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95 IRET Policy Bulletin 1 (2010)

handle is hein.taxfoundation/iretpbul0054 and id is 1 raw text is: December 28, 2010 No. 95 THE TAX SYSTEM OF HONG KONG Hong Kong has long been described as offering a prime example of the merits of a market economy. Milton Friedman, Nobel Prize laureate in Economics in 1976, described Hong Kong as the freest market in the world, in which most economic activities are coordinated by the price mechanism and the role of government is limited.1 As reflected by the 2010 Index of Economic Freedom, jointly published by the Heritage Foundation and the Wall Street Journal, Hong Kong is ranked the freest economy among 183 countries for the 16th consecutive year.2 This paper presents an overview and analysis of the tax system of Hong Kong. Hong Kong's low and simple tax regime has been an important factor in its economic growth and its amazing increase in standard of living over the past few decades. Low and Simple Tax Regime The level of labor employment is an important determinant of the output of an economy. The equilibrium level of labor depends on the supply and demand in the labor market, which reflect the rational and voluntary choices of individuals and firms responding to the level of the after-tax net wage. Individuals have to choose, according to the prevailing net wage, an optimal bundle of leisure and income, and hours of work are then determined. Taxes on labor income reduce the incentive to work as the net wage decreases and leisure becomes relatively less costly. Given an upward-sloping labor supply curve, the equilibrium level of labor drops and less output is produced. A low marginal tax rate on wages and salaries creates less distortion than a high rate, and does less to obstruct economic growth. Another crucial factor for production is the amount of capital stock available in the economy, which is affected by the level of investment every year. High marginal tax rates on income from saving and investment raise the required pre-tax return that an investment must earn to be profitable. Multiple layers of tax on income from saving and investment have the same adverse effects. Projects 1 Milton Friedman, Rose D. Friedman, Free To Choose: A Personal Statement (New York: Harcourt Brace Jovanovich, 1980) 2 Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2010), accessed at http://www.heritage.org/index/. Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote economic growth and efficient operation of the market economy. on the Economics of 1710 Rhode Island Avenue, N.W., 11th Floor 9 Washington, D.C. 20036 Taxation (202) 463-1400 9 Fax (202) 463-6199 9 Internet www.iret.org

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