In a commentary in TODAY, economist and academic Donald Low expressed his opinion that taxing the wealthy in Singapore must be done, otherwise the wealth inequality gap will only grow, to the detriment of the whole nation.
Mr Low’s reference point for his commentary is #SGBudget2019. He writes, “It should come as no surprise to anyone that the Budget Statement of 2019 did not introduce any new taxes on wealth in Singapore nor raise the rates of the few existing wealth taxes.”
For the economist, because of Singapore’s dominant pro-capital stand, it is also unlikely that during the budget debates in the following weeks any Member of Parliament would propose any new taxes on the rich, nor question why their taxes are low.
Low calls the absence of the debate on wealth taxes as “not just curious,” but “also unhealthy.”
He explains why, taking a few factors into consideration. The first is Singapore’s aging population.
The second is the possibility of a slowdown in economic growth. These two factors in play will only intensify wealth inequality and put further demand on social spending. For him, this is why taxing the wealthy in Singapore should be taken into consideration.
Why the rich should be taxed more
Reason number 1: Rising inequality
Mr Low quotes noted economist Thomas Piketty, who said that differences in wealth are a bigger root of inequality than differences in income from work.
Low writes, “Wealth comes from the ownership of capital, i.e. financial and physical assets. As ownership of capital is far more unequally distributed than labour, the former is a bigger determinant of inequality.”
Professor Piketty showed that the normal rate of return on capital is around 5 percent per year, but in mature economies “labour incomes are increasing at a much slower rate mainly because growth in these economies is well below 5 percent.”
He also explained that inequality increases when the rate of return on capital is higher than a country’s economic growth rate.
At present, Singapore’s growth rate is lower that 5 percent, while the elected return on capital is nearly the “historical average of 4-5 percent.”
Therefore, Mr Low said, “If we care about rising inequality at all, we should be taxing wealth — and therefore capital income — more.”
Reason number 2: The tax system is inequitable
His second point for raising taxes on the wealthy also has to do with capital.
The ratio of capital income (capital gains, dividends, interest, and rental income) to labour income rises “exponentially as one gets closer to the super-rich (e.g. the top 1 percent) in the income distribution.”
He explains that in this country, there are very few taxes on capital. In fact, there are no capital gains taxes or inheritance taxes.
Additionally, dividend and interest income are not included in personal income taxes either. As for property taxes, they have low rates, so are taxes on rental income.
This means that in all likelihood, the middle class, who are dependent on their labor, may be actually paying higher taxes than the wealthy, whose riches come from their capital, which is only taxed lightly.
Mr Low admits while that most income taxes are not high for wage-earners in Singapore, and that most people do have capital because of their apartments, the fact still remains that labor and consumption are taxed, while capital income is, for the most part, not taxed.
He asserts, “This makes the overall tax system less equitable than it should be.”
Reason number 3: Technological developments are likely to contribute to inequality
The third reason Mr Low for additional taxes for the wealthy is that inequality is likely to increase due to the disruptions of new technologies. “Automation, artificial intelligence, and other digital technologies are likely to disrupt labour-intensive activities more so than capital- or knowledge-intensive ones.”
Additionally, these disruptions will cause capital owners to obtain even greater productivity gains. According to Mr Low, this is why Bill Gates and other technologists believe that governments should tax robots, which are a form of capital.
Painless measures toward taxing the wealthy
But all is not bad news for the country’s wealthy, as the economist proposes measures that would not be painful for them. “The good news for Singapore is that taxes on wealth or capital income can be quite easily introduced without creating perverse incentives.”
He suggests that a 5-10 percent tax on capital gains would be a good start and that dividend and interest income be made taxable again.
Mr Low believes that “the state is giving up a potentially valuable source of revenue, which may necessitate higher taxes elsewhere to finance higher social expenditures.”
Another measure he suggests is taxing inheritance, which was removed in 2008. “The solution would be to treat inheritances above a certain threshold as taxable income — and to tax them at our marginal tax rates.
“Since Singapore’s personal income tax regime is already low and progressive, taxing inheritances this way would deliver similar benefits.”
As his final argument, Mr Low asserts that since the majority of Singaporeans are not in the income bracket of the wealthy that would be affected by these taxes, people should support taxes on the rich.
Therefore, the middle class should not identify with the wealthy, who would be affected by these taxes. Mr Low ends by saying “And if the middle class are opposed to wealth taxes — even though it is in their interest — we would also expect wealth to continue being taxed very lightly in Singapore, to the detriment of society.”