Imposing more taxes on the rich ends up hurting the middle class
By Dan Mitchell and Donovan Choy, Published The Straits Times, 11 Apr 2019
Singapore is one of the world's most impressive economic success stories. Decades of strong growth produced economic convergence with rich nations in North America and Western Europe. Given how few nations have made that jump, this is a remarkable achievement.
What's even more noteworthy is that Singapore's economy then continued to expand at a healthy pace. Based on measures such as per-capita economic output, residents of Singapore are now significantly better off than their counterparts in almost every nation in the so-called rich man's club of the Organisation for Economic Cooperation and Development (OECD).
For all intents and purposes, Singapore has shown that conventional theories about economic growth need to be updated to reflect that growth doesn't necessarily need to weaken once a nation becomes prosperous. Singaporeans should be thankful for the sensible governance that has made the nation a role model.
Unfortunately, some people are willing to threaten the country's prosperity by urging higher tax burdens on the wealthy. They risk national competitiveness by advocating additional layers of tax on income that is saved and invested.
This "class warfare" approach is deeply misguided, especially in a globalised economy. Singapore's policymakers should remember these six observations as they contemplate fiscal policy issues.
1. GOOD ECONOMIC POLICY PRODUCES GOOD RESULTS
Singapore's prosperity is not an accident. The country routinely ranks near the top of all indices of economic freedom and competitiveness. Small government, open markets and rule of law are a great recipe for national prosperity and Singapore is a powerful example of how a nation can become very prosperous with the right approach.
2. SINGAPORE AVOIDED THE TRAP OF "WAGNER'S LAW"
What makes Singapore special is that it avoided the mistakes other nations made when they became rich. Countries in North America and Western Europe created costly welfare states once they became relatively prosperous. This is known to academics as Wagner's Law, and it has serious consequences since larger public sectors reduce competitiveness and lead to less growth.
While poverty is a serious issue to be addressed carefully, it is noteworthy that most academics agree that there is no incidence of absolute poverty in Singapore.
Even the poorest in Singapore are comparatively far better off than the poor in other developed countries because it has largely avoided this mistake.
3. BY IMPOSING BAD POLICY, RICH NATIONS CAN BECOME POOR NATIONS
In some cases, rich nations completely reverse the policies that are associated with prosperity.
After World War II, Argentina was one of the world's 10 richest countries. But it then fell victim to populism under Juan Peron.
Politicians not only expanded the fiscal burden of government, but they also imposed protectionism, subsidies and other forms of intervention. The Argentine economy has continuously lost ground ever since.
4. GOOD POLICY IS PARTICULARLY IMPORTANT FOR DEALING WITH DEMOGRAPHIC CHANGES
An ageing population is the greatest challenge in almost every prosperous nation. It is good that people are living longer, of course, but when you combine increased longevity with falling birth rates, this puts a lot of pressure on welfare states.
Indeed, this is one of the reasons for Greece's recent collapse (and Italy's looming collapse). Singapore, by contrast, is in a relatively strong position to deal with demographic changes, thanks to a self-funded welfare system that has traditionally promoted self-reliance and self-responsibility, as well as a tax code that does not penalise saving and investment.
5. PENALISING SAVING AND INVESTMENT IS THE WORST WAY TO COLLECT REVENUE
Proponents assert that dividend and capital gains taxes are needed so that upper-income people pay tax. But this line of thinking is misguided. Such income is already subject to 17 per cent corporate income taxation in Singapore.
Imposing dividend and capital gains taxes would mean such income is subject to increasing layers of discriminatory taxation. The result is to discourage capital formation (savings and investment) - the very essence of entrepreneurship.
And that approach is economically foolish, since all economic theories - even Marxism and socialism - agree that saving and investment are key to long-run growth and rising living standards.
6. NEW TAXES ON THE "RICH" EVENTUALLY BECOME BURDENS ON THE MIDDLE CLASS
Capital gains and inheritance tax proposals are political crowd-pleasers because many believe they are targeted only at wealthier taxpayers. But this overlooks the fact that higher tax rates don't raise as much money as initially expected because taxpayers have less incentive to earn (and report) income.
So politicians then start extending the reach of the tax, which is how middle-class taxpayers eventually start paying the price.
But it's just as important to recognise that slower economic growth is an inevitable consequence of higher fiscal burdens and that also will negatively impact ordinary people.
The world is an economic laboratory. Some nations serve as negative examples. They teach policymakers about the policies to avoid. Greece, Venezuela, Italy and North Korea are examples of the wrong (in some cases, spectacularly wrong) approach.
Other jurisdictions are positive role models. Hong Kong, Switzerland and New Zealand generally are cited for their economic vitality (the United States used to be, but has endured too much statist policy in the 21st century). Singapore also belongs in this special group. Indeed, it arguably may be the world's strongest economy.
But today's success is no guarantee of tomorrow's prosperity. Singapore should not risk its economy with class-warfare policies that have never produced good results anywhere in the world.
Dan Mitchell, a specialist in international tax competition, is co-founder and chairman of the US-based non-profit Centre for Freedom and Prosperity that promotes free market ideas. Donovan Choy is a policy analyst with the Adam Smith Centre Singapore, a think-tank promoting pro-market principles.
By Dan Mitchell and Donovan Choy, Published The Straits Times, 11 Apr 2019
What's even more noteworthy is that Singapore's economy then continued to expand at a healthy pace. Based on measures such as per-capita economic output, residents of Singapore are now significantly better off than their counterparts in almost every nation in the so-called rich man's club of the Organisation for Economic Cooperation and Development (OECD).
For all intents and purposes, Singapore has shown that conventional theories about economic growth need to be updated to reflect that growth doesn't necessarily need to weaken once a nation becomes prosperous. Singaporeans should be thankful for the sensible governance that has made the nation a role model.
Unfortunately, some people are willing to threaten the country's prosperity by urging higher tax burdens on the wealthy. They risk national competitiveness by advocating additional layers of tax on income that is saved and invested.
This "class warfare" approach is deeply misguided, especially in a globalised economy. Singapore's policymakers should remember these six observations as they contemplate fiscal policy issues.
1. GOOD ECONOMIC POLICY PRODUCES GOOD RESULTS
Singapore's prosperity is not an accident. The country routinely ranks near the top of all indices of economic freedom and competitiveness. Small government, open markets and rule of law are a great recipe for national prosperity and Singapore is a powerful example of how a nation can become very prosperous with the right approach.
2. SINGAPORE AVOIDED THE TRAP OF "WAGNER'S LAW"
What makes Singapore special is that it avoided the mistakes other nations made when they became rich. Countries in North America and Western Europe created costly welfare states once they became relatively prosperous. This is known to academics as Wagner's Law, and it has serious consequences since larger public sectors reduce competitiveness and lead to less growth.
While poverty is a serious issue to be addressed carefully, it is noteworthy that most academics agree that there is no incidence of absolute poverty in Singapore.
Even the poorest in Singapore are comparatively far better off than the poor in other developed countries because it has largely avoided this mistake.
3. BY IMPOSING BAD POLICY, RICH NATIONS CAN BECOME POOR NATIONS
In some cases, rich nations completely reverse the policies that are associated with prosperity.
After World War II, Argentina was one of the world's 10 richest countries. But it then fell victim to populism under Juan Peron.
Politicians not only expanded the fiscal burden of government, but they also imposed protectionism, subsidies and other forms of intervention. The Argentine economy has continuously lost ground ever since.
4. GOOD POLICY IS PARTICULARLY IMPORTANT FOR DEALING WITH DEMOGRAPHIC CHANGES
An ageing population is the greatest challenge in almost every prosperous nation. It is good that people are living longer, of course, but when you combine increased longevity with falling birth rates, this puts a lot of pressure on welfare states.
Indeed, this is one of the reasons for Greece's recent collapse (and Italy's looming collapse). Singapore, by contrast, is in a relatively strong position to deal with demographic changes, thanks to a self-funded welfare system that has traditionally promoted self-reliance and self-responsibility, as well as a tax code that does not penalise saving and investment.
5. PENALISING SAVING AND INVESTMENT IS THE WORST WAY TO COLLECT REVENUE
Proponents assert that dividend and capital gains taxes are needed so that upper-income people pay tax. But this line of thinking is misguided. Such income is already subject to 17 per cent corporate income taxation in Singapore.
Imposing dividend and capital gains taxes would mean such income is subject to increasing layers of discriminatory taxation. The result is to discourage capital formation (savings and investment) - the very essence of entrepreneurship.
And that approach is economically foolish, since all economic theories - even Marxism and socialism - agree that saving and investment are key to long-run growth and rising living standards.
6. NEW TAXES ON THE "RICH" EVENTUALLY BECOME BURDENS ON THE MIDDLE CLASS
Capital gains and inheritance tax proposals are political crowd-pleasers because many believe they are targeted only at wealthier taxpayers. But this overlooks the fact that higher tax rates don't raise as much money as initially expected because taxpayers have less incentive to earn (and report) income.
So politicians then start extending the reach of the tax, which is how middle-class taxpayers eventually start paying the price.
But it's just as important to recognise that slower economic growth is an inevitable consequence of higher fiscal burdens and that also will negatively impact ordinary people.
The world is an economic laboratory. Some nations serve as negative examples. They teach policymakers about the policies to avoid. Greece, Venezuela, Italy and North Korea are examples of the wrong (in some cases, spectacularly wrong) approach.
Other jurisdictions are positive role models. Hong Kong, Switzerland and New Zealand generally are cited for their economic vitality (the United States used to be, but has endured too much statist policy in the 21st century). Singapore also belongs in this special group. Indeed, it arguably may be the world's strongest economy.
But today's success is no guarantee of tomorrow's prosperity. Singapore should not risk its economy with class-warfare policies that have never produced good results anywhere in the world.
Dan Mitchell, a specialist in international tax competition, is co-founder and chairman of the US-based non-profit Centre for Freedom and Prosperity that promotes free market ideas. Donovan Choy is a policy analyst with the Adam Smith Centre Singapore, a think-tank promoting pro-market principles.
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