Far east tax policy lessons: good and bad stories from Hong Kong

Some claim that Hong Kong is a remarkable tax policy museum while others say it is a centre of tax policy innovation - who is right? In fact, both views are credible. In both cases, these outcomes are the product of a near continuous economic dialectic - and happenstance - set within a particularly relevant culture. Textbook policy planning has provided after-the-fact rationales far more than it has generated future policy blueprints. This article explains why the Hong Kong Revenue Regime (RR) has such a museum feel. And also how this 'arrested development' has produced an 'innovative system'. The innovation is unorthodox but real enough. Compared to most other developed jurisdictions, it has involved, above all, applying an instinctive version of 'Occam's Razor' to system review and development: reform has been kept to the bare minimum. Hong Kong thus retains an RR which is (formally) low tax, clearly simple (with low compliance costs) and it has generated revenues sufficient to build excellent infrastructure, to provide often first rate government services, to enable Hong Kong to stay virtually debt free and to amass huge Fiscal Reserves. All of these achievements pivot, fundamentally, on Hong Kong's remarkable, long-term (and continuing) reliance on significant, landbased funding of public revenue. It also offers potentially important revenue policy lessons for application beyond Hong Kong - at least, where this may still be politically possible. But how about the bad stories? First, the cost of doing anything in Hong Kong is notably inflated by the very high cost of land - ultimately provided by a de facto monopoly supplier: the Hong Kong Government. Further examples: the poverty gap is far wider than it should be; and planning to cope with the onset of major demographic changes is poor. This paper will clarify how the success of the RR, together with other important factors, continues to underpin unacceptable policy inflexibility.