Financial gifts that just add to the inequality
SCMP March 5 2007
The plaudits that Henry Tang Ying-yen has received for his budget
are ill-deserved. Tax cuts make good headlines, but the implications
of the financial secretary's budget deserve rather closer scrutiny
than they have generally received. The cuts are massively regressive,
and the lack of forward thinking should be viewed as an alarming commentary
on a leadership trapped in convenient slogans, self-interest and 1970s
concepts of progress.
One of the government's priorities is supposed to be trying to do
something about the rapid growth of income inequality in recent years.
That is not easily done, but the budget is one of the few mechanisms
the government has to influence income redistribution. This budget
adds significantly to inequality. By far the biggest beneficiaries
are the upper-middle income groups, while those in the bottom 60 per
cent or so get very little.
This will not be a political problem for Chief Executive Donald Tsang
Yam-kuen. The Democrats and Civic Party have their own, non-poor constituencies
to guard. The Democratic Alliance for the Betterment and Progress of
Hong Kong - supposedly the party closest to the interests of the lower
50 per cent - is, in practice, in cahoots with any wealthy interests
that meet Beijing's approval.
There are three major components to the tax cuts: first, a permanent
adjustment of salaries tax rates, bands and allowances that will cost
the government HK$4.9 billion a year. The other two are handouts: an
across-the-board salaries tax concession of 50 per cent, up to HK$15,000,
costing HK$8.1 billion; and a rates waiver that will cost HK$5.2 billion.
The permanent salaries tax cut is the most regressive measure. The
tax savings look impressive as a percentage of current tax payable.
A married couple with two children earning HK$300,000 - close to the
median household income - will leave the tax net altogether. But their
gain is only HK$400 a year, while a family earning HK$720,000 will
The salaries tax concession supposedly benefits 1.35 million taxpayers
but, of course, those outside the direct tax net get nothing. Of the
beneficiaries, 447,000 will get an average of only HK$770, so almost
60 per cent of the handout will go to the top 900,000 earners. Only
the rates rebate is reasonably even-handed - though the cut, albeit
only temporary, offends against supposed principles of taxation: that
it should be fair, easy to collect and neutral in its economic impact.
Against these massive giveaways - mainly to the top 20 per cent of
earners - there is a derisory extra HK$1.2 billion for the 1 million
or so (mostly old) recipients of social security assistance, and HK$900
million for assorted schemes for poverty alleviation. Of this, HK$300
million will go to a child development fund, which sounds a good idea
given the low birth rate and poor prospects for children of the poor.
But it's tiny compared with the increased tax allowances for children
and newborn babies for better-off groups.
Self-reliance is important, and the social security crutch should
be sparingly used, but the mean-mindedness of Mr Tsang, Mr Tang and
Co is astonishing. Some in his cabinet inherited such vast wealth that
they have never had to worry about money, or even salaries tax; most
of the rest worked in a bureaucracy that offers the cosiest of taxpayer-funded
socialist systems - inflation-proof pensions, retirement at 60, and
free medical attention, for example.
Cutting government expenditure as a percentage of the gross domestic
product should not be an end in itself. Higher levels than now prevailed
when Hong Kong needed huge infrastructure spending to house a rapidly
growing population and economy. Now it needs less physical infrastructure
but more spending on health, as the population ages, and vastly more
on the environment.
But instead of serious efforts to modernise Hong Kong, Mr Tang remains
beholden to vested interests in the power and construction sectors,
and obsessed with accumulating reserves then used to underpin pensions
Mr Tang delights in penny pinching while adding to income disparities
and spending on yesterday's infrastructure demands - urban highways
- not to mention the Tamar monument to arrogance. He justifies these
not on the grounds of good investments, but of job creation! He may
be a nice man. But what a muddled mind.
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