Monday, 8 April 2013

Will taxing the rich more really help the poor?

By Rachel Chang, The Straits Times, 6 Apr 2013

THIS year's Budget announced an intention to spend more on the poor - but also to collect more from the rich.

In raising "wealth" taxes on those buying investment properties and conspicuous consumption items such as luxury cars, while in turn promising more social spending, Deputy Prime Minister Tharman Shanmugaratnam seemed to some to be playing Robin Hood - which has drawn a polarised reaction.

While some hailed it as fair redistribution, others worried that it marked the start of a chipping away of Singapore's capitalistic, competitive environment.

In any case, the latest "wealth tax" hikes are more symbolic than revenue-generating, because they bring in measly amounts compared to the broad-based taxes like the Goods and Services Tax (GST) or income tax, say experts and observers.

The tax hike for investment properties will bring in $72 million more a year, while that for luxury cars is about $150 million. This is a fraction of the $6.9 billion collected in income tax last year, says Ms Jill Lim, tax partner at Deloitte Singapore.

Ernst & Young transaction tax partner Russell Aubrey notes: "It's really more of a social measure about equality than a revenue measure."

But to further tax the rich to fund social spending in the years to come might be a political and economic battle that the Government may not have the stomach for.

The Budget debate last month gave a glimpse of how divisive the issue is, and battle lines ran not just along party lines, but through the ruling People's Action Party (PAP).

Workers' Party (WP) chairman Sylvia Lim (Aljunied GRC) called for higher taxes on those earning more than $1 million a year, pointing to a study of 54 countries that linked greater progressivity in tax systems to a higher subjective well-being among citizens.

Separately, PAP MP Denise Phua (Moulmein-Kallang GRC) suggested a "Do Good" tax of 1 per cent more for every $500,000 earned above an annual income of $500,000.

PAP backbenchers on the other side of the issue quickly fired back, with Sembawang GRC MP Ong Teng Koon cautioning against slaying the goose that lays the golden egg: Raising income tax rates may drive mobile global talent away, thereby shrinking the tax pie overall, he said.

However, while Singapore has a low income tax environment now, it is no stranger to high income taxes.

In 1980, its highest earners were taxed at a top rate of 55 per cent. Nominated MP Laurence Lien points out that Hong Kong's corresponding top tier then was 15 per cent: "I don't think we lost many expatriates to Hong Kong," he says. "We should be more confident about Singapore."

He notes that in the 2012 Mercer Quality of Living survey, Singapore came 25th for liveability - Hong Kong was 70th.

Ernst & Young's Mr Aubrey concurs that when deciding where to locate regional headquarters, tax rates are an important, but not deciding, factor for multinational companies. The availability of good schools, health care and a stable environment also tips the scale, he says.

Adding complexity to taxing the rich is Singapore's unique context of being a mature economy in a developing region, and in having vast national reserves, the use of which many see as an easy way to support social spending.

Places in the region such as Malaysia and Taiwan are lowering their income and corporate tax rates to attract foreign investment - as Singapore did as a developing economy throughout the 1980s and 1990s.

From 55 per cent, the top personal income tax rate was lowered every few years until the current 20 per cent; the corporate tax rate has gone down further to 17 per cent.

"Singapore may be at a different stage of development, but to go against the trend of neighbouring countries now would give a bad signal to MNCs investing with an eye on the years ahead," says Mr Aubrey.

By some international markers, Singapore's tax system as it stands is highly progressive.

Regarding the calls to raise taxes on those earning above $500,000 a year, PAP MP Mr Ong noted that they currently form 1.3 per cent of resident taxpayers but pay 38 per cent of all income taxes.

Generally, the top 11 per cent of earners here bear 80 per cent of the income tax burden, compared to an OECD average of 31.6 per cent. This makes the tax system very progressive.

But, says National University of Singapore economist Chia Ngee Choon, the Singapore Government's tax haul is about 12 to 17 per cent of gross domestic product, while the OECD average is 34 per cent. This suggests room to collect more.

The biggest obstacle to any change in the tax structure may be polarised public sentiment.

PAP MP Ms Phua, reflecting on public response to her "Do Good" tax proposal, says that "the reaction from the affluent is generally cool and from the rest - that is, those earning below $500,000 and won't be taxed more - generally warm".

Mr Ong worries that precisely such a "Not In My Backyard" attitude is being applied to the public debate over taxing the rich more. "As long as someone else is paying it, I am all for it," is how he characterises the sentiment.

Referencing a middle-class couple in his constituency who had returned from living in a European country where they had to pay tax of 30 per cent, he says that the middle-class here is almost tax-free: 55 per cent of employed Singaporeans do not pay any income tax.

"The Singapore Government does not take your money away and then decide to give it back in the way it sees fit. It allows you to use your money as you see fit."

Top earners interviewed by Insight echo this, emphasising they have no say in how the Government spends their taxes, but can direct their own philanthropic contributions.

Then there are those who say that this difficult conversation is premature, given Singapore's healthy fiscal position and the options that the reserves present.

Indeed, Centennial Asia Advisors chief executive Manu Bhaskaran says: "We need more transparency from the Government about the true level of our reserves and the actual cashflow returns each year.

"Only then can we determine how much of the additional social spending can be funded by the returns."


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