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to Invest
Saturday, September 25, 2010
By David John Marotta
According to the Heritage Foundation’s 2010 Index of Economic
Freedom, Hong Kong has the most economic freedom. Freedom does
matter. Hong Kong is the poster child for superior investment returns
following free markets. Investments there have appreciated 71% more
than the S&P 500 over the past decade.
Hong Kong has an incredibly low tax rate. Individuals are taxed at the
lower of a progressive tax maxing at 17% of adjusted gross income or a
flat tax of 15% of gross. Just as good is Hong Kong’s 16.5% top
corporate tax rate.
The value of the Hong Kong Index is 60% in financials, which includes
real estate properties and stock exchanges as well as traditional banks.
So imagine you are opening a bank and have the option to locate it in
either Hong Kong or the United States. You can serve clients anywhere
in the world. The only difference that your choice will make is which
economic environment will bring the best value to your shareholders.
If you opt for Hong Kong, oversight and regulation are light and evenly
applied by the independent Hong Kong Monetary Authority. As
mentioned earlier, your profits are subject to a top corporate tax rate of
only 16.5%.
In contrast, if you locate in the United States you are subject to the
expensive and invasive 2002 Sarbanes-Oxley Act. The government
subsidizes large firms competing with you that benefited from risky
investments by allocating additional credit to them at below-market
rates. And after the Frank-Dodd Regulatory Act of 2010, the
government can decide to dismantle your company without judicial
review because it considers what your company is doing to be a threat.
In the United States your profits are subject to a tax rate of 35%, second
only to Japan. And in 2011 the U.S. top corporate rate will rise to
39.5% as Japan starts to lower its tax rate from 40%.
In Hong Kong, however, banks like Hang Seng live up to their name,
which means “ever-growing” in Chinese. Sun Hung Kai Properties is
another financial company in Hong Kong. If being located in Hong
Kong is lucrative, owning real estate in Hong Kong is equally so. Sun
Hung Kai controls over 43 million square feet of real estate.
Hong Kong is only 426 square miles, less than 60% of the size of
Albemarle County, Virginia. But its population is more than 7 million,
making it one of the most densely populated places in the world.
Economic freedom matters. And it makes you wonder why all the
capitalists are in China and all the socialists are in Washington.
Hong Kong provides a place for free markets to work so they can
compete in the global economic environment. Even though China
knows that Hong Kong is a cash cow, every now and then they long to
eat beef. It would be a grave mistake, but it is still a strong temptation.