Update: This ‘Plan B’ is not feasible because Hong Kong taxes personal income only from salaries, so few recipients of an old age allowance would have taxable income from which to claw back the allowance.
The Hong Kong government has delayed until Tuesday, 30 October, a vote in the Legislative Council to approve its proposed doubling of the Old Age Allowance (OAA), from HK$1090 (US$140) to HK$2200 (US$284). This is still too low, given Hong Kong’s European levels of income, and its minimum wage of HK$28 (US$3.60) an hour. But my concern at this moment is not with the amount, but rather with the government’s insistence that the bulk the expense be financed by a means test, which falls heavily on the poor and makes access difficult for the many Hong Kong elderly who are living in poverty.
The current OAA is means tested for ages 65-69, but universal (without means tests) for every resident from the age of 70. The proposed allowance, known as an Old Age Living Allowance (OALA), even though it is far too small to finance the basic cost of living, is to be means tested for all ages from 65. (Anyone younger than 65 need not apply.) Residents older than 70 who cannot pass the means test, or prefer not to put themselves through the humiliation, are welcome to apply for an Old Age Allowance (OAA) at the old rate, known as ‘fruit money’ because that is all beneficiaries can purchase with it.
The means tests remain the same. There are two. The assets test prohibits beneficiaries from owning more than HK$186,000 (US$24,000) in stocks, bonds, jewellery, gold coins and other stores of value. Married couples are allowed up to HK281,000 in joint savings. Owner-occupied housing, automobiles for personal use and similar goods are not counted as assets for the means test. The assets test makes no sense, for two reasons. First, the government claims to want to encourage saving for retirement, provides tax incentives, and even mandates workers to save 10% of their salaries in the Mandatory Provident Fund (MPF) scheme. Second, the assets test is easily evaded. Applicants are supposed to list, for example, the value of all the gold bars and coins that they own. Is the government going to search the house of each applicant to see if there is hidden gold and jewellery? This is not likely. An asset test does discourage applications from honest citizens, but the dishonest will have no difficulty passing this hurdle.
The income test is more difficult to evade, especially if an elderly person continues to work for wages. The limit is HK$6,660 {US$859) a month for a single person, and HK$10,520 (US$1,357) for an elderly couple. The problem with this test, as I pointed out last week, is that it produces some extremely high rates of taxation on income, which can discourage the elderly from working, to supplement the meager rations they receive from the government of Hong Kong. A single person who is earning HK$6,600 a month will qualify for the OALA, so will enjoy a total income of HK$8,800 (US$1,135) a month. But, earning just one dollar more will cause her to lose the OALA, and her income will fall sharply to HK$6,601 (US$852).
My preference, my ‘Plan A’, as readers of this blog know, is universal benefits, without means tests. Means tests are taxes, an aid in financing social expenditure, but these taxes fall heavily on the poor, and discourage participation in the paid labour force. In addition, means tests stigmatise the poor and cause low take up by those who truly need the benefits.
Still, some will object that it is wasteful to use public money to provide benefits to the wealthy, who do not ‘need’ them. My response is that the wealthy pay more taxes than the poor do, so why shouldn’t they also receive benefits, if they so desire? To deny some residents access to a cash benefit solely because of their income or assets is equivalent to imposing a tax on their income or assets. Why not collect a tax instead from all of the wealthy, rather than only from those wealthy who also happen to be old (or happen to have children, or happen to be disabled, in the case of other means-tested allowances)?
Nonetheless, for those who want to limit payment of OALA benefits to those who are relatively well-off, I offer a ‘Plan B’ that avoids the spectacularly high rates of income tax implicit in income tests. More importantly, it avoids stigmatisation. Under ‘Plan B’, any person that qualifies by age and residence can request the OALA, provided that he or she duly notes receipt of the benefit in each year’s tax return.
The income tax in Hong Kong is called a “Salaries Tax”, so I assume that it is a tax only on salaries, and not on income from investment. The assumption is that investment income is taxed via the corporate profits tax. Now, one might argue that the claw-back of OALA that I propose should take into account investment income as well as income from salaries. But if no citizen is taxed directly on his or her investment income, why should the elderly be treated differently? I think the Salaries Tax is an adequate vehicle to claw back the OALA from beneficiaries who are able and willing to continue working, even on a part-time basis.
There are many deductions available before arriving at what is referred to as “net chargeable income”. The main deductions are HK$120,000 a year for a basic allowance, and an additional HKI120,000 for a dependent spouse. The tax is payable at the rate of 2% for the first HK%40,000 of chargeable income, 7% for the next 40t, 12% for the next 40t, and 17% for all remaining chargeable income. The taxpayer always has the option, however, of paying tax at a flat rate of 15% on his net income (before deduction of allowances). Details for the 2012-2013 tax year are shown here.
This is how the claw-back works. First, the OALA of HK$2,200 a month (HK$26,400 a year) should be included in taxable income. This means that some residents, who otherwise would have had no taxable income in the year, will now have to pay an income tax. A key variable is the rate of claw-back. I have selected a claw-back rate of 15%, since Hong Kong has a tradition of low taxes on income, which I am respecting. This claw-back is actually a surtax, added to the normal rate of tax. The progressive rates thus start at 17% (15+2), then become 12%, 27% and finally 32%. The rates return to the normal rates of 2% to 17% once the OALA has been ‘clawed back’ from taxpayer income.
Below is a chart that illustrates the clawback, for a wide range of ‘taxable incomes’, from zero to HK$800,000 (US$103,000). Note that taxable income, on the horizontal axis, includes the OALA. The tax rates are simply income taxes paid as a percentage of taxable income, so are average, not marginal, rates. For comparison, I show the same calculations using the means test that denies the OALA to anyone with enough income to be taxable. The ‘means test’ curve is simply the normal taxes for each amount of chargeable income, plus an additional lump-sum tax equal to HK$26,400, the value of the OALA that is denied to taxpayers under the means test. The total tax as a percentage of taxable income is extremely high when taxable is low, because the lump sum ‘tax’ is proportionally very large. Nonetheless, it is interesting to note that the “means test” tax line is almost everywhere below the “claw-back” tax line. Taxpayers, even those with very high incomes, tend to do much better with the 15% rate of clawback than they do with Hong Kong’s income test.
With a taxable income of HK$176,000 (US$22,700), the OALA is fully clawed back. The net benefit at this point falls to zero and the tax rate falls to a more reasonable 7.7%. Both the means test and the claw-back affect only elderly taxpayers, but a 15% claw-back is much more equitable, and has better incentives for continued work, than the denial of benefits to anyone whose income exceeds, even by a tiny amount, HK$6,660 a month.
Should a smaller Old Age Allowance be offered to residents from the age of 70 without restriction, even with a system of recovery through the income tax system? I don’t see the need for it. There is no reason, in my opinion, to have one system for those aged 65-60 and another for those aged 70 and older. The claw-back has the virtue that it recovers some or all of the allowance from those who are able and willing to continue to work, possibly to set aside savings for a more comfortable retirement at a later date
