On the January 24 edition of "The Point," Sinclair Broadcast Group's two-minute nightly conservative commentary, host and Sinclair vice president Mark Hyman praised the "flat tax" system of income taxation and claimed that Hong Kong is "a flat tax country." It is not.
A flat tax system has a single tax rate; in its purest form, there are no personal allowances or deductions for dependents, home mortgage interest, or any other purpose, and all individuals pay the same percentage of income in tax regardless of income. A modified flat tax system, advocated by some, maintains the key ingredient of such a system -- a single tax rate -- while adding in exemptions for, say, some initial amount of income.
By contrast, according to the accounting firm PricewaterhouseCoopers, Hong Kong's system has multiple tax brackets, with differing marginal tax rates for different levels of income. It also has a system of exemptions for individuals and deductions for dependents, as well as deductions for expenses such as home mortgage interest, self-education, and elderly residential care. There are four tax brackets as of 2004-05; the first HK$30,000 in income is taxed at a 2 percent rate, the next HK$30,000 at 8 percent, the next HK$30,000 at 14 percent, and the remainder taxed at 20 percent. Deducted from this are a basic allowance for all taxpayers of HK$100,000, HK$30,000 for each child, and other potential dependent allowances. Approximately eight Hong Kong dollars equal one U.S. dollar.
Hong Kong does have what is called a "standard rate" of tax, 16 percent in 2004-05, up from 15.5 percent in 2003-04. This is the maximum tax rate that any person is obliged to pay on their gross income, minus some allowable deductions, such as charitable donations, but not including personal or dependent allowances. For a single person with no children or other allowable deductions, this rate would kick in at an annual gross income of HK$770,000 (about $96,000 in U.S. dollars). Everyone below that level of income faces four separate marginal tax rates, not a single "flat tax." When Hong Kong's latest population census was taken in 2001, only 8.7 percent of households, which potentially include more than one working member, earned an annual income greater than HK$720,000. Therefore, only a small portion of Hong Kong's workers, presumably somewhat less than 8.7 percent, actually pay the standard rate under an effective "flat tax."
From the January 24 edition of "The Point":
Estonia was the first in 1994 to adopt a 25% flat tax rate that is being cut to 20% in 2007. Latvia joined the flat tax club the following year. Serbia, Slovakia, and the Ukraine joined. So did Russia in 2001. The Czech Republic and Poland are reportedly eyeing a flat tax.
Hong Kong has been a flat tax country for more than 50 years. And it is no coincidence that Hong Kong has led the world in economic growth. This is why China is seriously considering a flat tax.