Stephen Moore, president of the Free Enterprise Fund and a senior fellow at the Cato Institute, falsely claimed in a January 27 Wall Street Journal op-ed that "nearly all the workers" in Hong Kong opt to have their salaries fully taxed at Hong Kong's "standard rate," which Moore calls a voluntary "flat tax," instead of paying lower rates of taxes under what Moore described as the "convoluted 'long form' tax system." In fact, the vast majority of workers -- more than 98 percent -- opt against paying the standard rate. Moreover, a significant number of them -- indeed, the majority of workers in Hong Kong -- actually do not pay any taxes at all on their salaries because of the number of personal income allowances that can be taken only under the "long form" system.
As Media Matters for America has previously explained, Hong Kong's system for taxing salaries includes personal allowances for individuals and their dependents and consists of four separate tax rates for income over and above eligible allowances and other deductions. Hong Kong also has what is called a "standard rate" for taxation, currently 16 percent; this is the maximum any worker is legally obligated to pay on his or her taxable income. Workers who pay the standard rate are allowed to take certain deductions, such as for charitable donations, but cannot reduce their taxable income by applying the significant personal and dependent allowances granted to other taxpayers.
Moore's assertion that "nearly all the workers" choose to opt for the standard rate system rather than reduce their tax burden by taking their allowed personal and dependent allowances is simply not true. As then-Hong Kong Financial Secretary Antony Leung stated in a speech to Hong Kong's Legislative Council on April 9, 2003:
In the assessment year of 2002-03, among the 3 million or so working population, only 1.2 million people are subject to salaries tax. And among these taxpayers, only 13,000 are subject to the standard rate.
And, as Ambrose Leung and Kelvin Chan reported in the March 6, 2003, South China Morning Post, writing about the impact of proposed changes to the system:
Around 90,000 salary earners who do not pay tax will fall into the tax net when the measures are implemented. At present, about 13,000 taxpayers making [HK]$1.4 million a year and above pay the 15 per cent standard salaries tax rate. Under the budget proposal, those earning [HK]$998,834 and above would have to pay the standard rate. In the following financial year, the threshold would drop further to [HK]$770,000.
According to government figures, the total number of people paying the standard rate of tax will rise to 27,000 in 2003-04 and 44,000 by 2005.
With roughly 3 million workers in Hong Kong, the 44,000 expected to pay the standard rate of tax this year is less than 1.5 percent of the total, a far cry from the "nearly all the workers" Moore claims.
It's illustrative to consider how costly it would be for families to opt into the "standard rate," as Moore wrongly claimed they do. Consider the example of a married couple with one child with a gross salary income of HK$260,000 (about $33,000 in U.S. dollars) and no allowable deductions other than the personal and dependent allowances. Under the standard rate, this family would be obligated to pay 16 percent of this amount, or HK$42,000 (about $5,200 in U.S. dollars). However, if the family takes the personal allowances allowed by law -- a HK$200,000 married person allowance and HK$30,000 for their child -- their total tax liability would be 2 percent (the bracket for the first HK $30,000 in income) of HK$30,000, or HK$600 (about 75 U.S. dollars) -- which is significantly less than one percent of their overall income.