Calvin Cheng

Tax the wealthy more, not the high-wage earners

Even though the Budget has made a step in the right direction in increasing taxes on high-income earners, many of these individuals paying higher income taxes are not the truly wealthy. -- PHOTO: AFP 
Even though the Budget has made a step in the right direction in increasing taxes on high-income earners, many of these individuals paying higher income taxes are not the truly wealthy. -- PHOTO: AFP 

The Budget for 2015 has been characterised as a Robin Hood Budget because it increased taxes on the highest 5 per cent of income-earners.

I agree with Deputy Prime Minister Tharman Shanmugaratnam who said it isn't a Robin Hood Budget - but for a different reason. The rich that the Budget is purported to take away from, are far from the truly rich.

Private banks generally sub-divide rich individuals into three categories: the High Net Worth Individuals (HNWI) are those with US$1 million (S$1.4 million) in liquid assets; the Very High Net Worth Individuals (VHNWI) with US$5 million; and the Ultra High Net Worth Individuals (UHNWI) with US$30 million. 

Under these classifications, a salary of $160,000, where income tax upward adjustments start, does not even come close.

As for the top income bracket of $320,000, some of these individuals, if canny investors, may attain the status of HNWI, or even VHNWI. But they are extremely unlikely to be the truly rich - the UHNWI with US$30 million of liquid assets or more.

A report on March 5 forecast that this class of the super rich is set to grow by 1,700 in Singapore by 2024, the highest in 108 cities.

Singapore already has the third largest number of UHNWI in the world, behind Tokyo and London, with 3,575 persons.

The report also predicts that we will have 1,177 persons with net worth of US$100 million or more, and 36 billionaires, by 2024. Already, for a small city, we already have an impressive 24 billionaires, the ninth highest in the world.

The thing about the truly rich is that, by and large, they will not be affected by the increase in income taxes for one simple reason - the wealthy do not make their money from earned income, but through investments.

One can make money from investments through capital gains or dividends, both of which are not taxed. Singapore does not tax capital gains. It has a tax regime where income is taxed once at the source. Since the corporations already pay corporate tax, the dividends given out are not taxed.

This means that wealthy individuals - the truly wealthy rather than the high-income earners - pay very little tax on the money they make every year.

So even though the Budget has made a step in the right direction in increasing taxes on high-income earners, many of these individuals paying higher income taxes are not the truly wealthy.  

Controversial as it may seem, people on $160,000 a year incomes may be in the top 5 per cent of income earners, but I suspect that they will not even come close to being in the top quarter in terms of wealth.

Although income inequality is high in Singapore, wealth inequality is higher. Credit Suisse's private bank for example estimates that Singapore's wealthiest 1 per cent hold a quarter of the country's private household wealth.

Implications

The implications of not targeting the people with real wealth are several fold.

Firstly, wealth inequality is far more significant than income inequality, which has become a buzzword only because it is currently a trending topic amongst book-writing academics and economists.

Yet, anyone with a basic understanding of finance will know that high income does not always mean high wealth.

If our policies aim to ameliorate inequality and the social consequences it brings, including the threat to our valued meritocratic values, looking at income inequality is not enough: wealth inequality matters far more.

Secondly, if the rich are not identified correctly, the Government will just be shifting the middle-class squeeze upwards to a higher-income bracket.

If those who start bearing a larger fiscal social burden feel that they are unfairly targeted, this will create even more resentment towards the Government.

Already "high income" earners suffer a disproportionate burden as they are not poor or middle-class enough to receive subsidies from the Government, but are by a long measure not wealthy enough to benefit from the tax breaks or instruments at the disposable of the truly wealthy.

MP Tin Pei Ling (Marine Parade GRC), for example, pointed out that business owners who pay themselves a high salary may either choose to take dividends in lieu of pay, or incorporate themselves as a company since the corporate tax of 17 per cent is now 5 percentage points lower than the highest personal income tax rate of 22 per cent.

Thirdly, if "taxing the rich" is one of the chosen methods the Government is going to employ to make up for the higher social spending on the middle and low income, then it makes sense to tax the "right rich".

Solutions

It is time therefore for Singapore to seriously consider wealth taxes. It is a point that many commentators have brought up in previous Budgets, but never seriously discussed by the Government.

Firstly, a zero per cent capital gains tax may make sense when we were establishing ourselves as a financial hub, but it is something we can reconsider today. There are many levels of capital gains tax between the current zero and a rate that will make us lose our competitiveness.

Moreover, Singapore's attractiveness as a financial hub is no longer due to its zero capital gains taxes, but is also due to its stable, attractive and safe living environment for investors. We should not only compete on tax to attract investors at this point of our development.

Secondly, I join the growing chorus of people calling for a re-introduction of the estate/inheritance tax.

It is true that the wealthy find ways and means of avoiding these taxes, but the very fact that they have to go through all sorts of contortions to do so (for example, giving away their money to their grandchildren whilst they are alive) means that inheritance/

estate taxes are not ineffective. Inheritance/estate taxes may not in the larger picture raise a very large amount of taxes but they are important symbolically to a society that values meritocracy and starting on a level playing field.

The Budget puts Singapore towards an even more progressive path when it comes to taxation. But it is important to recognise that wealth inequality is far more important than income inequality.

Just taxing income to reduce inequality only increases the tax burden on high-income professionals, while leaving the truly wealthy (many of whom are bosses these professionals work for) unaffected.

This will only create more social tension and resentment in the long run.

The writer is a media entrepreneur and former Nominated MP.

stopinion@sph.com.sg