article 1, Section 9, Clause 4 of the US constitution forbade direct taxation explicitly. The fact that this provision was inserted in Article 1 of the constitution is significant evidence that the founding fathers did not intend the state to infringe on the freedom of the people to generate and keep their own wealth.

HK’s situation is perhaps also conducive to a move away from income taxes – by virtual of its vast trade and re-export flows, immense tariff or sales tax intake could be achieved without burdening either its wage earning population, or profit making enterprises.

The other advantage of a move from income tax to sales tax is the more stable income stream compared to volatile sources such as land sales and even income/profits taxes.

Theoretically speaking, private consumption expenditure, when taxed at a mere 10% tax rate on 80% of total consumption can already generate HK$188billion of revenue (Table 2):

Table 2: Theoretical sales tax collectable for various tax rate scenarios

Table 3: Sales tax at 14% on 80% of consumption more than covers all income tax and corporation tax takes

In other words, Hong Kong can collect enough sales tax with a rate of 13.5% on 80% of private consumption expenditure to cover all the income and corporation taxes foregone if we were to make such a transition tomorrow.

Revisiting study: less income tax leak = more economic growth

In our earlier research looking at tax composition amongst US states, it was clear that more sales tax than income tax allows people keep more of their wealth, and is better for ecnomic growth, and similarly giving individuals equal or better treatment than company also engenders prosperity (the study can be seen here – English: web, blog, linkedin, facebook; Chinese: web, blog, linkedin, facebook).

Adopting the same analysis in the prior study, we now add our five candidate tax regimes to the study, by plotting them on the same two measurements:

1.    sales tax less income tax (x axis) – higher value means consumption rather than savings are being taxed, thus encouraging investment for longer term;

2.    income tax less corporation tax (y axix) – a low reading indicates either there is a booming corporate sector or individuals get to keep more of their salaries.

Below chart shows that with current tax compositions, HK and Singapore (near the red states) are better positioned than Switzerland/Australia/UK which are situated in the more oppressive quadrant (amongst the purple states) of the original distribution:

Chart 5: lower income tax for HK/SGP suggests better economic prospects

Then if we replace all HK income/corporation taxes with sales taxes as outlined above, HK’s position improves massively – becoming the jurisdiction furthest right in the study universe (right hand red diamond, Chart 6) and leaving Singapore well and truly in the dust:

Chart 6: by replacing income/corporation tax with sales tax, HK beats all US states on tax attractiveness

The above scenario places Hong Kong very much near (if not at) the top of the (Sales Tax – Income Tax) axis amongst the 130+ countries in the world collecting sales taxes. By abolishing the income and corporation taxes, Hong Kong’s global competitiveness and attractiveness for almost all global companies and high income talents, not to mention vast amounts of tax refugees in developed countries where simply being rich is a sin, and having income anywhere outside the country’s borders is a reason to be taxed.

 

Given the significant benefit of not just economic attractiveness, but also a massive reduction in administrative burdens that the whole tax collection bureaucracy brings with the income/corporation tax regimes, improvements in citizen’s privacy standards (no need to declare what, how, and when you earn your incomes), Hong Kong can truly become a beacon of freedom and commerce. Chief Executive Lee and Financial Secretary Chan should ignore the cacophony of calls from vested interest groups calling for ‘boradening tax base’ including accountants, regulators, and academics, whose livelihood only improves if we have complex and oppressive tax systems, for it is they who get work / compensations when we go down that road. HK deserves better.

 

The author would like to thank Tia Yik Ethan from The University of Hong Kong majoring in Finance for assisting in data collection, analysis, and drafting of this article.

 

僱用外傭日見難 緩解良方不在管 20230718

本文亦於2023年7月18日在【信報】刊登：僱用外傭日見難 緩解良方不在管 

家有一小的上班族應該對本港於疫情期間航班禁令下外傭短缺的情況記憶猶新，尤其是當時空缺多申請人少的情況下每月工資曾搶高至8000港元以上，實是蔚為奇觀。爲了針對這一短暫供求失衡下出現的高薪現象，特區政府竟然建議修訂《職業介紹所實務守則》，試圖降低外籍家庭傭工「跳工」的難度。

筆者並不認為此一守則修訂是解決問題的最佳方案（因為，它限制了就業自由這一基本人權），本文借機探討外傭在香港經濟格局中的地位，以及在相關的供求情況下，如何解決供求失衡的問題。

本港外傭依賴度 30年間節節升

隨著越來越多的女性進入就業市場，香港經濟越來越依賴輸入外傭；由外傭人數從1990年佔家庭總人數的4.5%上升至2021年的12.7%（見【圖一】藍線，增加約1.8倍）可見一斑。此外，就算沒有家庭的單身人士（無論是獨居長者，還是隻身專業人士）似乎對外傭更愛好有加，以至外傭佔人口比例的同期上升幅度更大，由1.2%增至現時的4.6%（即躍升2.8倍之多）：

圖一：外傭人數佔比長線攀升

圖二：頭三大國籍之外傭人數走勢

然而，外傭招聘的持續增長前後遭遇了兩次挫折，一次是在2001年互聯網泡沫之後，另一次是在2019年（抗議運動之後），這些都如【圖一】中的虛線所示。

在外傭大軍蜂起雲湧之下，當中存在著一些有趣的暗流——例如，在2001年4月菲律賓外傭人數在下降的情況下，印尼外傭大軍的湧入有助於減輕供應短缺的壓力，直到2019-20年的社運和新冠封城雙重打擊下才令人數出現整體下降（見【圖二】）。

香港經濟日益長，外傭功勞不可量?

在90年代，外籍家庭傭工數量激增，對香港經濟貢獻亦大幅上升，從0.4%增加到0.8%，上升了足足一倍；雖然傭工薪酬佔本地生產總值比例仍然非常細小，然而彼等所幫助釋放的本地高增值勞動力的貢獻卻實在不容小覷：

圖三：外籍家庭傭工薪資佔香港本地生產總值的百分比

上圖可見，即管人數不斷攀升，但是外傭的整體收入在2002年之後的5年卻大幅下滑，比之前的峰值下降了23%。就算現在，排名前三的外傭國家薪酬總額都僅佔GDP的0.645%，離2002之高峰仍差一截。可見本港經濟增長的速度仍然跑贏輸入傭工勞力所需的成本。

本國經濟因素 決定來港人數多寡

那麼在三大供應國傭工的眼中，那些因素是決定其來港就業人數多寡呢？三國中最屬異數的莫過於泰傭一面倒離開香港這一趨勢（見【圖六】），而此一離港潮亦正正與自2000年以來香港最低外傭工資大幅跑輸泰國通脹息息相關。反過來看，菲傭數量基本上是持續上升的趨勢，除了2000-3年間香港工資相對於菲律賓通漲急跌期間出現回流，及近兩年因社運／封關而見短暫離職潮除外【圖四】：

圖四：菲傭薪酬指標及在港菲傭人口

圖五：印傭薪酬指標及在港印傭人口

圖六：泰傭薪酬指標及在港泰傭人口

印傭的心態與泰傭及菲傭大相逕庭，由1998年起之12年間，儘管實質最低工資不斷縮水，印傭赴港人數卻如日方中，越升越有（見【圖五】中黃線）；表明了香港最低工資兌回當地貨幣必定仍是非常豐厚的收入，所以就算趨勢上被通脹蠶食亦無減彼等來港的熱情！

在【圖四】至【圖六】中之薪酬指標算法如下：先將香港外傭的最低工資算成外傭本國貨幣，再將結果除以當地消費物價指數。如此比較可以準確地衡量外傭在香港賺取的收入是否在匯回家鄉後仍然保持消費能力。而每個相對指標亦可拆開成兩條線來作比較，如下所示：

圖七：外傭在港薪金一般都跑輸本國通脹

上圖清楚表明，印尼在過去30年間的通脹率遠高於菲律賓（多1.4倍），而相比泰國就更加誇張（高5倍之巨）。此也解釋為何香港最低工資在不敵通脹下仍然無阻眾多印傭赴港工作此一現象：香港穩定的貨幣購買力實是另一重要優勢。

僱主節節勝利 外傭難望項背

去年外傭短缺之下的短暫加薪潮已令政府緊張應對，然而身在福中的港人僱主又是否認識到外傭最低工資不但連港人最低工資都追不上（見【圖八】綠線），更勿論消費物價指數了矣。事實上，從僱主的角度出發，外傭工資在過去33年裡只上漲了58%，而同期香港通脹卻飆升了139%（紅線）：

圖八：外傭工資不敵本地最低工資，更遑論本港通脹

當然，上述討論純粹圍繞工資此單一指標，從僱主角度來看，過去數年衍生出來的其他行政負擔尚未計入整體成本內（包括：代買外傭機票、保險、中介費用及其他申請／管理相關的壓力）。或許政府在調整薪酬上除了須要更加平衡各方利益，還應該向如何減輕僱傭家庭行政負擔方面著想？

 

筆者特別鳴謝香港城市大學會計系葉健朗同學協助收集及整理本文相關數據及圖表。

How can HK alleviate the shortage in domestic helpers? 20230705

Any working couple with kids at home could recall the times when the Philippines flight bans during covid lockdowns caused a sudden shortage in helpers and pushed pay upwards of HK$8k a month for a brief period of time. In response to that symptom, the HKSAR government proposed amendments to the “Code of Practice for Employment Agencies” to reduce the ease of “job hopping” among foreign domestic helpers (FDHs).

We do not believe this rule change is the right solution (eg it infringes on freedom of labour, a fundamental human right), but take this opportunity to look at the FDH phenomenon in the context of HK’s economic set up, as well as the specific circumstances of the supply countries, hopefully identifying solutions to the shortage of staffing being reported.

Rising importance in past 30 years

HK’s economy has increasingly relied on the importation of FDH labour presumably as more and more women entered the job market, resulting in the number of FDH rising from 4.5% of total household number in 1990 to 12.7% in 2021 (blue line in Chart 1) – a 1.8x increase in proportional terms. However, obviously more singleton families are also employing FDHs (be it elderlies by themselves or unattached young professionals), this explains why FDHs as a proportion of population has increased even more over the same period from 1.2% to 4.6% now (or a 2.8x increase):

Chart 1: Number of Foreign Domestic Helper as a percentage of Hong Kong Households

Chart 2: Number of Foreign Domestic Helpers in Hong Kong

However, this relentless increase in FDH hiring also suffered two bouts of setbacks – one after the dotcom bubble in 2001, and then another drop took place in 2020 (after the protest movement), these are marked by the dotted lines in Chart 1 above.

Within the overall trend of generally rising army of helpers, there are interesting undercurrents too – for example, against the drops in Philippines FDH in 2001-4, Indonesian reinforcements were surging that helped soften the blow. This was until the protests and lockdowns of 2019-20 drove a wholesale drop in all helper populations (Chart 2).

Cheap FDH labour helped HK’s economic wellbeing

In the 1990s when the number of FDHs surged, their impact on HK’s economy, as measured by their pay as a proportion of Hong Kong GDP, was significant – doubling from 0.4% to 0.8% overall:

Chart 3: Foreign Domestic Helper salary as a percentage of HK GDP

However, their input took a dive in the 5 years that followed 2002, dropping by 23% from the prior peak. Today the top 3 helper communities together make up only 0.645% of local GDP (Chart 3).

Changing national compositions driven by economies back home

So how has HK’s attractiveness fared in the eyes of the top 3 supply countries? One thing is clear – Thai FDH supply has gone on a one way decline for pretty much the whole of the last 20 years (Chart 6) reflecting HK minimum pay underperforming Thai inflation massively since 2000. On the other hand, Phils FDH numbers have by and large increased, except during 2000-2003 when HK pay fell most against Phils inflation; and only recovered meaningfully after GFC once the pay decline has reversed once more (red line in Chart 4):

Chart 4: Philippine FDH pay relative and population of Phils in HK

Chart 5: Indonesia FDH pay relative and population of Indos in HK

Chart 6: Thai FDH pay relative and population to Thai in HK

Indo was quite different from both Thai and Phils in that despite massive pay underperformance, the absolute number of FDHs continued surging, suggesting that our minimum wage must have been rich income for the locals such that drops vs local inflation has not dented the enthusiasm with which the locals wanted to earn more income in HK (see yellow line in Chart 5).

In the above charts, the ‘pay relative’ measures were arrived at using HK minimum FDH wages, translated into the local currencies back home, and divided into the local CPI, so the lines are a fair measure of how well the FDHs on minimum wages paid in HK compared to their compatriots back home. Put another way, the minimum income vs local CPI can also be expressed in separate lines, as shown here:

Chart 7: Indo/Thai pays were roughly in line with local inflation, but Phils pay significantly lost out to inflation

The above chart is also telling in that much higher Indonesian inflation over the period compared to Phils (lower by 60%) and even more vs Thai (lower by 83%) may have contributed to persistently higher FDH inflows into HK where price stability is a more important factor and USD based income considered a premium.

HKers have had it good, less so their helpers

Even so, the FDH minimum wage has still lagged behind the minimum wage levels applied to local Hongkongers (see green line in Chart 8), let alone local CPI index. In fact, from the employer’s point of view, their helpers’ wage bills have only gone up 58% over the past 33 years compared to HK inflation rising some 139% over the same period:

Chart 8: FDH minimum wage lagged the equivalent standards for locals, and both lost out to inflation in turn

The above, of course are purely based on the minimum wage measure, when there are a plethora of other administrative costs that is burdening employers on top (flight tickets, insurances, agency fees and other admin costs) which seem to proliferate constantly – perhaps on top of more equitable pay adjustments for the helpers, reform should also focus on how these new forms of administrative burden can be lessened for the hiring families?

The author would like to thank Yip Kin Long Tommy from City University of Hong Kong majoring in Accounting for assisting in data collection, analysis, and drafting this article.