Introduction
Hong Kong is a very attractive city business wise, and currently many business people are willing to invest in it due to its enticing tax policies. Taxation is a very important factor for investors who might be considering new avenues for their business. Many countries of the globe are trying to use tax systems as sweeteners to attract more investors. Like the case of Hong Kong, tax is corrected though inland revenue department in a simple transparent and straightforward way. The tax system in place has immensely affected wealth inequalities in a positive way. Therefore, its important to understand how a simple, transparent and straightforward tax system can help reduce wealth inequality.
Evaluation of the Hong Kong Tax System
Hong Kong is characterized with the lowest tax rates in the world. This is one of the tax benefits that its citizens enjoy over the other countries. One of the pillars of their tax system is the fact that it is protected by the constitution. According to Ooi (2020) in 1990 there was an introduction of two articles mainly to protect low tax system. Thus, these policies make it the friendliest tax regime and helps reduce tax inequalities as well. Hong Kong has set a tax ceiling on corporations at 16.5 percent (Ooi, 2020). There is no existence of taxes such as estate, withholding capital gains or dividends tax in the city. Tax on inheritance as well as estate duty was completely abolished. Thus, this ensures that citizens as well as foreign investors find it easier to trade in Hong Kong.
The city has been preferred as global shopping destination because goods are more affordable as a case of friendly tax regime. Moreover, a good tax system helps motivate people to undertake more investment, improves business competition and a balanced level playing ground for business to operate. In Hong Kong, taxation is also proportionate to the income of individuals (Wissink et al., 2017). This implies that people pay as per their ability to pay and low-income households rarely pay taxes. In turn this helps even out wealth inequalities in the city and thus, improves the quality of living. These and many other tax incentives as well as tax holidays are the recipe to high growth of business ventures in the city.
Effectiveness of the Hong Kong Tax System Towards Reduction of Wealth Inequality
Wealth inequality has been on high trend in the city of Hong Kong. There is a huge disparity between the super-rich and the poor which brings a big challenge on the tax system to try and bring about equity. According to Wissink et al. (2017) a large part of Hong Kong remains to be relatively poor while a few individuals have the luxury of profiting due to influence on tax policies. Therefore, there is a need to ensure that the tax system in place can effectively reduce the wealth inequalities.
The fact that tax is levied proportionately to the income is one effective way of reducing wealth inequality. The most affluent persons in the city pay the most taxes while others of low income are considered and thus, pay little or nothing at all. Salary taxes are set at 2 percent for lowest earners and a cap of 17 percent maximum (Ooi, 2020). This is a good measure which means that those who earn little will have more savings from the tax gap with those who are high income earners. However, the Hong Kong taxation method has been criticized by the European union since it creates tax haven for diaspora companies that want to evade tax. The fact that they have the lowest corporate tax it has led to many companies creating offshore companies as tax havens to evade taxation.
Optimal Tax Change Recommendations for Wealth Redistribution
Redistribution of wealth can be a complex matter when it pertains to taxation. As Islam (2018) state, there is a great concern on the rising of wealth inequalities which poses a great threat to the growth of the world economy. They further argue that there is a need to put in place policies that are pro-poor to ensure redistribution of wealth hence reduction of inequality. There are many measures and policies that need to be put into place to ensure that the system does not overburden the middle and the lower income earners. Thus, the reason for optimal tax changes to ensure even redistribution of wealth.
Taxing the incomes of the rich proportionally more than those of the poor and low-income earners. This will ensure that the poor have more income in their disposal allowing them to reduce the wealth deficit. As Wu (2020) states, to address the issue of income inequality, administering a more progressive income tax policy is crucial. Moreover, the issue of progressive taxation is the most ideal in a society where jobs and skills are unevenly distributed as well as compensated. Therefore, it becomes important to ensure that tax is progressive proportionately to the income earned to even out wealth inequality.
Establishing a wealth tax is another measure that can be introduced to even out the wealth inequality. As is the case with imbalance at is brought about by concentration of wealth on one sector of economy, the rich-poor margins can also bring similar effects. Islam (2018) argues that, concentration of wealth on a few rich individuals will have a devastating effect by the fact that there will be lower taxes and thus, reducing government welfare expenses. Therefore, it is crucial to establish a policy that taxes the wealth in order to sustain tax base as well as lender welfare services and reduce wealth inequality.
Financial inclusion is also another tax recommendation that can help reduce wealth redistribution. According to Von Fintel and Orthofer (2020), financial inclusion can significantly reduce wealth inequality. They further assert that, to achieve equality in income and wealth, broadening of financial system to consider the poor is paramount. Moreover, when tax policies are tailored to favor only a certain class of income individuals such as the middle class, it therefore creates a wealth class leaving a gap between them and the low-income earners. The best policies for optimal tax recommend that any tax policies ought to consider evening the income tax proportionally to ensure financial inclusion is achieved.
Other Possible Measures for Reduction of Wealth Inequality
Government social spending welfare in order to boost the incomes of the poor is another recommendation to booster wealth redistribution. This strategy is said to be productive in that it improves the standard of living of the poor and low-income earners. It helps bridge the gap between the rich and the poor thus being successful in health redistribution as the taxes collected by overtaxing the rich is used for these social programs. According to Rodan (2016) the government of Singapore has used the social spending welfare to great effect even earning it a political mileage. Therefore, this type of tax change where tax collected is redirected social spending welfares can be effective in wealth redistribution.
Improvement in minimum wage will go a long way in helping reduce wealth inequality. The idea of universal basic income (UBI) is one that can simply address the issue of wealth disparity as every person will have a decent earning. However, for UBI to be a success there must be an issue of taxation at play so as to raise the funds to support the initiative. Special tax on companies, raising consumption and lifestyle taxes and also levying tax on financial transaction can be an option. Thus, for this idea to be possible there is a policy requirement which would mean more taxes for some sectors. As Straubhaar (2017) indicates, to attain a social welfare there will be a need for a blind social policy which will prove most effective. Moreover, with rising cases of job automation the rate of unemployment is very high thus, triggering the wealth inequality. Therefore, the idea of UBI is inevitable to a certain degree.
Conclusion
By conclusion, we can note that taxes are a better means of ensuring wealth is equitably distributed in a country. Taxation and tax system in a given country can prove to be effective either in bolstering the livelihood of people or being detrimental and creating a wealth disparity. Like the case with Hong Kong, its tax system is proving to be effective in the sense that it favors both business people and individuals equally. A good tax system needs to be simple, transparent and straightforward so it can help reduce wealth inequality. Factors such proportionately levying of income taxes are some of the optimal tax measures that can be put in place to great effect. Other measures such as establishing wealth tax, financial inclusion policies, government social spending welfare and ideas of minimum wage can be effect in addressing wealth inequality. Therefore, the ideal tax system can be aided by putting in place strong pillars such as being protected by constitutional bills like the case with Hong Kong to help reduce wealth inequality.
References
Islam, M. R. (2018). Wealth inequality, democracy and economic freedom. Journal of Comparative Economics.
Ooi, V. (2020). Tax considerations for funds structuring in Asia. Journal Of Taxation Of Investments, 38(1), 49-62.
Rodan, G. (2016). Capitalism, inequality and ideology in Singapore: New challenges for the ruling party. Asian Studies Review, 40(2), 211–230.
Straubhaar, T. (2017). On the economics of a universal basic income. Intereconomics, 52(2), 74-80.
von Fintel, D., & Orthofer, A. (2020). Wealth inequality and financial inclusion: Evidence from South African tax and survey records. Economic Modelling, 91, 568-578.
Wissink, B., Koh, S. Y., & Forrest, R. (2017). Tycoon city: Political economy, real estate and the super-rich in Hong Kong. Cities and the Super-Rich, 229–252.
Wu, C. (2021). More unequal income but less progressive taxation. Journal Of Monetary Economics, 117, 949-968.