Hong Kong: An Economic Gem

November 24, 2014

By: Kelly Diamond, Publisher

I’m not a big fan of taxes. (I’ll give you a moment to recover from the shock. Ha ha.) But while that might be VERY true, I’m never adverse to measures taken to move away from taxes. Do I like 12% corporate taxes? Absolutely not. Do I like it better than 40% corporate taxes? You can bet the farm and win.

So, when I read about the economic successes of countries that don’t have the same horrific tax regime the United States does, I consider it a brick in the argument against government interference as a whole, but the mortar to the argument for freer markets.

I’ve referred to the Heritage Foundation’s Economic Freedom Rankings in the past, to illustrate several points. It’s not the be-all-end-all, but it does serve as a good indicator. For example, the claim is that the American Revolution was about “freedom”. Britain was a big fat corporatist that wanted to micromanage commerce in the New World. Well, colonists got fed up, and decided economic freedom is worth fighting for. (Today, our history books take far more poetic license with that era and tacked on civil liberties as well. But that was not why we went to war. War, at its core, is an economic matter.)

Anyway, here we are hundreds of years later, and the United States is not only ranked 12^th in the world for economic freedom, but lost out to three major British commonwealths: Australia, New Zealand, and Canada. None of them needed a violent revolution to be freer than the United States. Go figure.

A former British colony and now a Special Administrative Region (SAR) of China, Hong Kong, ranks FIRST in economic freedom in not just the Asia-Pacific region, but in the world. Up until 1940, they didn’t even have an income tax, but that it has barely fluctuated since then, is absolutely incredible from an American standpoint.

There are a great number of factors that keep their tax rates low, and it has nothing to do with political ideology or a heartlessness toward the poor. In fact, it is quite the opposite. There is a cultural and legal understanding that what keeps Hong Kong prosperous is its ability to compete globally with its tax regime. Corporations devote more of their money to reinvestment – in Hong Kong – than they do trying to get out of paying taxes.

Hong Kong isn’t exactly bursting at the seams with natural resources. It’s a small geographic area about one THIRD the size of Rhode Island – the smallest state in the United States – and a population of 7.2 million.

Here is a snapshot of Hong Kong:

• No inheritance tax.
• No sales tax.
• No Value Added Tax (VAT)
• No property tax (unless you receive rental income).
• No capital gains tax.
• No dividend tax.
• No interest tax.
• A maximum 15% income tax.
• A maximum 16.5% corporate tax.

Now, if I looked at this through the ignorant lens of someone like Bernie Sanders, I would expect to find an economic wasteland wrought with poverty and oppression. But this is what is happening instead:

• Sixth highest GDP per capita.
• Longest life expectancy in the world.
• Highest average IQs in the world.
• Second highest scores in science.
• Second highest scores in reading.
• Third highest scores in math.
• Sixth best tourism index.
• Sixth lowest crime rates.
• Highest rate of public transportation in the world.
• World’s best ranked airports.
• Second best port system in the world.
• Second most internet enabled system in the world.
• Highest level of Government Effectiveness in the world.
• Highest level of Regulatory Quality in the world.
• Best Net International Investment.
• Fourth best labor freedom.
• Highest rate of capital attraction.
• Seventh best in global competitiveness.
• Thirteenth lowest corruption.
• Sixth best in innovation.
• Highest Economic Freedom Index score.
• Despite a population of only 7 million, Hong Kong’s currency is the 8th most traded in the world.
• It is in the top 20 for quality of life, health care, Human Development Index, Prosperity Index, and median household income.
• Top 10 in property rights, legal system, technology.

(Here are more elaborate breakdowns of Hong Kong’s enviable situation here and here.)

This is not capitalist spin. This is years of tracking and observation. And at some point, it is necessary for even the most stubborn, albeit well intended, socialist to ingest these facts and reevaluate their philosophical means to achieve their compassionate ends.

Hong Kong is not absent of taxes, nor is it absent of social programs. And while I’m an advocate of neither, they have managed to maintain this at a consistent and sustainable level while operating at a surplus rather than at a deficit. Their surplus is steadily in the millions, which is admirable considering what the U.S. and Eurozone are currently experiencing.

Their “secret” isn’t very complicated, and it isn’t entirely attributable to low taxes. Aside from the cultural and legal mechanisms which restrain Hong Kong from becoming much like the U.S., their overall tax code is very simple. Their entire tax return has four pages and still offers exemptions despite the already low tax rate.

It’s not just income or corporate taxes. It’s the amount of commerce generated by that feature of their economy. Allow me to demonstrate with a simple example of transaction based vs traffic based structuring:

The Transaction based model is something high ticket businesses typically follow. For example boats, houses, and cars. People buy them regularly, but not the same people on any frequent basis. They buy it, and then hold on to it for years before moving on to the next one. That’s due in part to the price point, as the average person can’t afford to buy these types of things regularly. Moreover, a very small portion of the population could even economically qualify to buy them anyway. So the market is there, but it’s small, concentrated, and infrequent.

The Traffic based model is something low ticket businesses typically follow. For example, toilet paper, printer paper, groceries. These aren’t very expensive things. And the consumer finds themselves needing more of them more frequently.

What makes no sense is when something that should be employing a traffic based model, prices itself at transaction based levels. The traffic will inevitably dwindle. So if I’m selling cans of corn at $50 per can, only those who don’t care about the price point will buy that corn. I will have priced several people out of the can corn market. So this tiny fraction of people who don’t care about the price are left to sustain my can corn business. How long until someone sells it for less? Or until consumers just realize they can get their corn elsewhere for less?

I can sell 100 cans of corn per year at $50 each and make $500 or I could drop my price of corn to $1 each, sell 5,000 cans of corn and make ten times more. The US is the former, Hong Kong is the latter. The US is priced at transaction levels, and blames the small market than can afford their prices for not paying up and sustaining it. Hong Kong is priced at traffic levels, which has people coming from all over the world to enjoy their low affordable prices to help sustain and grow their economy.