Arthur Laffer says Hong Kong should let the market adjust naturally, rather than trying to fix a potential structural deficit through higher taxes. Photo: HKEJ
Arthur Laffer, the economist known for the Laffer Curve, which depicts the trade-off between tax rates and revenue, has warned the Hong Kong government against any attempt to deal with a projected structural deficit by means of taxes.
The best way of coping with it is to do nothing and allow the market to adjust naturally, Laffer said, according to the Hong Kong Economic Journal.
Financial Secretary John Tsang had warned earlier that Hong Kong will run into a structural deficit in seven years.
Observers are anticipating that the government will launch soon a series of infrastructure projects to boost the economy after the city posted slower growth in the second quarter.
Laffer, a strong believer in achieving an effective economy through tax cuts, is known as the Father of Supply-Side Economics, advocating the use of tax and fiscal incentives to stimulate economic activities.
He said the existing low-rate income tax in Hong Kong is already effective enough in redistributing wealth, and that the government should not raise the tax rates.
In defense of a minimal tax regime, Laffer also said, among other things, that raising the tobacco tax may in the end encourage people to choose parallel imports or other illegitimate ways to smuggle illicit cigarettes. That will ultimately hurt tax revenues, and also put law-abiding smokers at a disadvantage, he said.
Laffer is staying for a few days in Hong Kong to promote his new book “Handbook of Tobacco Taxation: Theory and Practice”.
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