The taxing problem of implementing wealth tax in Singapore
LAST month, Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), said there might be a need for a property gains tax or an inheritance tax to address wealth inequality in the city-state. The problem, the central bank chief noted, will worsen over time if price increases in private housing consistently outstrip that in public housing. In the Budget 2021 debate in February, Deputy Prime Minister Heng Swee Keat had said there was scope to review Singapore's wealth taxes.
Wealth taxes - defined as taxes on an individual's stock of assets, and not on income, profits or transactions - has gained more attention recently as the wealth of the super-rich continues to grow, even as the plight of the lower income worsens amid the global Covid-19 pandemic. Knight Frank's Wealth Report 2021 suggests the number of ultra-wealthy individuals - those with at least US$30 million in net assets - rose 10 per cent last year to over 3,700 in Singapore. According to Credit Suisse's global wealth report for 2021, Singapore's wealth Gini (a measure of income inequality) of 78.3 is much higher than that of Japan (64.4), South Korea (67.6) and Taiwan (70.8), as is the wealth share of the top one per cent, which was about 34 per cent at the end of 2020. In a small country like Singapore, higher wealth inequality can result from an unrepresentative cluster of very high net-worth individuals.
The debate over the merits of a wealth tax is not unique to Singapore. In 2019, Warren Buffett and Bill Gates also highlighted that the rich in America are not paying enough in taxes, relative to the general population. Changes in equity prices and house prices have deepened the income divide. Globally, the aggregate wealth of the super rich grew nearly four-fold to US$191.6 trillion in 2020 from US$41.5 trillion in 2000, and their share of global wealth rose to 46 per cent (from 35 per cent) over the same 20-year period.
The debate is unlikely to go away. Proponents say the tax system can afford to be a lot more progressive to reduce inequality, which if left unchecked will have repercussions on social cohesion and mobility, as well as economic growth. Dissenters argue that higher income earners in Singapore are already taxed at higher tax rates - though arguably they are relatively "low" on the global scale. Those with higher income spend more, and pay more goods & services tax (GST) and thus contribute more to GST revenue. The top 10 per cent of individuals who pay Personal Income Tax (PIT) contribute about 80 per cent of PIT. As a means of redistribution, wealth tax has had limited success overseas. Tax the rich in one jurisdiction, and they pop up in another. Tax only some asset classes, and they buy up more of others.
Considering the potential trade-offs to growth, overall tax revenues and efficiency, Singapore is right to tread carefully before implementing any changes in its taxes. Taxing property gains may address the problem at the root since the widening wealth gap across the world has been historically driven by property investments. An inheritance tax will just drive wealthy individuals and families to park their wealth and assets elsewhere, jeopardising Singapore's role as a wealth management and private banking hub.
If the mission is to reduce inequality and increase the overall wealth of lower-income citizens, Singapore's tax policies must avoid disincentivising hard work. It may be more efficacious to first consider other avenues that are more palatable, that encourage the wealthy to donate and contribute to nation-building and spending.
