Can Asia afford low taxes?

Before now, no one would have described the leaders of Hong Kong or Singapore as Asian Robin Hoods. Both cities have earned well-deserved international reputations for high efficiency and low taxes, with income taxes topping out at 15 percent in Hong Kong and 20 percent in Singapore. Their decades of sustained prosperity would seem proof of the virtues of trickle-down economics.

That dogma may finally be shifting, though. Clearly worried about rising inequality, Singapore’s government this week announced the first increase in the top income-tax rate in decades, raising levies on the richest 5 percent of citizens. Even Hong Kong’s fabled billionaires are concerned about the widening gap between haves and have-nots, which helped drive last fall’s Umbrella Revolution. Li Ka-shing, Asia’s richest man, has said he’s losing sleep over the issue. Henderson’s Lee Shau Kee has begun donating land to non-profit organizations to build old-age homes and youth hostels.

Yet in its own budget this week, Hong Kong resisted lifting taxes on the wealthy, instead tossing a few sweeteners at the poor and elderly, and trimming personal taxes slightly. Apparently Hong Kong Chief Executive Leung Chun-ying believes the city can still afford to coddle its tycoons. That’s an increasingly questionable assumption.

Earlier this month, the Group of 20 for the first time signaled joint concern about mounting inequality across the world economy. As French economist Thomas Piketty argues in his best-selling “Capital in the Twenty-First Century,” returns on money have outpaced gross domestic product over the past 30 to 40 years. The Organization for Economic Cooperation and Development says that the rich-poor gap in most of its member countries has reached its most egregious levels in three decades. The top 10 percent now pockets 9.5 times more than the poorest 10 percent, up from seven times in the 1980s. Things look to get even worse. Oxfam predicts the richest 1 percent will control most of the world’s wealth by 2016.

Growth in Asia has lifted hundreds of millions of people out of poverty, but at a cost. According to the Asian Development Bank, four-fifths of Asians - nearly 3 billion people - live in nations where inequality has been rising for 20 years now. That’s deadened the benefits of even rapid growth, meaning Asia’s output tends to be more about quantity than quality.

The rise of China in particular has been both boon and curse. While the mainland provides a huge market for Singaporean and Hong Kong entrepreneurs to tap, the powerful competitive forces its 1.3 billion people have unleashed are dragging down Asian wages. At the same time, rich Chinese are buying up property in Hong Kong and Singapore, pushing prices out of the orbits of average families (although in Singapore at least, measures to pop the luxury property bubble are having some effect).

The answer, development economists agree, is for governments to strive to raise productivity, curtail corruption, invest in education and establish secure safety nets. In a report last year, the ADB recommended four steps to reduce inequality: implementing more efficient fiscal policies that invest in education and support poor families; developing new industries; supporting small-and-midsize enterprises; and looking for innovative solutions to spread the benefits of growth.

Singapore’s budget tries to address all these points. But it also acknowledges that the government needs to collect more revenues if it’s going to build Western-style welfare systems to support the most vulnerable households. By contrast, Hong Kong’s government still seems focused on growth as a panacea; its budget offers additional relief to the tourism industry and other businesses affected by the weeks of pro-democracy protests. The measures do little to address the fundamental problem - an economic structure that’s impeding the ability of lower-income households to move upward.

What Singapore’s government at least seems to recognize is that urgent action is needed - bold investments in affordable housing, social-safety nets and job training that perhaps only a tax on top earners can finance in short order. The city is already ranked 26th out of 136 economies for income inequality; standing pat will only continue to hollow out the middle class. As in Hong Kong, what used to be a competitive advantage - a generous tax regime that attracted businesses and talent from around the world - may simply be unaffordable.

The Umbrella Revolution showed that fears about social unrest are not idle. Along with attractive business environments, Singaporeans and Hong Kongers long prided themselves on something else: pragmatism. It’s time to exercise some.

*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

by William Pesek