Friday, August 22, 2014
I was a toddler when Ronald Reagan and Margaret Thatcher took the leadership to turn around the economy.
One of the most important measures was to cut tax and free the power of capitalism. Three decades have elapsed and it is obvious that the supply-side reformers won the debate governments do not create wealth.
A few days ago, the American Chamber of Commerce hosted a talk by Arthur Laffer, the name we often find in textbooks on public finance.
Although he didn't invent the idea of optimal tax, he was the one who gave the concept a name by illustrating it in an inverted-U shape curve the Laffer curve.
He asserted that by lowering tax rates governments can increase revenue. In fact, the US and UK governments drastically improved their fiscal positions after the reform and the rest is history.
As opposed to those two nations, Japan serves as the best example of what supply-side reform will do.
In 1997, Japan increased sales tax from 3 percent to 5 percent and the economy once again went into a deep recession. Tokyo then had to print money, devaluate and resort to repressive micromanagement of the financial sector to keep money at home and to stay afloat. Fourteen years later, the Japanese government is in no better shape and it has resorted to the same old trick again.
Other nations now have a better understanding about the effects of printing and taxation, which is always politically controversial and economically damaging.
In fact, taxes have became a policy for governments to micromanage behavior rather than make money. The special stamp duty on Hong Kong property transactions is a case in point. Tobacco tax is prevalent globally.
Taxes, no matter what their original purposes are, tend to increase rather than decrease, given that politicians and bureaucrats see everything as problems and the levying of taxes is the solution.
How can we bring the government back to sanity about tax policy? It takes time to change people. But they will. It is like quitting smoking. It takes time, but they will. Simon Lee is a business consultant
http://www.thestandard.com.hk/news_detail.asp?pp_cat=15&art_id=148667&sid=42681537&con_type=3
