By Robin Chan, The Straits Times, 4 Dec 2012
AS THE debate over wealth taxes in the West rages on, the rich here must be breathing a sigh of relief.
In Singapore, there have been few whimpers of protest calling for more taxes on the wealthy.
Across Europe and the United States, proposals for taxes on the wealthy to reduce states' fiscal deficits and narrow socially and economically damaging inequality levels are gaining momentum.
Thousands in Germany have taken to the streets for the reinstatement of a wealth tax. In Britain, a mansion tax on expensive property has been proposed by Deputy Prime Minister Nick Clegg. In the US, President Barack Obama and his Democrats are locked in battle with the Republicans over how much to tax the rich.
Governments are desperate to boost empty coffers, and the rich are being targeted, as conversations turn from concerns over rising income inequality to a potentially more unsettling wealth gap.
The good news for Singapore is that government finances are in much, much better shape than those of Western countries. There is no debt mountain looming; the balanced budgets of governments past have seen to that.
But as Singapore's population ages and economic growth slows, it is a near-certain bet that the tax base is going to shrink, even as demands on public expenditure increase.
Some 900,000 people are expected to be aged 65 and above by 2030 - three times more than the number today - exerting a demand for new sources of revenue to fund expanded social spending.
Another concern is not just a growing income divide, but also a rising divide in wealth.
Economists such as Mr Joseph Stiglitz and Mr Daniel Altman have argued that income inequality is not often a good gauge of the distribution of economic power.
Economists such as Mr Joseph Stiglitz and Mr Daniel Altman have argued that income inequality is not often a good gauge of the distribution of economic power.
The distribution of wealth can be very different from income trends, as wealth measures the assets accumulated in the past, while income is just the flow of money in a year.
High earners, therefore, are going to add a lot more to their wealth every year, compared with low earners. Over time, wealth inequality rises even if income inequality stays the same, and wealth inequality eventually becomes much more severe.
Wealth, and not income, therefore, is a more significant divider between the haves and have-nots and their access to resources.
There has not been enough discussion about the wealth gap in Singapore.
While income inequality measures like the Gini coefficient show Singapore's income inequality to be a rather high 0.47 - the closer to 1, the higher the income inequality - and it has risen over the past decade, wealth inequality could be potentially much higher.
Yet, what the information also reveals (by not revealing), is that there is likely much more income that is not captured - such as that from investments due to the absence of capital gains tax; and foreign-sourced income, as it is not taxable.
Thus the wealth gap, accumulated over time, could be far worse than thought.
The Boston Consulting Group estimates that Singapore has a whopping 188,000 millionaire households, just taking into account financial assets such as cash deposits, shares and insurance. That works out to 17 per cent of all households, making the concentration of rich people in this little island the highest in the world, even above the oil-rich, sparsely populated countries of Qatar and Kuwait.
According to Credit Suisse's Wealth Report, average household wealth in Singapore "has grown steadily and vigorously since the turn of the century", rising to US$285,000 (S$348,000) in mid-2011 from US$105,000 at the outset.
More data on wealth distribution in Singapore would paint a clearer picture of the growing disparity.
The Government has tried to address growing income inequality through transfers, and tightening the foreign worker tap and emphasising productivity growth to raise wages. But these measures may not be sufficient or aggressive enough to reverse the large wealth gap already upon us.
Here is where taxes need to better target the wealthy, be it in the form of capital gains tax, a wealth tax on total assets above a certain threshold, or the imposing of higher personal income taxes or property taxes.
Of course, such tax increases could have their drawbacks, and will definitely have their opponents. They will argue, first, that it could lead to capital flight, or the movement of assets outside of Singapore to tax havens and lower tax jurisdictions.
Second, it runs contrary to the Government's desire to grow a wealth management hub. And third, there will be challenges to how total wealth is measured.
These are all valid concerns, but they should not detract from having a deeper discussion about how to address the growing wealth gap.
Furthermore, the prevailing economic wisdom has changed dramatically over the last few years. In the years leading up to 2008, the predominant thinking was still to remain as tax competitive as possible in order to compete favourably for business, investments and talent.
However, the global financial crisis has put into focus the dangers of unfettered capitalism and spiralling wealth inequality, with more urgency for the need for redistribution and fairer, higher- quality growth.
Billionaire investor Warren Buffett in the US has volunteered to pay higher taxes. He argues that higher taxes on income and capital gains will not necessarily lead to a loss of investments or economic growth.
Contrary to that, in America in the 1950s and 1960s, when capital gains tax was 27.5 per cent and marginal rates on dividends hit 70 per cent, there was increased employment and economic growth.
"Let's forget about the rich and ultra-rich going on strike and stuffing their ample funds under their mattresses if - gasp - capital gains rates and ordinary income rates are increased. The ultra-rich, including me, will forever pursue investment opportunities," Mr Buffett wrote in The New York Times recently.
If and when that happens, the Government should not shy away from raising taxes for the rich, even if it seems politically unpalatable.
Whether higher taxes are broadly accepted by the population depends on how progressive the taxes are, and whether the wealthy agree that the benefits derived from higher taxation may not be tangible to them, but in the form of greater social harmony and social protection for the less privileged.
More and more, the social compact is being re-evaluated in developed countries. Similarly, any conversation about our nation's future should include ways to reduce the wealth gap, and make the wealthy contribute more.
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