Time to introduce a wealth tax in Singapore?

Time to introduce a wealth tax in Singapore?

Han Fook Kwang
Editor At Large

Jan 7, 2018

Such a move will also signal that the Govt is serious about tackling growing class divide


The question is not whether taxes will be raised in Singapore but when.

When both the Finance Minister and the Prime Minister put it like that, it is, as they say in Singlish, "double confirmed".

So, when?

Some of the smart money is on this year.

I would not bet on it, but you could make a case for why 2018 might be the year the Government will start making some tax changes to increase the size of its coffers.

First, it's right in the middle of the election cycle, with the next general election not due till 2021.

Delaying it to it next year or 2020 runs the risk of provoking public unhappiness too close to the general election, as tax changes take some time to work their way on the ground.

Second, Singapore is entering the final stretch of the leadership transition to the fourth generation, with the possibility that the next PM might be made known as early as this year and certainly no later than the next general election.

Going by past experience, Prime Minister Lee Hsien Loong would want to settle difficult political issues such as a tax hike before he leaves office. He already tackled the unpopular matter of the reserved presidential election last year, at some political cost.

Clear the decks, for the next group of leaders, so the thinking goes.

Third, the economy is finally showing some signs of life, growing at 3.5 per cent last year, more than double the earlier forecast.

It's not exactly bubbling but if it signals the beginning of a global uptick, a tax increase would not be as unpalatable as it might be in a sluggish economy.

So, it all points to a hike this year?

But there is the other question which has nothing to do with timing and everything to do with whether Singapore needs to collect more taxes when its fiscal position every year has been solid and its reserves are still growing.

How can a government with surpluses almost every year justify raising taxes?

This was how Finance Minister Heng Swee Keat put it in the Budget statement in February last year: "Domestically, we will also face rising expenditures over the longer term, as we invest more in healthcare and infrastructure. We will have to raise revenues through new taxes or raise tax rates. We are studying the options carefully. We must make these decisions in good time, to ensure that our future generations remain on a sustainable fiscal footing."

He did not give much away but is sure to say more at this year's Budget announcement on Feb 19.

My money will be on "new taxes" rather than just raising the "tax rate".

There is already speculation about the introduction of a wealth tax, which is a tax on assets and can also include tax on capital gains made from the selling of assets such as property or stocks and shares.

This will be new territory for the country which has relied mainly on income tax.

If Singapore goes down this road, it will be a significant change.

The last time it tinkered with a wealth tax in 2008, it went in the opposite direction, removing estate duty completely.

This is a tax on a deceased person's property, and its removal then was a huge bonus for the wealthy and their multimillion-dollar possessions.

The Government said at the time that the move was to make Singapore an attractive place for the wealthy and promote it as a wealth management centre.

I do not know how much of a difference it made but this place is certainly a magnet for the rich and famous, not just because of low taxes but because the city scores highly on law and order, liveability and efficiency.

A wealth tax can well be justified as the price the world's multimillionaires pay for these privileges.

In fact, the amount of taxes Singapore collects falls well short of those in other developed countries.

According to the Organisation for Economic Cooperation and Development (OECD), Singapore's tax revenue as a proportion of gross domestic product (GDP) was 13.9 per cent in 2014, compared with 34.2 per cent in the OECD countries (mainly in Western Europe, Japan and the United States), 32 per cent in Japan and 24.6 per cent in South Korea.

More important, lower tax revenue translates to lower spending on social services compared with other countries - that's healthcare, welfare and retirement benefits, unemployment insurance and so on.

In Singapore, social spending amounted to 5.5 per cent of GDP, but it is 23 per cent in Japan, 19 per cent in Australia, 8 per cent in China, and an average of 21 per cent in the OECD countries.

That's a huge difference, and an indication of the very different approach to welfare spending that has been a hallmark of the PAP Government since independence.

It believes a people overly dependent on public handouts loses its desire to put in the effort to become self-reliant.

But an ageing electorate will demand more and better healthcare services and financial security, and they will cast their votes accordingly.

Singapore has many options to finance these growing needs: raise income tax or the goods and services tax (GST), or introduce new taxes such as a wealth tax or, as has also been speculated, an e-commerce tax.

Or, use more of the country's reserves beyond the current limits.

Because the Government's financial position is still very strong, it need not rush into a decision.

Will it use the time to gradually introduce a wealth tax, opening up another source of revenue for the future? Such a tax will have an added political significance: It will signal the Government is serious about tackling the growing class divide in Singapore.

This division is based not only on incomes, but on total wealth including assets such as property.

A recently released study by the Institute Of Policy Studies showed class divisions in Singapore to be more sharply present than that along racial or religious lines.

People who live in private housing and go to elite schools tend to mix with each other and not with those living in public housing or who attend neighbourhood schools.

While more should be done to encourage mixing among these social classes, you have to be realistic about how much can be done.

Social stratification is inevitable and impossible to eradicate, and it isn't unique to Singapore.

The more practical solution is to do more to assure the less well-to-do that their interests and needs are being protected, and that the wealthy contribute their fair share.

That means higher social spending for the welfare of the majority of Singaporeans, funded by heavier taxes on the wealthy.

Will Mr Heng "double confirm" this on Feb 19? Watch that space.

•The writer is also a senior fellow at the S. Rajaratnam School of International Studies, Nanyang Technological University.