Hong Kong Taxes...

I lived in Hong Kong for 2 1/2 years, and I thought that their tax system was excellent. It only took me about 6 minutes to fill out the form.

Unlike the United States, Hong Kong is not plagued with tax credits that create random spikes in marginal tax rates as the credits are phased out. But Hong Kong does allow charitable deductions up to 25 percent of salary income and a mortgage interest deduction up to about $13,000 (in U.S. dollars). Other deductions are allowed for adult education, care of elderly relatives and retirement savings plans.

Personal exemptions are so generous that most employees owe little or no tax on salaries. For those with high salaries, however, it is cheaper to forego personal exemptions (but not deductions) and pay a 16 percent "standard rate." Only the top 2 percent usually pay that standard rate, yet they account for nearly half of all revenue from the salaries tax.

Groping for an explanation of the standard rate a decade ago, I suggested it was something like an "alternative maximum tax" -- a phrase Moore has used to describe his own, very different tax proposal. But the standard rate is automatic, not a matter of choice. Taxpayers fill out a one-page online return declaring their salary and deductions, and the government sends them a bill.

The standard rate does not make Hong Kong's tax system simpler, but it does make it more efficient. Academic studies of optimal taxation have long concluded that marginal tax rates should be lowest at the highest levels of income. As Joseph Stiglitz wrote in 1987, "the marginal tax rate on the highest income (ability) individual should be zero." Hong Kong does not go quite that far, but the marginal rate is reduced from 20 to 16 at the highest incomes, while keeping their average tax high by eliminating personal exemptions.

As clever as this is, it is not the most interesting aspect of the Hong Kong tax system. What makes taxes in Hong Kong so uniquely simple and effective is that businesses pay all the taxes on income originating in business (profits), and employees pay all the taxes on salaries.

Hong Kong has no payroll tax for Social Security, no general sales or value-added tax, no tariffs on imports and no personal tax on income from financial assets. What Hong Kong has is called a "Dual Tax" -- progressive tax rates on labor income but a flat tax of 17.5 percent on corporate profits, 16 percent on property owners and unincorporated enterprises.

The low tax on profits brings in substantially more revenue than the tax on salaries, in marked contrast to the United States, which collects little from profits taxes that are nominally twice as high. Corporations in Hong Kong pay the profits tax before distributing dividends to shareholders, so there is no extra tax on dividends to be collected from individuals. Reinvested profits result in more business income to tax in the future, so there is no extra tax on capital gains to be collected from individuals.