Why wealth taxes may not be such a good idea for Singapore

In a recent commentary in TODAY headlined “The curious case of missing wealth taxes in Singapore”, Mr Donald Low raises many interesting points, and his concern about inequality in incomes and wealth in Singapore is legitimate.

There is an unhealthy lack of debate on whether to tax wealth in Singapore, the author says. Sure, let us have that debate, and then hopefully we can put this issue to rest once and for all.

The author brings up Thomas Piketty’s work. Professor Piketty is the poster economist for Western liberals, and he argues that the return on capital recently has been greater than economic growth in general and wages in particular, and this phenomenon has contributed to inequality in wealth distribution. This is correct.

But the answer to that is not to tax capital and make most of us poorer. The answer should be exactly the opposite: To make capital readily available, the way it is done in Singapore, so that most of us can benefit and get richer.

Singapore has a sound self-funded pension scheme, where Central Provident Fund members can invest their savings in equities and other approved financial products tax-free.

Or they can let the Government do this for them and just collect the 2.5-6 per cent per annum (depending on individual circumstances) risk-free return.

Either way they benefit tremendously from historically healthy returns on capital.

In Budget 2019, the Net Investment Returns Contribution is expected to be over S$17 billion. This is a laudable way of sharing the good returns on capital with everyone.

Taxing capital as well as labour and consumption will likely require building up a bloated government bureaucracy to administer tax collection, as has been done in Professor Piketty’s native France.

This has in fact led to the current situation where over-taxed middle-class French riot in the streets.  

In other words, Mr Low’s concerns are legitimate; his conclusions however are debatable. Let us look at some of them:

1.     The proposed 5-10 per cent capital gains tax is an administrative nightmare.

How exactly would that affect the thousands of day-traders and ordinary Singaporeans investing in the stock market? Singapore works because we have a relatively lean and efficient public service.

Our government spending to GDP was 18 per cent the last time I checked. In high-tax Denmark it is 52 per cent, with most of that simply inefficient waste that contributes little to public welfare.

I know, because I have lived almost 30 years in Denmark and another over 30 years in Singapore.

2.     Tax dividends? Again, the administration requirements for implementing additional taxation schemes are not small.

For one thing, you would have to put in place dividend refund schemes for overseas investors.

As a case in point, I deal with the Danish authorities to have my dividend tax on Danish investments reduced from 27 per cent collected at source to a final 10 per cent.

The letter from the Inland Revenue Authority of Singapore stating I am fully taxed in Singapore takes about 10 days to arrive. Yet, each application for a tax refund from the Danish authorities takes up to 18 months to process.

On top of that, the scheme has been riddled with corruption and fraud. From 2015-2017, the state lost more than DKK12.7 billion (about S$2.6 billion) to fraudulent claims.

This goes to show that even in a well-functioning society like Denmark — least corrupt country in the world according to the Transparency International 2018 index, Singapore is number three on that list — taxing wealth is a tricky business.   

3.     "There is also a case for taxing inheritances”, Prof Low writes. No, there isn't.

Those countries that have tried it are either reducing or doing away altogether with this unfair tax that can open a can of worms of financial avoidance mechanisms and sometimes fraud.

There is a reason why territories and countries such as Hong Kong, Norway, Sweden, New Zealand and others have abolished the estate duty, as Singapore did in 2008: It is morally unjust and penalises frugal individuals who make the right life choices over others.

Going back to taxing inheritances as income is simply unfair to successful parents who take care of their kids.   

Singapore has managed to implement a tax regime that must surely be one of the best in the world. It combines low taxes on labour with little or no taxes on passive income and capital.

A clever variety of other income sources funds the government without distorting the economy and generating resentment.

Taxing capital will reduce the incentive to save, thereby reducing the amount of capital available for investments. It will also hurt thrifty Singaporeans trying to live in financial freedom and pass their gains on to the next generation.

Yes, inequality regarding both income and wealth is an issue. But there are other ways to mitigate inequality, and the Government here are applying many correctly.

For instance, by letting public housing leases expire within a limited time frame (often 99 years), it has avoided the inequality trap of many European countries where young people today cannot afford to buy their own home as prices have skyrocketed.

What else should be done regarding income inequality?

Protect low-skilled workers from unfair competition by limiting the number of foreign workers. Keep taxes on income to a minimum and on a progressive scale. Regarding wealth inequality, use fiscal policies to help build up the wealth of the poor.

In general, conduct tight monetary policies to prevent internationally low interest rates from pushing asset prices (such as housing and stocks) out of reach of low-income families.

As you might have noticed, this is what Singapore is already doing.    

ABOUT THE AUTHOR:

Morten Strange is a Singapore-based financial analyst and the author or Be Financially Free: How to become salary independent in today’s economy (Marshall Cavendish, 2016) as well as The Ethical Investor’s Handbook: How to grow your money without wrecking the Earth (Marshall Cavendish, 2018).