Taxation for a Dynamic and Fair 21st Century Economy

Mr Deputy Speaker, I am keenly aware that seven o'clock in the evening, or seven o'clock in the morning or, for that matter, anytime really, is hardly an opportune time for a dry lecture on economic matters. But I will speak on the issue of taxes on capital because such taxes matter not only for the sustainability of our public purse, but also because their just application could reshape the landscape of rising inequality in income and wealth, matters which matter enormously to the common man and woman.

My speech will first lay out the case for and against taxes on capital. I will then explain why our Government's revenue mix can potentially benefit from attention to a richer slate of objectives and how wealth taxes can play a role in meeting those expanded objectives. I will then discuss a menu of possible taxes on capital, before closing with a specific proposal for wealth taxation in the modern world.

I will begin by declaring that I am the Chief Economist (Emeritus) of Thirdrock Group, a homegrown asset and wealth management advisory, and am still occasionally invited to speak at various academic and industry events to audiences that serve high networth individuals.

It is useful to clarify, first, what I mean when I speak of taxes on capital. This is a tax applied to any form of productive assets. The most common form is the corporate income tax levied on profits for a company. Another common form are allowances for expenditure on plant and machinery; and since these are write-offs, they are negative capital taxes.

Truth be told, discussion on capital taxes seldom focus on these routine forms, which are widespread and uncontentious. Rather, they centre either on capital gains taxes, which are applied to receipts through the ownership or sale of financial property, or intangible assets, along with wealth taxes, which are charged to the outstanding value of an individual's assets.

While the issue of capital gains is important, it is best left for another day. Today, I will only focus on wealth taxes.

The most common objection to capital taxes in general is that this entails a double taxation of income, since capital holdings typically result from saved income, which had already been taxed previously. As such, it could discourage savings behaviour.

But we can still make the case for a separate taxation of capital if we accept that taxes are always due whenever they are productive gains. In such instances, taxes reflect a host of indirect benefits, such as a well-functioning legal system and financial infrastructure or initial tax breaks the individuals and firms receive when they first invest.

Since the risks of providing such benefits are borne by society, it is reasonable to recoup these after gains are realised.

Another common objection is that taxes applied to wealth may be excessive because by eroding the principal, it could kill the very goose that laid the golden eggs.

However, there is actually little difference in principle between taxes on the flow of profits versus the stock of wealth so long as the latter also generates income. Indeed, for an asset that generates 5% returns, an entirely pedestrian capital gains tax of 20% is fully equivalent to a wealth tax of 1%.

MOF has often stated that it maintains a diverse revenue mix to finance its Budget. To a significant extent, this is correct. In a typical year, MOF draws around a quarter of revenue from taxes on corporations, another quarter from those imposed on consumers, another quarter from fee and investment income and the rest from various other sources.

Such a broad range of contributions is important because it ensures that Government spending needs are not threatened by declines in any single source. In that sense, the revenue mix has a certain robustness and resilience built into it.

From another perspective, however, this revenue mix is rather imbalanced. While our overall tax system may be progressive – that is, the effects are felt more keenly by the rich than the poor – a quarter of our taxes remain regressive, even with the current Voucher Scheme.

The Goods and Services Tax (GST), for instance, affects lower-middle- and middle-income families disproportionately more than the wealthy while only contributing around 11% of revenue. Moreover, fees and charges, especially the fines that our little red dot is so infamous for, also hit the poor disproportionately harder than the rich.

To be clear, there is no correct revenue mix when it comes to financing Government expenditure. Even so, we can aim for objectives that go beyond efficient collection and diverse sources.

In particular, one laudable objective is that we should seek to minimise, as much as possible, the number of regressive components in the tax regime rather than just being content that the system happens to be progressive overall.

Recent global developments also make the case that the time is ripe to re-examine our traditional tax mix. The recently concluded OECD-led agreement for Global Minimum Tax could weaken our nation's attractiveness as a location for siting headquarter operations, which in turn could erode the incomes we currently receive from the corporate sector.

This is where wealth taxes come into play. Such taxes will shore up the diversity of our revenue sources, especially the contribution from capital. Wealth taxes also help fulfill additional objectives of lowering regressivity, as I mentioned, in our current revenue mix since they are progressive by design.

Wealth taxes also offer an additional potential benefit. It is a tool that can help reduce the overall level of inequality in society. Why should we care about disparities in income and wealth?

Mr Deputy Speaker, a sizeable academic literature points to how rising inequality undermines economic growth, worsens health outcomes, conditions divergence in educational attainment and even alters political stability. For economic, social and moral reasons, therefore, countries cannot afford to allow inequality to continue its inexorable rise.

That said, is inequality in income and wealth a problem in Singapore? Many measures suggest that it is. The most popular measure of inequality is known as the Gini coefficient. This metric captures in a single number the extent to which existing distribution of income or wealth departs from the theoretical ideal of perfect equality. The higher the number, the more unequal the distribution.

Because different countries scale this coefficient differently, a direct comparison between countries is challenging but not impossible.

Using comparable measures, Singapore's Gini, prior to taxes and transfers, actually compares favourably to many major developed economies, including those of famously egalitarian Scandinavian nations such as Denmark, Sweden and Norway.

However, after taking redistribution into account, Singapore's inequality metric jumps to the top of the range, comparable to that of the United Kingdom and the United States. Moreover, Singapore's post-tax Gini also fell significantly to 0.375 from 0.398 during the COVID-19 crisis, even as pre-tax Gini remains unchanged.

This implies that pandemic-related assistance and tax relief, which surged in 2020, was responsible for the improvement in equality outcomes rather than any disproportionate drop in income from the rich.

Other metrics of income inequality tell a similar story.

Similarly, despite the massive drop of close to 6% of gross domestic product (GDP) growth last year, household wealth actually went in the opposite direction, expanding by around 15%. As a consequence, the share of total wealth held by the top 1% grew to around 34% and the number of those with assets of $40 million or more rose by 10% to more than 3,700 ultra-high net worth individuals.

Notably, this wealth Gini at 0.783 by one estimate is much higher than that of comparable neighbouring economies such as Japan, Korea or Taiwan.

Taken together, these facts suggest that inequality is a real and pressing issue and our nation's effort at redistribution has been far more restrained than in other advanced economies, including that of our immediate neighbours. We can do more to address our inequality problem.

Sir, it turns out Singapore is no stranger to taxes on capital and wealth. Between 1929 and 2008, Singapore taxed inheritance via an estate duty. The Estate Duty Act was amended in 2005 to apply only to estates of those that passed prior to 15 February 2008.

During the debate on the abolition, Members explained that wealth was now being generated by other means, thereby rendering the inheritance less impactful. The duty was also viewed as a tax that affected mostly the middle class as the wealthy had generally been able to shelter the estates from such taxes.

Stamp duties and Additional Buyer's Stamp Duty (ABSD) are also currently applied to properties in Singapore. The Buyer's Stamp Duty is applied progressively up to a marginal rate of 4% for property values in excess of $1 million. ABSD is payable on additional properties and by most non-Singaporeans and it is likewise progressive.

Both taxes play triple duty by not just raising revenue and enhancing progressivity, but also by helping contain speculative pressure, especially from wealthy international buyers.

Mr Deputy Speaker, so, in thinking about taxes on capital, we have several options.

We could consider reintroducing the inheritance tax. The major strategic reason for eliminating taxes on inheritance was to provide greater ballast for Singapore as it sought to position itself as a globally competitive wealth management centre. Singapore has since indeed emerged as a leading cross-border wealth management hub managing $1.2 trillion in worth, just behind Switzerland and Hong Kong.

The fear is that in reintroducing an estate duty, even a limited one, could weaken our value proposition as a wealth centre. This may also seem unnecessary, given the small amounts that will be raised by the reintroduction of such a tax.

Or we could weave in greater progressivity into our estate duty. The top marginal tax rate for properties above $1 million is currently set at 4%. We could introduce another tier for higher value properties – at 5% for properties valued above $5 million or for owners of multiple properties that cumulatively exceed $5 million. The suggestion was recently raised by my Sengkang GRC colleague, Louis Chua, in his speech to this House on the Income Tax (Amendment) Bill.

As he shared, with a relatively high threshold, the aspiring middle class would not be penalised by such a tax. This option has the additional benefit of tempering increases in house prices even in public housing because private housing prices have a spillover effect on public markets in Singapore.

Or, alternatively, we could introduce a progressive net worth tax. While wealth taxes could, in principle, be applied to any amount of asset holdings, most proponents have in mind only the highest tier of wealthy individuals such as those in the top 1% or, more likely, in the top 0.1% of the wealth distribution. The wealth tax can itself be progressive with different marginal rates for various income tiers.

The key advantage of such wealth taxes is that it ensures that the large and growing asset basis of ultra-high net worth individuals, which is typically held in non-property form, would not be inadvertently exempt.

In choosing the target tax base, we should strike a balance between raising revenue and effecting redistribution versus heightening the incentives for avoidance and evasion.

One way to minimise evasion is to make such taxes one-off. However, one-off taxes are best when there is no prior announcement since doing so will impose the least distortion due to tax avoidance behaviour.

However, sudden major policy announcements are seldom infeasible in the real world. Furthermore, the significant amount of work in the run-up to implementation, legislative design, asset valuation, collection mechanisms will only be drawn on once. Any revenue gain, redistributed benefits and impact on inequality will also be temporary.

A practical solution to this is to require one-off assessment but have payments rendered over time.

Another strategy to limit evasions is allow the wealthy some agency in the deployment of their tax contributions.

For instance, a wealth tax could be directed to foundations, which by mandate will be required to spend a fixed amount of the endowment each year on approved causes until depleted. Alternatively, the tax can be levied annually and collected amounts automatically channelled to the foundation.

This is not such a novel concept. Indeed, legal instruments such as charitable trusts or foundations already exist. All that is required is for us to pair the wealth tax with these entities.

Mr Deputy Speaker, I believe the time has come for a more explicit tax on wealth. This tax should be designed in a manner that takes into account current realities, including the inherent mobility of capital and wealth but also the importance of not just taxes but other non-monetary motivations for why high net worth individuals may choose Singapore as a home for asset and wealth management.

While I have mentioned a number of possibilities, my simple proposal is to introduce a tax of 0.5% on net wealth in excess of $10 million, 1% above $50 million and 2% above $1 billion.

This tax may be designated to a special-purpose foundation mandated to exhaust its entire endowment on an accrual basis over time with some flexibility in terms of the allocation of payouts toward Government-approved uses that are consistent with national priorities.

We could even permit tax loss harvesting for up to two years or restrict taxation to only instances where net wealth gains are positive.

In either case, the returns on wealth in any given year would typically significantly exceed these tax rates. Otherwise, they should get rid of their wealth manager. So, the ultra-rich should generally not expect to see any decrease in the principal on the asset.

The natural reservation to doing so would be that it would threaten our competitive position as a global wealth management centre, especially relative to our closest competitors, Hong Kong and Switzerland.

But circumstances have changed. Recent geopolitical developments in Hong Kong are a reminder that political stability and respect for property rights are far more important determinants for factors for siting one's immobile wealth. And all but on canton of Switzerland – the world's leading wealth centre – maintain progressive estate taxes, and the canton of Zürich – the beating heart of Swiss wealth management – applies wealth taxes even more aggressively, starting at CHF 77,000 for singles and CHF 154,000 for households, with the top bracket of a little more than CHF 3 million.

International developments have also pointed to a greater appetite for cross-country cooperation on tax regimes, such as the OECD deal on the global corporate taxes I mentioned earlier. It is therefore not inconceivable that similar agreements on wealth taxation could be in the offing.

More generally, we need to disabuse ourselves from the mistaken notion that low taxes offer the most competitive advantage for our status as a global financial centre. Indeed, taxes feature so little in such decisions that in a recent PWC report that listed 12 factors that made Singapore "best in class within the region" for asset and wealth management, not one of these was "low taxes". Tax competition is a mindset more suited for the 20th, rather than the 21st century.

Wealth taxes can improve the diversity of our Government's revenue sources and help manage the societal dislocations that result from rising inequality. We already have experience with other forms of wealth taxation in the past, and we need not fear the competitive position for the future, because other jurisdictions have already moved ahead with similar taxes on capital.

Mr Deputy Speaker, in Christopher Nolan's masterful Dark Knight trilogy, Bruce Wayne – a billionaire playboy – rediscovers his life's purpose in the mountains, dons a suit and cape, and returns to bring justice to a fallen city. Gotham was dank, crime-ridden and deeply unequal, but Mr Wayne, like his philanthropic father before him, chose to expend his own enormous wealth to redress the very imbalance that he had been such a beneficiary of.

My heartfelt belief is that all of us, the ultra-wealthy included, want to live in a world where we can all contribute our fair share to make it a better place, both today and for our children. That is how I view wealth taxes: it is another salve for our imperfect world, an opportunity to create new opportunities for Singaporeans, and an idea whose time has come.