Wealth tax: not a magic bullet for wealth inequality

THE imposition of some form of wealth tax is a hotly anticipated subject in the upcoming Budget, next to the expectation of a GST hike.

In the short term, a wealth tax would help to expand the government's revenue. In the longer term, it may help to address Singapore's widening wealth disparity.

Government officials have emphasised the need to build a more inclusive society. Certainly Singapore's social expenditure for items like health and education has been rising. With an ageing population, healthcare expenditure is expected to triple to nearly S$60 billion a year by 2030.

The big question is how effectively a wealth tax could help to narrow the wealth gap. To be sure, the answer depends on the form a wealth tax takes - whether it is imposed on property, for instance, or on liquid assets in the form of a tax on capital, an estate duty or inheritance/gift tax. Ultimately collections from wealth taxes should also be channelled towards redistributive measures.

Gaining resonance

In considering a wealth tax, Singapore is far from alone. Globally the idea is gaining resonance for a few reasons. One, governments are anxious to shore up ever-growing fiscal holes exacerbated by the pandemic. Two, countries recognise that wealth and income disparity is worsening. Numerous wealth studies show that even through the Covid crisis, the ultra wealthy have only become wealthier, and the poorest of the poor are falling further below the poverty line. This does not bode well for overall economic growth and for social and political cohesion, among others.

Three, the most prominent of billionaires including Warren Buffett have stepped up to call for higher taxes. In January at the World Economic Forum, more than 100 millionaires signed an open letter to ask governments to tax them at a higher rate, and to counter the perception that a tax on wealth would damage business growth and economies.

To date, research on the likely economic impact of a wealth tax isn't promising on how far it might go to reduce wealth inequality. A paper by the OECD says there are "limited" arguments to impose a net wealth tax "in addition to broad-based personal capital income taxes and well-designed inheritance and gift taxes". Net wealth taxes, it said, "tend to be more distortive and less equitable" because they are imposed irrespective of the actual return taxpayers earn on assets.

A policy paper published in the US concluded that raising taxes on wealth or capital is "like cutting off your nose to spite your face". "It will reduce wealth inequality but at great cost to workers since it also reduces the capital stock which in turn depresses wages."

Still, if a wealth tax was to be imposed, it is more likely now than ever before, as the drive towards a more sustainable future recognises that stark inequality harms everyone.

Chequered history

But the history of wealth taxes thus far is instructive. In Europe, eight countries out of 12 abolished their wealth tax by 2019. Among OECD nations, only 4 now have a wealth tax - Colombia, Norway, Spain, and Switzerland. In most cases, wealth taxes were repealed because they were administratively cumbersome to implement; collections were low; and the tax also failed to meet redistributive goals.

France has had a particularly mixed history. It imposed a wealth tax in 1982, scrapped it in 1986, reinstated it some two years later, only to abolish it in 2017. It found that collections were paltry and worse, it sparked a capital flight among the wealthy.

Singapore repealed its estate tax in 2008 partly to support the wealth management industry and, as then-finance minister Tharman Shanmugaratnam explained, the estate duty affected the "middle and upper-middle-income estates disproportionately compared to wealthier ones". Collections were also relatively modest. Singapore has not had an inheritance or gift tax, which is a tax on the heirs rather than on the estate itself. In any case, similar to the estate tax, the most wealthy are able to employ tax minimisation strategies, which may well reduce their tax bill significantly.

Credit Suisse's Global Wealth Report 2021 examines the issue of wealth inequality. Like most other wealth reports, it found that wealth levels globally rose in 2020 despite Covid-19's toll on economic growth.

With the benefit of hindsight, this development is not surprising. As Covid-19 spread in early 2000, global central banks proactively rolled out stimulus in the form of income and job support payouts for businesses and individuals. Interest rates were also cut to nearly zero. This has fuelled asset prices, both financial assets and real estate. With their ample cushion of wealth, wealthy individuals are able to take on higher risk, and hence are richly rewarded.

The report singles out Singapore among countries that have done disproportionately well in wealth terms, despite the GDP contraction in 2020. Singapore's GDP shrank by 5.4 per cent in 2020, but household wealth, according to the report, rose more than 7 per cent in US dollars.

But wealth disparity here is greater; it said Singapore's wealth Gini at 78.3 was much higher than Japan, Korea and Taiwan. The wealth share of the top 1 per cent here - defined as those who hold over US$1 million in wealth - was 33.9 per cent.

What kind of wealth tax?

So, what form might a wealth tax take? A tax on capital is surely a challenge to implement and would send a negative signal to wealthy families and individuals who have already shifted or are considering shifting more funds to Singapore. A capital flight would also hurt the ecosystem that has developed around the wealth management industry, which includes private banking, fund management, legal and a host of advisory services.

However, a wealth tax on property ownership is - as a consultant put it - "low-hanging fruit".

Attention lately has focused on the strong gains in residential property which prompted the latest round of cooling measures last December. Based on URA estimates for the whole of 2021, private home prices climbed 10.6 per cent, more quickly than the 2.2 per cent increase in 2020. In the public housing market, resale flat prices rose 12.5 per cent.

In terms of household assets, the share of financial assets has risen from 51 to 58 per cent between 2008 and end-September 2021. Property holds the second largest share, even though its share of the household balance sheet has dropped from 49 to 42 per cent in the same period.

Government officials have hinted that that a wealth tax may focus on property. Property tax on non-owner occupied property is charged on a progressive scale ranging from 10 to 20 per cent.

As for additional buyer's stamp duty (ABSD), this was just raised in December for Singaporeans and permanent residents by 5 and 10 percentage points, respectively, for second properties. ABSD was also raised for third and subsequent properties.

A tax on capital gains on property, however, would be a new and surely unwelcome measure, and risks a major blow to the real estate market, which is still digesting the latest cooling measures. Singapore currently does impose a seller's stamp duty (SSD) for the sale of non-owner occupied property, linked to the holding period. The SSD is currently 12 per cent for properties sold within one year of purchase. After the third year, the SSD drops to zero.

A wealth tax, if on the cards, must be finely calibrated to target the top echelons of wealth, or it risks further aggravating the wealth gap.