Friday, October 12, 2007

Hong Kong Tax Cut Harmony....

Continuing yesterday's post, William Pesak of Bloomberg agrees that Hong Kong's tax cut is a bad idea- although he adds some additional reasons to my argument about macroeconomic instability: (1) instead of cutting taxes, the government could have used it's largese to try to reduce inequality, and (2) the government should focus less on competing with Singapore (Hong Kong's closest competitor in the low-tax stakes in Asia), and more on forward planning- figuring out what Hong Kong needs for future growth.

(2) is obvious: planning is good-provided such planning is focused solely on trying to ensure that Hong Kong has all the essential ingredients in place to allow for future growth. Here I'm thinking of physical infrastructure, and ensuring Hong Kong is an attractive location for human capital to locate. On the first one, the CE's announcement included some important news: expansions to the subway trains and highways to improve mobility. On the second one, there was further good news: new green-field sites for international schools (places in which are currently significantly over-subscribed, and are limiting the relocation of expats to Hong Kong). But there's still room for more. In my opinion, the greatest issue in making Hong Kong a more attractive location for human capital is the air quality- which is affecting the quality of life of all Hong Kong residents.

But forward planning is not necessarily a great idea, depending on what it entails. If it includes trying to determine which sectors will be the "winners" in the future evolution of the economy, as in Singapore, then Hong Kong may be better off without it. Think of the unpopular and unprofitable Hong Kong Disneyland and the mis-allocation of resources involved in the Cyberport project as the results of this type of planning. The private sector should be left to make these decisions.

Regarding (1), inequality in Hong Kong may be high by international standards, but is it too high? That's a difficult question to answer.... although from the point of view of contributing to economic stability, a large increase in government spending to increase equality (by spending on public housing, education, and health care, for example) may be just as destabilising as a tax cut! Someone receives that increase in government spending as income, contributing to overheating of the economy. Stability would be greater if the government increased such spending during a recession rather than the current boom.

For more of Pesek's column, see here.

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