Hong Kong and Singapore

American Journal of Economics and Sociology, The, Dec, 2000 by Sock-Yong Phang

B. Land Value Capture and Economic Development

Income from land transactions is an important source of government revenue in Hong Kong. A study by Hong [6] shows that the Hong Kong government was able to capture 39 percent of land-value increments occurring between 1970 and 1991 from land leased in the 1970s. Land revenue from the initial auctions, rather than from lease modifications and renewals, was the most important source of land revenue. This captured value financed an average of 55 percent of the annual infrastructure investment during the same period. Hong also estimated that combined land-related revenues could recover, on average, 79 percent of the annual costs of public infrastructure investment.

The current profits tax rate for corporations is 16.5 percent. Profits from unincorporated businesses are taxed at 15 percent. Salaries tax rates range from two percent on the first HK $30,0000 of net income, to eight percent and 14 percent on the second and third segments of $30,000 each, respectively, and then to 20 percent on remaining net income, subject to the limitation that the total tax paid shall not exceed 15 percent of gross income. Due to generous personal allowances, about 53 percent of the labor force does not pay any salaries tax. [7] The low level of tax rates and their lack of progressivity have contributed to the economic dynamism of Hong Kong, encouraging work effort, investment, and enterprise.

Moreover, generous depreciation allowances encourage new capital investment in the industrial sector. In order to promote Hong Kong's status as a financial center, there is no interest withholding tax on foreign currency deposits.

Since 1973, the Hong Kong government has also assisted selected industrial ventures by its provision of land for their needs via private treaty instead of public auction. In 1977, the Industrial Estates Corporation was set up to provide land at a price which reflects only the cost of formation and servicing for industrial processes which could not be carried out in multistory industrial buildings. These industries include land-intensive ones such as gas, telecommunications, oil refineries, and electricity. The land premia are decided by negotiation rather than auction with the objective being to foster industrial growth and develop public utilities. Land grants of this category include leases for the development of industrial estates and the new airport, the expansion of container terminal facilities, and for the development of hospitals and other nonprofit community ventures.

Similar to Singapore, Hong Kong has a large subsidized public housing sector which has been made possible partly by state ownership of land. In 1994, over three million people (or half the population of Hong Kong) resided in some 879,000 public housing flats. Some 2.5 million live in 685,000 rental units while 593,000 live in purchased flats. [8] In 1998, public rental housing accommodated about 2.5 million people (39 percent of the population) compared with 1.7 million in 1975. Since 1978, the government has built more than 240,000 subsidized flats for sale under various ownership schemes. In early 1998, the new government announced a new housing strategy that included an annual supply of 85,000 flats from 1999, and a target of increasing the overall homeownership rate from 52 percent to 70 percent by 2007. Inasmuch as all the land is state owned, the government does not have to purchase land from private landowners to build public housing for the lower income group. In addition, the government further subs idizes the provision of public housing by providing grants and loans at concessionary interest rates to the housing authority.