Harbour View: Tax cuts are the policy winner CY needs for 2017

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CY desperately needs a policy winner before 2017. Two more years of tax cuts are just the thing.

A day doesn’t go by without speculation about who is giving the green light for various pro-establishment players to either lambaste the CE or speculate about his replacement. Whether it is a Xi v Jiang proxy war playing out in Hong Kong or a question of 分而治之 (divide and rule), clearly some dogs have been let off the leash. If CY is to consolidate his standing for the next CE election, he needs to add a strong policy pillar that delivers economic and political results before 2017’s election. He has staked a claim to home-building to relieve real estate pressures, but that will only credit his legacy and only if its effects are felt during his uncertain second term.

One idea never goes out of style – and can help him now.

The Hong Kong Tax Institute, lately commentator Mark Simon, and last year Financial Secretary John Tsang, have all seen the benefits of middle class tax cuts. There is no reason to stop this year given all the same pressures and opportunities in force over the past two years are all in play now.

The government has another surplus in hand and can safely raise the tax brackets for exemptions at the bottom end of the scale of our progressive tax scale. Raising exemptions takes people at the lower end of the income scale out of the tax bracket and, ideally, the tax reporting line of fire. It would also reduce taxes for the middle class.

Reducing the tax burden on the poor, defined as those at the  bottom of the taxable income brackets, is always a great way to help that leaves the poor more in charge of their lives. For the middle class, definition is problematic in Hong Kong, where asset inflation means that those with inherited property and modest incomes may have seen their net worth jump dramatically during Hong Kong’s asset inflation run of recent years. This author once defined middle class as anyone paying rent – neither asset nor income rich, but not so poor as to qualify for public housing. However defined, the middle class has been hammered by food inflation, belted by rocketing education costs and slammed by rental increases. Most despair of ever achieving home ownership.

All of these pressures could be relieved by extra money in the pockets of the beleaguered middle class to distribute according to their priorities. Some may be willing to bite the property bullet to shell out for education, others may prefer to save for future home ownership – here or abroad.

Over the past  few years, tax exemptions for parents, per child, have been raised to good effect.  Whether buying more nutritious food, springing for extra-curricular activities or just keeping up with tuition raises, parents deserve to keep their hard-earned wages to support their children’s growth.

Tax cuts are great political move as well. There is no political reason for Beijing to oppose such a popular measure – it’s politically neutral and just doesn’t fit into their calculations. There’s one of the two camps covered.  The other camp, Hong Kong people, and the multitude of special interest groups here, have no cause to oppose these cuts as long as Hong Kong is running surpluses. Combined with last year’s cuts, two more years of reducing taxes for the lower and middle income brackets, above and beyond keeping up with inflation, would help the CE going into a hotly contested CE election – which seems more and more likely.

While tax cuts are, strictly speaking, the preserve of the Financial Secretary and the budget, the CE can claim a broad reduction of taxes as a success that he could continue into a second administration. A competitor would be wise to make it part of an electoral platform; CY could make it part of his proven track record.

It is the right thing to do and wildly popular – a rare conjunction in politics. Mr Leung, you’ve done it before – you can do it again. It works for everyone.  Let’s have two more years of tax cuts.