Wealth such as capital income and inheritances ought to be taxed to curb growing inequality in Singapore: Prof Donald Low

The absence of any mention regarding new forms of wealth taxation or increase in current forms of such taxation in the 2019 Budget Statement is a cause for concern, as it may pave the way to greater wealth inequality in Singapore when coupled with slow economic growth and an ageing population, said Professor of Practice and Director (Leadership and Public Policy) at the Institute of Public Policy at Hong Kong University of Science and Technology Donald Low.

In an op-ed published on TODAY Online on Wednesday (20 Feb), Prof Low, formerly the director of fiscal policy at the Ministry of Finance and associate dean of executive education and research at the Lee Kuan Yew School of Public Policy at the National University of Singapore, dubbed the omission of wealth taxes from this year’s Budget as not only being “curious”, but also “unhealthy” for wealth redistribution in the Republic.

Citing French economist Thomas Piketty’s argument, whereby the gap in wealth is “a greater source of inequality than differences in labour income”, Prof Low said that such is because capital ownership is “far more unequally distributed” than labour, noting that “wealth comes from the ownership of capital, i.e. financial and physical assets”.

He also cited Prof Piketty’s observation in Capital in the 21st Century that “except in times of war and depression, the annual rate of return on capital has averaged nearly 5 per cent”.

“Inequality, Professor Piketty posits, rises when the rate of return on capital exceeds the growth rate of the economy,” wrote Prof Low.

“In mature economies, labour incomes are increasing at a much slower rate mainly because growth in these economies is well below 5 per cent,” he added, noting that “Singapore is now growing at below 5 per cent, even as we expect the return on capital to be close to its historical average of 4-5 per cent”.

“If we care about rising inequality at all, we should be taxing wealth — and therefore capital income — more,” argued Prof Low.

Extremely low pre-existing wealth taxation suggests capital owners pay lower taxes than middle-class, whose income is sourced from their labour

Prof Low highlighted that “capital is taxed very lightly” in the Republic, noting that “there is no capital gains tax or inheritance tax”, and that “dividend and interest income are also exempt from personal income tax”.

“Property taxes are relatively low, and only rental income is taxed at one’s marginal tax rate,” he added.

“Given that the rich,” which Prof Low classified as being “the top 1 per cent” in the income distribution, “derive a significantly larger share of their income from capital, the very low taxes on capital in Singapore means that capital owners may be paying a lower effective tax rate than the (upper) middle class whose main (if not only) source of income is their labour”.

While Prof Low acknowledged that even income taxes in Singapore are not very high, in addition to many Singaporean wage-earners having HDB flats as a form of capital ownership, he argued that taxation in the Republic overall is “less equitable than it should be”, seeing how labour income is largely taxed while much of capital income is not.

Wealth inequality as a by-product of disruption in the economy due to technological advancements, affecting labour more significantly than capital

The rise of technological advancements such as “automation, artificial intelligence and other digital technologies”, added Prof Low, will most likely have a negative impact on labour compared to capital or “knowledge-intensive” activities.

“The productivity gains from these disruptions will also accrue more to capital owners than to labourers, even if these disruptions create more jobs than they destroy.

“This is also why we hear arguments, by technologists such as Bill Gates, for governments to impose a tax on robots, a form of capital,” said Prof Low.

Capital gains, inheritances should be taxed to combat wealth inequality in Singapore

In order to mitigate the growing inequality in wealth distribution in Singapore, Prof Low suggested the implementation of a capital gains tax, starting with a low rate of around “5-10 per cent”.

He added that dividend and interest income should once again be taxed, due to the nature of global economic conditions in the present time.

Quoting a recent issue of The Economist magazine, Prof Low noted that “the cross-border flows of goods, services and money are growing more slowly (or not at all)”, in comparison to the start of this millennium, or the period he dubbed as “the era of hyper-globalisation”.

“Dividends and interest income were exempt from tax in the early 2000s as part of the government’s effort to lower income taxes to attract talent and capital to the country,” he wrote.

Prof Low noted that “it was widely believed that governments had to reduce income and capital taxes and shrink social safety nets to compete for talent and investments” during the early 2000s.

However, he said, “much of this neoliberal ideology has been discredited” following the global financial crisis of 2008-2009.

Singapore, Prof Low opined, “is giving up a potentially valuable source of revenue, which may necessitate higher taxes elsewhere to finance higher social expenditures”.

“At low levels, taxes on capital income will not reduce savings and investment. And because ownership of capital is much more unevenly distributed than labour income, such taxes increase the overall progressiveness of the tax system,” he explained.

On the question of imposing taxes on inheritances, Prof Low argued that such taxes are less likely to “reduce incentives to work” in comparison to income taxes, due to their relatively lower popularity, and are more progressive than labour consumption taxes such as the Goods and Services Tax, due to the emphasis on capital income as opposed to labour income.

“Nonetheless, the former estate duty did not raise much revenue. Its high exemption level meant that almost all estates were exempt from it,” noted Prof Low, adding that “inheritances above a certain threshold” should be considered “taxable income”.

“Since Singapore’s personal income tax regime is already low and progressive, taxing inheritances this way would deliver similar benefits,” he added.

“Taxing wealth”, opined Prof Low, “should be popular since most of us aren’t wealthy enough to pay these taxes”.

“But because of naive optimism, many of us may believe that we would eventually be wealthy,” he wrote.

Overall, opined Prof Low, “if the middle class are opposed to wealth taxes — even though it is in their interests — we would also expect wealth to continue being taxed very lightly in Singapore, to the detriment of society.”