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The capital conundrum
BUSINESSES need workers to operate, and workers need businesses for jobs. You could say that they are two sides of the same capitalist coin each trying to come up on top. Where to strike the balance is a matter of growing debate in Singapore.
In November, Finance Minister Heng Swee Keat said that the government is looking at the option of taxing labour less and capital more, as one of the options for changes to Singapore's tax structure.
A month later, Ambassador-at-large Tommy Koh argued during a discussion on a minimum wage that Singapore over-rewards capital and does not reward labour enough.
The tax perspective shows how complex the issue can be. A pro-business stance is a fundamental pillar of Singapore's competitiveness, although more should perhaps be done to address rising inequalities from wealth, according to tax and policy experts.
And policy options can be complicated to shape, like property taxes affecting many Singaporeans because of the country's high home ownership rate.
Good for business…
Few places in the world are as friendly to capital and business as Singapore. As of May 2018, Singapore maintained its World Bank ranking as the second-best country in terms of ease of doing business, coming after New Zealand and ahead of Denmark and Hong Kong.
Harvey Koenig, head of Enterprise Incentives Advisory at KPMG Singapore, says that as a small city state with no natural resources, Singapore has had to rely on foreign direct investments to power its economy.
"In line with this reality, Singapore has historically adopted a policy of low corporate taxes, including the use of tax incentives, to encourage investments into Singapore."
As Soh Pui Ming, head of tax at Ernst & Young Solutions points out, Singapore's corporate income tax rate has remained at 17 per cent since the 2010 year of assessment.
That compares favourably to other financial hubs, she adds. Companies in New York face a 21 per cent federal tax; in London, they pay a 19 per cent corporate tax rate; and in Shanghai, companies are taxed at 25 per cent.
It might therefore seem that Singapore tax policy is extraordinarily friendly to businesses, but the competitive edge has actually been narrowing.
According to an Organisation for Economic Co-operation and Development (OECD) report, the global trend in corporate income tax rate cuts has been largely driven by significant reforms in a number of large countries with traditionally high corporate tax rates.
The average corporate income tax rate across OECD member countries - which includes the United Kingdom, the United States and Germany - has dropped almost 9 percentage points from 32.5 per cent in 2000 to 23.9 per cent in 2018. London's 19 per cent corporate tax rate is due to drop to 17 per cent by April 2020.
The median tax burden ratio of the world's listed companies, that is to say the percentage of taxes paid by them around the world on their consolidated pre-tax profits, has fallen to 24.6 per cent from 27.8 per cent a decade ago, according to a Nikkei Asian Review article in 2017.
As Mr Koenig notes: "In recent years, larger countries have been reducing their corporate tax rates in the realisation that technology and globalisation was making it easier for businesses to relocate operations to anywhere in the world."
…Good for all?
Singapore also does not tax capital gains, although it is not alone on that front.
In Shanghai, the applicable income tax rates for capital ownership are generally lower than those for labour service performed by employees.
Capital gains tax is 20 per cent for locals, whereas employment income is taxed at progressive rates of between 3 and 45 per cent. Like in Singapore, there is also no estate or inheritance tax in China.
In London, capital gains are subject to a lower rate of tax than income in the hands of local individuals.
In general, capital gains tax is between 10 and 20 per cent, and there are also a number of capital gains reliefs which may reduce or eliminate the tax on any gains arising. There is also a 20 per cent lifetime rate and 40 per cent death rate.
In the US, tax law also favours capital over ordinary income. Capital gains, and some dividend income, are subject to a federal tax of 20 per cent, plus a 3.8 per cent investment tax. An estate tax of 40 per cent is levied on estates over approximately US$11 million.
Alongside pro-capital and pro-business tax policy, Singapore also has a personal income tax policy that adopts progressive principles of taxing the higher earners more than the lower earners.
As Mr Koenig points out, only about half of workers pay little or no income tax because of exemptions and Singapore's graduated rates, which start at zero per cent and top out at 22 per cent for those with a chargeable annual income above S$320,000. The government also offsets taxes through incentives such as the recent bicentennial bonus and its regular personal income tax rebates. On the other hand, the top 10 per cent of the taxpayers contribute 80 per cent of Singapore’s personal income tax collections. (see amendment note)
In contrast, according to EY, the United States has a 37 per cent tax rate for its top individual tax bracket. The UK and China are at 45 per cent, while Hong Kong's stood at 17 per cent.
While Singapore has little or no tax at the bottom of its individual income tax scale, its top-end rate of 22 per cent is also significantly lower than the global average, and those at the lower end of the scale look much better off compared to elsewhere around the world.
Aiming for better
But generally low tax rates across the board does not mean they are felt equally by all, and the question remains whether Singapore can strike a better balance.
Donald Low, professor of practice and director for leadership and public policy at the Institute of Public Policy at the Hong Kong University of Science and Technology, recently honed in on Singapore's low rate of taxation on capital as a key source of inequality in the country.
In a TODAY opinion piece, he argued that wealth comes from the ownership of capital, and as ownership of capital is far more unequally distributed than labour, the former is a bigger determinant of inequality.
Given that the rich derive a significantly larger share of their income from capital, the very low taxes on capital in Singapore mean that capital owners may be paying a lower effective tax rate than the upper middle class in Singapore, whose main - if not only - source of income is their labour.
Mr Low proposed introducing a low tax rate on capital gains, from 5 to 10 per cent. Another move he suggested would be to make income from dividends and interest taxable once more. These capital gains were made tax-exempt in the early 2000s in order to attract more investments and foreign talent to Singapore shores, he said.
With the global financial crisis of 2008-2009 and recent slowdowns in cross-border flows of goods, services and cash, Mr Low said such exemptions may no longer be as effective in attracting capital.
Capital taxes need to go up, he maintains, and the top end of the individual tax scale needs to increase, in order to reduce inequality. There have been attempts to address wealth accumulated from investing in property with a slew of taxes.
That includes stamp duty when buying and selling, income tax on rents and annual property taxes. And despite the absence of a capital gains tax, when a person is seen to be buying and selling real estate regularly, gains realised from the sale of real estate could be subject to income tax, Mr Koenig said.
Indeed, Finance Minister Heng recently said wealth taxes should ideally target fixed assets like property instead of levying inheritances or other holdings as most household wealth here is held in the form of property.
However, PwC Singapore tax leader Chris Woo says there are non-fiscal factors that need to be taken into consideration. As a result of Singapore's housing policies, the wealth of many lower and middle income Singaporeans is locked up in their residential property (and CPF), he says.
"Hence, while further taxes on real property ownership may be easy to administer, they would likely affect this segment of the population the most," he says.
"Individuals who are better off have the ability to diversify their investments and even to move them elsewhere if need be."
For Mr Koenig, the answer may lie in figuring out how to lift all boats. He says a strong economy provides the foundation to support job creation, which in turn generates government revenues through taxes to support government spending.
"Firstly, Singapore is a country with no natural resources and a small domestic economy," he says.
"Secondly, capital and talent are more mobile than ever. Thirdly, business cycles are becoming increasingly shorter. As a result, Singapore needs to continually reinvent itself and this requires injection of fresh capital and talent.
"But as with many societies, Singapore is facing increasing income disparity. While government interventions are required to ensure social policies are directed at addressing income inequality such as by investing in education and affordable healthcare, the most sustainable way to achieve a fair distribution of society's resources is to ensure a strong and resilient economy."
Amendment note: An earlier version of this article said a majority of workers pay little or no income tax in Singapore. It is actually only half. The article has been corrected to reflect this.