Capital Gains Tax with Hong Kong Characteristics: Desirability, Feasibility and Design

Abstract

Hong Kong is known for its simple, low-rate tax system. Its current schedular income tax mechanism dates from the 1940s and is based on a much older income tax system developed in the United Kingdom (UK). When capital gains tax (CGT) was introduced in the UK in 1965, no similar step was taken in Hong Kong. The economic and social conditions underlying the original design of the system have changed dramatically over the years and will continue to change, but the system itself has seen little reform to keep pace with these changes. Furthermore, in recent years Hong Kong’s housing market has become one of the world’s least affordable, which exerts a profound influence on the prospects of the city and its people, particularly the younger generation. The tax measures taken by the Hong Kong government to tackle the situation focus solely on levying stamp duty on residential property transactions. This paper argues for the need for a CGT in Hong Kong with a view to reduce speculative property investment, stabilise the housing market and alleviate the social division. The stamp duty modifications in recent years show that the tax system in Hong Kong is not immune to change and that Hong Kong people are not necessarily resistant to such change. This paper also suggests a design for the proposed CGT, based mainly on its equivalent in the UK but taking into account the circumstances peculiar to Hong Kong.