Thursday, 8 May 2008

Reforming Social Policy in Hong Kong

In the absence of a contributory social insurance program, the Comprehensive Social Security Assistance (CSSA) scheme serves as the major social welfare program in Hong Kong. For a typical 4-person household, they will only get around HK$ 10,000 each month from the CSSA, including rent. Put it into perspective, each person on average will get less than 15% of Hong Kong’s GDP per capita per year. These figures demonstrate that despite strong economic growth in Hong Kong in recent years, there is increased social polaarization as there are a large number of poor people who did not share the benefits in the economic boom. While the stock market is reaching new highs, nearly 10% of Hong Kong citizens are living at abject poverty. Means-testing in the CSSA scheme is the major drawback of relying CSSA as the major social security program. Apart from its stigmatizing effects, the means-testing criteria also creates strong work disincentive. There is a pressing need to reform the social welfare system in Hong Kong as it is neither economically efficient nor socially just.

A negative income tax is a tax reform that has been discussed among economists. It was proposed by Juliet Rhys-Williams, a British politician, in the 1940s and later by Milton Friedman, the Nobel laureate in economics, in 1962. There are a number of variants of this proposed tax system. In its most basic form, it consists of a flat tax rate and a fixed tax exemption. Normally, if a person’s income exceeds the tax exemption, he needs to pay the tax on the excess of his income over the exemption at the flat rate. When a person income is less than the tax exemption, he will then get a subsidy from the government. The subsidy is calculated by applying the flat rate on the difference between the exemption and the person’s income. In this way, there will be a floor below which no person’s net income can fall.

The benefits of this scheme are plenty. First, it successfully achieves the aim of maintaining income security. By adjusting the tax rate and the tax exemption, we can set the minimum net income that is guaranteed to everyone. Unlike minimum wage, this is done through a welfare payment instead of compelling corporations to raise their wage levels artificially.

Comparing with a means-testing social assistance scheme like the CSSA, the disincentive effects are relatively insignificant. It is because every extra dollar you earn from your own job will increase your net income. There is an incentive for an unemployed person to look for jobs even though he has job a minimum payment from the NIT.

As the social security provision is integrated seamlessly with taxation, it reduces the administrative costs as there is no need to maintain two separate systems. The notorious means-testing can also be removed as the income guarantee will be paid as part of the taxation system, which already has a robust income reporting system. This is especially suitable for Hong Kong as it has got a simple tax system.

The current CSSA scheme fails to provide basic income security, which is a fundamental human right, for its citizens. It also creates serious work disincentives for claimants which reduce the productivity in the society. In addition, this also leads to intensified conflicts between different social groups. It seems sensible that the NIT is a more desirable approach to adopt in Hong Kong, both because of its sound economic rationale and its compatibility with Hong Kong’s situation. The NIT will help to guarantee income security for Hong Kong citizens without infringing the principles of financial conservatism. Compared with other options, this approach works in harmony with the culture of self-reliance in Hong Kong. In order to create a more socially just society in Hong Kong, adopting negative income tax as its social welfare policy will be a step towards the right direction.