Monday, 8 April 2013

Room at the top - for rich to pay more taxes

Some among the rich argue - or would at least agree - that they should pay more
By Han Fook Kwang, The Sunday Times, 7 Apr 2013

If you asked someone whether he was willing to pay more tax, you would probably be expecting a rude answer - it seems like asking if he wants to have his bones broken.

It turns out though that it isn't such a no-brainer, and there are people who are not only prepared to pay more but who will also argue quite vociferously why they should do so.

The most well-known is American billionaire investor Warren Buffett, who has long argued that the United States' tax system needs to be overhauled because wealthy people like him are not paying enough tax.

According to him, the tax rate on his income amounted to only 17.7 per cent in 2011, way below the 32.9 per cent average of what his own office staff, including his secretary, were paying.

That's because a large part of his income came from stock-related earnings, which in the US attracted a flat tax rate of 15 per cent.

This was how he put his case in a piece he wrote in 2011: "Our leaders have asked for 'shared sacrifice'. But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labours but are allowed to classify our income as 'carried interest', thereby getting a bargain 15 per cent tax rate...

"These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It's nice to have friends in high places."

The world's most successful investor, who is worth US$53 billion (S$66 billion), wants a more progressive tax system where the rich are taxed a much higher rate.

He isn't alone in making this call.

Some time ago, I heard on BBC radio a Scandinavian businessman defend the very high taxes he had to pay to support the welfare system there because he believed it was a good system and those better off should help pay to support it.

The issue of how progressive a tax system Singapore should have was raised in this year's Budget debate when Finance Minister Tharman Shanmugaratnam gave what I thought was the most detailed thinking from the Government on this matter.

He made several points worth recapping because this will be an important issue in the years ahead as government spending increases and revenues decline with an ageing population.

First, he argued that Singapore already has a progressive system and that if you take total taxes - including maid levies, car taxes and so on, and not just income tax - the top 10 per cent of tax payers contribute one third of the tax revenue.

Second, he stressed that the Government wasn't interested in making the system progressive for its own sake but wanted to do it in a way which would best help the lower- and middle-income groups.

Hence it needed to take into consideration issues such as how any change would affect the economic dynamism of the country, what it would spend the revenue collected on and whether the system was fair and equitable.

These are sound principles and we are fortunate to have a finance minister who has thought deeply about these issues.

The question remains though: Can and should the rich be made to pay more?

I believe there is room in Singapore to do so.

This is particularly so in the area of wealth, as opposed to income.

Wealth is what you have at any one time - property being the most common - while income is what you earn in a year.

The rich here get away with too much of their wealth left intact from taxation.

Owners of high-value homes must have felt like Mr Buffett, having friends in high places, when the Government abolished estate duty in 2008.

This is a tax on assets left behind after death and, when it was applied to property before it was abolished, affected those with a value above $9 million.

It was a high threshold and so would not affect most people, only the very rich.

Yet it was removed, without much debate even from the opposition Workers' Party.

One reason cited then was that removing it would help promote the wealth management industry in Singapore by encouraging the overseas rich to bring their assets here.

I wouldn't be surprised if they responded in droves as a result, with many buying property here to add to their stockpile, pushing up prices.

Whatever the result, the move made the tax system less progressive.

In this year's Budget, there was an attempt to redress this somewhat when changes were made to property tax which would result in those owning high-value homes paying more taxes.

But estate duty remains a relic of the past.

Is it time to bring it back, perhaps for the second and subsequent property?

And what about introducing a capital gains tax which taxes gains made when, say, you sell a property or shares in the market?

Any decision about how much more the wealthy should pay should take into account the principles that Mr Tharman highlighted. It also depends on whether there is a need to increase tax revenue, given the healthy surpluses in the Government's coffers.

One further caveat: This shouldn't descend into an ideological war to milk the rich for its own sake. That's why it was important for Government to set out its approach to this issue.

You might ask what right any government has to tax what is rightfully yours and you've worked hard to accumulate.

The answer is that when the value of your assets, especially property, goes up, it usually isn't solely because of what you've done personally, but the result of the effort of all in the country to make it a stable and prosperous place with a promising future. Without these conditions, there would be no asset appreciation.

Singapore is a great place for the wealthy - it's peaceful, safe and stable, has first-class infrastructure, and where everything (well, almost) works.

Where else can the super-rich drive and park their luxury cars in peace?

When millionaires buy seafront homes on Sentosa, they know there will be no armed robbers from the sea to threaten their lives.

Should they be taxed more to enjoy these privileges?

If they were asked whether they would pay more so as to continue with this happy state of affairs, I believe most will say yes.

That's as good a reason as any to tax them more.

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