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By Toozle2
December 9, 2008

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For economic recovery to be sustained there needs to be a fundamental shift in thinking and policy. So look at what is proven to work from the freest economy in the world. Hong Kong.

http://www.heritage.org/research/features/index/topten.cfm

Facts: no sales tax, no capital gains tax, low business and personal income tax the max being 17.5 %

1. Conversion of wall street to HK example: The HK govt, taxes every transaction. The govt benefits from those who chose to invest in the market, this offsets the need for higher personal income taxes. The average citizen gains from the actions of the HK exchange. Those who chose not to participate in the market enjoy lower taxes. This is the reverse of the US course, using tax payers to finance wall street. If the govt taxed the actions of the market there would no need to allocate tax dollars for the financial institutions. Brokerage fees are distinct and separate from the govt tax. As well, because the govt gets $ from every transaction there is no need for a capital gains tax. Recommendation: the transition team needs to crunch the numbers. The amounts raised could be significantly higher than amounts raised by capital gains, which as we know are only realized with the sale. HK does tax on dividend income as does the USA, for that there is no change except to look at the percentage of tax.

2. A direct government stake in the exchange. The HK govt last year purchased a 6% stake in the HK exchange. The US government operates as a business. By taking a stake in the exchange it instills confidence in the market and in those public companies. These companies produce the goods and services that keep the economy functioning. During the financial crisis of 1997, the HK govt set up the tracker fund. This fund is comprised of public company shares in the largest contributors to the economy. So, rather than being a shareholder in one sector,such as the financial sector, the fund is broad based and publicly listed. Another vote of confidence. More about the functioning of the exchange:

http://www.hkex.com.hk/index.htm

A good read is found from Paul Chow head of the exchange on where it is going.

3. A fundamental need to encourage savings for the average citizen. While 70% of the GDP is consumer oriented the fact is those consumer dollars are borrowed. America's love affair with leverage. This thinking will not change over night. There are ways to encourage savings. Open up the financial institutions to cross currency savings, for the average citizen. Example: A man purchases Australian $ and earns interest as he would in Australia for a fixed amount of time. At the end of the holding period the Australian $ plus interest are converted back to US $. This common practice for the banks in HK. There are a wide variety of options to account for rate fluctuations. Bottom line: This encourages savings. As reference look at the flexibility on offer at HSBC: (Notice that the bank can also be your broker through the HSBC securities department. A one stop shop)

http://www.hsbc.com.hk/1/2/home


4. Never make unsecured loans, and repeal laws which allow for property to be used as collateral. This forces people to live in their means, and would drastically reduce foreclosures, and bad debt on the books of the banks. Mortgage backed securities would be a thing of the past. This would be long term as the mortgages work their way to being fully repaid, 25-30 years. This is a sustainable answer to fix the problem. Throwing money at it does not fix the structural problem. Reverse the law that allowed for it.

5. Health Care: As some of you may know the head of the World Health Organization is the former head of the Hong Kong government's health department. The top doc. Dr. Chan was instrumental in the SARS outbreak and swiftly locked down the territory to contain it. However what you may not know is the structure of the HK Health-care system that operates for maximum efficiency.
The system: Both public ( socialized) and private ( for profit)
Doctors work in both systems. This ensures that the quality being provided in the public hospital is on-par with the private. The doctors are on-staff at each and alternate depending on the case. The system does not ask the doc to give up his high $ private practice. It only asks him to provide his services to those in need as the case arises. Medical insurance: Optional for the HK citizen. With a public hospital the poorest of the poor have only one need, quality health care. Asking them to have insurance is outrageous. Taking advantage of the poor is unsatisfactory. Recommendation for the transition team: Send a group to HK and study a system that works, and has been tested with the worst..SARS. Funding for this system is a combination of tax dollars, and lottery style( but the lottery is not like the US, it is simply a tax on the HK Jockey Club for bets at the races.)

6. THE MPF- The mandatory provident fund. This requires people save. This system has been in place about 5 years and is structured similar to Singapore's fund. For employees earning over $11,600 per year the company contributes a fixed percentage to the fund and the employee also contributes. It's like a universal 401(k). The difference is the fund is independently managed. A waiver may be obtained to self manage the MPF. Now this scheme is expensive for the small employer, so corporate tax breaks need to be given to offset the expense as to not run the little guy out of business so his employees can save. This law does not have direct government involvement like Social Security does. HK does not have Social Security, the MPF is its answer to the future retirement of the citizens. A hands off approach from the govt, and only legal structural requirements of contributions. A conversion of Social Security in combination with an MPF type fund, taken out of the direct hands of govt will go a long way to solving the problems. After all not everyone in America contributes to SS. The govt role, to provide legal structural means, not write the checks. This is a system that works.


7. Stay far far away from protectionist trade measures. It will kill a recovery.

This is only the tip of the iceberg. Bottom line:

Do not provide more regulation for the system you have. Change the system completely and look at what works. Move to a freer economy.

Toozle2