Delivered in Parliament on 1 November 2021
Mr Speaker, I’m keenly aware that 7 o’clock in the evening (or 7 in the morning, or for that matter, anytime really) is hardly an opportune time for a dry lecture on economic matters. But I will speak on the issue of taxes on capital because such taxes matter not only for the sustainability of our public purse, but also because their just application could reshape the landscape of rising inequality in income and wealth, matters which matter enormously to the common man (and woman).
My speech will first lay out the case for and against taxes on capital. I will then explain why our government’s revenue mix can potentially benefit from attention to a richer slate of objectives, and how wealth taxes can play a role in meeting those expanded objectives. I then discuss a menu of possible taxes on capital, before closing with a specific proposal for wealth taxation in the modern world.
I will begin by declaring that I am the Chief Economist (Emeritus) of Thirdrock Group, a home-growth asset and wealth management advisory, and am still occasionally invited to speak at various academic and industry events to audiences that serve high-net-worth investors.
The case and against for taxes on capital
It is useful to clarify with I mean by taxes on capital. This is a tax applied to any form of productive assets. The most common form is the corporate income tax, levied on profits of a company. Another common form are allowances for expenditure on plant and machinery; since these are writeoffs, they are negative capital taxes.
Truth be told, discussions on capital taxes seldom focus on these routine forms, which are widespread and uncontentious. Rather, they center on either capital gains taxes—applied to receipts from the ownership or sale of financial, property, or intangible assets—along with wealth taxes, which are charged to the outstanding value of an individual’s assets. While the issue of capital gains is important, it is best left for another day. Today, I will focus only on wealth taxes.
The most common objection to capital taxes in general is that this is a double taxation of income, since capital holdings typically result from saved income, which had already been taxed previously. As such, it could discourage saving behavior. But we can still make the case for separate taxation of capital, if we accept that taxes are always due whenever there are productive gains. In such instances, taxes reflect the host of indirect benefits—such as a well-functioning legal system and financial infrastructure, or initial tax breaks—that individuals and firms receive when they first invest. Since the risks of providing such benefits are borne by society, it is reasonable to recoup these, after gains are realized.
Another common objection is that taxes applied to wealth may be excessive, because by eroding the principal, it could kill the very goose that laid the golden eggs. However, there is actually little difference, in principle, between taxes on the flow of profits and the stock of wealth, so long as the latter also generates income. Indeed, for an asset that generates 5 percent returns, an entirely pedestrian capital gains tax of 20 percent is equivalent to a wealth tax of 1 percent.
A richer slate of objectives for the revenue mix
The Ministry of Finance (MOF) has often stated that it maintains a diverse revenue mix to finance its budget. To a significant extent, this is correct. In a typical year, the MOF draws around a quarter of revenue from taxes on corporations, another quarter from those imposed on consumers, another quarter from fee and investment income, and the rest from various other sources. Such a broad range of contributions is important, because it ensures that government spending needs are not threatened by declines from any single source. In that sense, the revenue mix has a certain robustness and resilience built into it.
From another perspective, however, this revenue mix is rather imbalanced. While our overall tax system may be progressive—that is, the effects are felt more keenly by the rich than the poor—a quarter of our taxes remain regressive in nature. These include the GST, of course, which—even with the current voucher scheme—affects lower-middle and middle-income families disproportionately more than the wealthy, while only contributing around 11 percent of revenue. Moreover, fees and charges—especially the fines that our Little Red Dot is so (in)famous for—also hit the poor disproportionately harder than the rich.
To be clear, there is no “correct” revenue mix when it comes to financing government expenditure. Even so, we can aim for objectives that go beyond efficient collection and diverse sources. In particular, one laudable objective is that we should seek to minimize, as much as possible, the number of regressive components in the tax regime, rather than being content that the system is progressive overall.
Recent global developments also make a case that it is time to reexamine our traditional tax mix. The recently-concluded OECD-led agreement for a global minimum tax could weaken our nation’s attractiveness as a location for siting headquarter operations, which in turn may erode the incomes we currently receive from the corporate sector.
This is where wealth taxes come into play. Such taxes will shore up the diversity of our revenue sources, especially the contribution from capital. Wealth taxes also help fulfill the additional objective of lowering the regressivity of our current revenue mix, since they are progressive by design.
Is inequality a problem?
Wealth taxes offer another potential benefit: it is a tool that can help reduce the overall level of inequality in society. Why should we care about disparities income and wealth? A sizable academic literature points to how rising inequality undermines economic growth, worsens health outcomes, conditions divergent educational attainment, and alters political stability. For economic, social, and moral reasons, therefore, countries cannot afford to allow inequality to continue an inexorable rise.
That said, is inequality in income or wealth a problem in Singapore? Many measures suggest that it is.
The most popular measure of inequality is known as the Gini coefficient. This metric captures, in a single number, the extent to which the existing distribution of income (or wealth) departs from the theoretical ideal of perfect equality; The higher the number, the more unequal the distribution. Because different countries scale this coefficient differently, a direct comparison between countries is challenging, but not impossible.
Using comparable measures, Singapore’s Gini, prior to taxes and transfers, actually compares favorably to many major developed economies, including those of famously-egalitarian Scandinavian nations such as Denmark, Sweden, and Norway. However, after taking redistribution into account, Singapore’s inequality metric jumps to the top of the range, comparable to that of the United Kingdom and United States.
Moreover, Singapore’s post-tax Gini also fell significantly—to 0.375 from 0.398—during the COVID-19 crisis, even as the pre-tax Gini remained unchanged. This implies that pandemic-related assistance and tax relief—which surged in 2020—was responsible for the improvement in equality outcomes, rather than any disproportionate drop in income among the rich. Other metrics of income inequality tell a similar story.
Similarly, despite a massive drop of close to 6 percent in our GDP growth last year, household wealth went in the opposite direction, expanding by around 15 percent. As a consequence, the share of total wealth held by the top 1 percent grew to around 34 percent, and the number of those with assets of $40 million or more rose by 10 percent, to more than 3,700 ultra-high net worth individuals. Notably, the wealth Gini, at 0.783 by one estimate, is much higher than that of comparable neighboring economies, such as Japan, Korea, and Taiwan.
Taken together, these facts suggest that inequality is a real and pressing issue, and our nation’s efforts at redistribution have been far more restrained than in other advanced economies, including that of our immediate neighbors. We can do more to address our inequality problem.
Singapore is no stranger to capital taxes
As it turns out, Singapore is no stranger to taxes on capital and wealth.
Between 1929 and 2008, Singapore taxed inheritance, via an estate duty. The Estate Duty Act was amended in 2005 to apply only to estates of those that passed prior to Feb 15, 2008. During the debate on the abolition, members explained that wealth was now being generated by other means, thereby rendering the inheritance tax less impactful. The duty was also viewed as a tax that affected mostly the middle class, as the wealthy had generally been able to shelter their estates from such taxes.
Stamp duties and additional buyers’ stamp duties (ABSD) are also currently applied to properties in Singapore. The buyers’ stamp duty is applied progressively, up to marginal rate of 4 percent for property values in excess of $1 million. ABSD is payable on additional properties and by most non-Singaporeans, and is likewise progressive. Both taxes play triple duty, by not just raising revenue and enhancing progressivity, but also helping contain speculative pressure, especially from wealthy international buyers.
A smorgasbord of options for taxes on capital
In thinking about taxes on capital, we have several options.
We could consider reintroducing the inheritance tax. The major strategic reason for eliminating taxes on inheritance was to provide greater ballast for Singapore as it sought to position itself as a globally-competitive wealth management center. Singapore has, since, emerged as a leading cross-border wealth management hub, managing $1.2 trillion in wealth, behind just Switzerland and Hong Kong. The fear is that reintroducing an estate duty, even a limited one, could weaken our value proposition as a wealth center. This may also seem unnecessary, given the small amounts that would be raised by the reintroduction of such a tax.
Or we could weave in greater progressivity in estate duty. The top marginal rate for properties above $1 million is currently set at 4 percent. We could introduce another tier for higher-value properties, at 5 percent, for properties valued above $5 million, or for owners of multiple properties that cumulatively exceed $5 million. This suggestion was recently raised by my Sengkang colleague, Louis Chua, in his speech to this House on the Income Tax (Amendment) Bill. As he shared, with a relatively high threshold, the aspiring middle class would not be penalized. This option has the added benefit of tempering increases in house prices—even in public housing—because private housing prices have a spillover effect on public markets.
Or, alternatively, we could introduce a progressive net wealth tax. While wealth taxes could, in principle, be applied to any amount of asset holdings, most proponents have in mind only the highest tier of wealthy individuals, such as those in the top 1 percent or, more likely, the top 0.1 percent of the wealth distribution. The wealth tax can itself be progressive, with different marginal rates for various income tiers. A key advantage of such wealth taxes is that it ensures that the large and growing asset bases of ultra-high-net-worth individuals—who are typically in non-property form—will not be inadvertently exempt.
In choosing the target tax base, we should strike a balance between raising revenue and effecting redistribution, versus heightening the incentives for avoidance and evasion.
One way to minimize evasion is to make such taxes one-off. However, one-off taxes are best when there is no prior announcement, since doing so would impose the least distortion due to tax-avoidance behavior. However, sudden, major policy announcements are seldom feasible in the real world. Furthermore, the significant amount of work in the runup to the implementation—legislative design, asset valuation, collection mechanisms—would only be drawn on once. And any revenue gain, redistributive benefits, and impact on inequality would also be temporary. A practical solution to this is to require a one-off assessment, but have payments rendered over time.
Another strategy to limit evasion is to allow the wealthy some agency in the deployment of their tax contributions. For instance, a wealth tax could be directed to foundations, which—by mandate—would be required to spend a fixed amount of their endowment each year on approved causes, until depleted. Alternatively, the tax can be levied annually, and collected amounts automatically channeled toward the foundation. This is not a novel concept. Indeed, the legal instruments—such as charitable trusts or foundations—already exist; all that is required is to pair the wealth tax with these entities.
A 21st century wealth tax
I believe that the time has come for a more explicit tax on wealth.
This tax should be designed in a manner that takes into account current realities, including the inherent mobility of capital and wealth, but also the importance of not just taxes but other, nonpecuniary motivations for why high net worth individuals may choose Singapore as a home for asset and wealth management.
While I have mentioned a number of possibilities, my simple proposal is to introduce a tax of 0.5 percent on net wealth in excess of $10 million, 1 percent above $50 million, and 2 percent above $1 billion. This tax may be designated to a special-purpose foundation, mandated to exhaust its entire endowment on an accrual basis over time, with some flexibility in terms of the allocation of payouts toward government-approved uses that are consistent with national priorities. We could even permit tax loss harvesting for up to two years, or restrict taxation to only instances when net wealth gains are positive. In either case, the returns on wealth in any given year would typically significantly exceed these tax rates, so the ultra-rich should generally not expect to even see any decrease in the principal of their assets.
The natural reservation is that doing so could threaten our competitive position as a global wealth management center, especially relative to our closest competitors, Hong Kong and Switzerland.
But circumstances have changed.
Recent geopolitical developments in Hong Kong are a reminder that political stability and respect for property rights are far more important determinants for factors for siting one’s immobile wealth. And all but on canton of Switzerland—the world’s leading wealth center—maintain progressive estate taxes, and the canton of Zürich—the beating heart of Swiss wealth management—applies wealth taxes even more aggressively, starting at CHF 77,000 for singles and CHF 154,000 for households, with the top bracket at a little above CHF 3 million.
International developments have also pointed to a greater appetite for cross-country cooperation on tax regimes, such as the OECD deal on a global corporate taxes. It is not inconceivable that similar agreements on wealth taxation could be in the offing.
More generally, we need to disabuse ourselves from the mistaken notion that low taxes offer the most competitive advantage for our status as a global financial center. Indeed, taxes feature very so little in such decisions that in a recent PWC report that listed 12 factors that made Singapore “best in class within the region” for asset and wealth management, not one of these was “low taxes”. Tax competition is a mindset more suited for the 20th, rather than 21st, century.
Wealth taxes can improve the diversity of our government’s revenue sources, and help manage the societal dislocations that result from rising inequality. We already have experience with other forms of wealth taxation in the past, and we need not fear our competitive position for the future, because other jurisdictions have already moved ahead with similar taxes on capital.
In Christopher Nolan’s masterful Dark Knight trilogy, Bruce Wayne—a billionaire playboy—rediscovers his life’s purpose in the mountains, dons a suit and cape, and returns to bring justice to a fallen city. Gotham was dank, crime-ridden, and deeply unequal, but Mr Wayne—like his philanthropic father before him—chose to expend his own enormous wealth to redress the very imbalance that he had been such a beneficiary of. My heartfelt belief is that all of us—the ultra-wealthy included—want to live in a world where we can all contribute our fair share to make it a better place, both today, and for our children. That is how I view wealth taxes: it is another salve for our imperfect world, an opportunity to create new opportunities for Singaporeans, and an idea whose time has come.
 Recent research emphasizes, however, that the prevailing low interest rate environment favors capital income taxes over wealth taxes, insofar as efficiency is concerned. See Auerbach, A.J. & W. Gale (2021), “Tax Policy Design with Low Interest Rates,” NBER Working Paper 29352, Cambridge: National Bureau of Economic Research.
 This need not be the case, of course; capital may be transferred or inherited, in which case it did not directly derive from individual effort.
 While total revenue varies by the year, this is representative of the past four years. Source: https://www.straitstimes.com/multimedia/graphics/2021/02/singapore-budget-revenue-and-spending-breakdown-2021/index.html?shell
 This is obtained by summing the corporate income tax (which contributes around 19.5 percent of revenue) with other taxes generally attributable to corporations: a withholding tax applied to payments made to nonresident companies (1.8 percent), along with customs, excise, and carbon taxes (4.1 percent).
 This comprises mainly the personal income tax (13.5 percent) and the goods and services tax (12.3 percent).
 The larger part of this is the net investment returns contribution (NIRC) (21.3 percent), with a much smaller share deriving from statutory boards (2.7 percent).
 These include vehicle taxes, betting taxes, stamp duty, land sales, and asset taxes.
 GST remains regressive overall because the GST voucher scheme, which offsets part of the effects of GST for the lowest income households, is only extended to those earning under $28,000 a year, which (at best) applies to only the lowest decile of the income distribution.
 Betting taxes are also regressive, although a case may be made that these could potentially help curb problems of gambling that could be even more detrimental to the poor in the longer run.
 There are broad principles, such as how we should aim to fund recurrent spending with recurrent income. We should rely, as much as possible, on taxes that do not distort economic behavior. And we should avoid taxes whose burdens increase during a recession, and vice versa.
 Bagchi, S. & J. Scejnar (2015), “Does Wealth Inequality Matter for Growth? The Effect of Billionaire Wealth, Income Distribution, and Poverty,” Journal of Comparative Economics 43: 505–40; Cingano, F. (2014), “Trends in Income Inequality and Its Impact on Economic Growth,” OECD Social, Employment, and Migration Working Papers 163, Paris: Organization for Economic Cooperation and Development; Berg, A., J. Ostry, C.G. Tsangarides & Y. Yakhshilikov (2004), “Redistribution, Inequality, and Growth: New Evidence,” Journal of Economic Growth 23: 259–305.
 Pickett, K.E. & R.G. Wilkinson (2015), “Income Inequality and Health: A Causal Review,” Social Science and Medicine 128: 316–26.
 Mayer, S.E. (2010), “The Relationship Between Income Inequality and Educational Attainment,” Theory and Research in Education 8: 5–20.
 Roe, M.J. & J.I. Siegel (2011), “Political Instability: Effects on Financial Development, Roots in the Severity of Economic Inequality,” Journal of Comparative Economics 39: 279–309; NFuentes-Nieva, R. (2014), “Working For the Few: Political Capture and Economic Inequality,” Oxfam Briefing Paper 178, Oxford: Oxfam.
 Gini, C. (1909), “Concentration and Dependency Ratios,” Rivista di Politica Economica 87: 769–89.
 The three common measures are by household member (per capita scaling), by an adjusted household composition that assigns different weights to adults and children (modified OECD scaling), or by the square root of the household size (square root scaling). There is no commonly-agreed international scaling methodology. See Singstat (2021), “Understanding the Gini Coefficient,” Singapore: Department of Statistics.
 Hansard 94(69), Mar 19, 2018.
 Singstat (2021), “Key Household Income Trends 2020,” Singapore: Department of Statistics.
 Since 1995, the income shares of the top 10 and 1 percent of the population have shot up significantly, to 46 and 14 percent, from lows of 33 and 10 percent, respectively. At the same time, incomes of the bottom 50 percent have steadily trended down, from 22 to 17 percent. These, and other similar metrics, are drawn from the World Inequality Database. See Alvaredo, F., A.B. Atkinson, T. Piketty & E. Saez (2013), “The Top 1 Percent in International and Historical Perspective,” Journal of Economic Perspectives 27(3): 3–20.
 CSRI (2021), Global Wealth Report 2021, Zürich: Credit Suisse Research Institute.
 Knight Frank (2021), “What It Takes to Be the Top 1% Wealthy in Singapore,” Knight Frank Wealth Report 2021, Singapore: Knight Frank.
 These were estimated at 0.644, 0.676, and 0.708 for Japan, Korea, and Taiwan, respectively.
 Oxfam’s Commitment to Reducing Inequality Index currently ranks Singapore at 107 out of 157 countries overall, and 145 when it comes to the progressivity of our taxation. See: https://www.inequalityindex.org.
 Technically, there is a mild distinction between the estate tax, which is levied on the value of the decedent’s estate, versus the inheritance tax, which is applied to the value of the beneficiary. In practice, this distinction rarely matters for the overwhelming majority of cases.
 Estate Duty Act (1929), Cap 96 (2005 Rev Ed).
 Hansard 89(8), Nov 17, 2004. Arguably, this may also have been a strategic response to Hong Kong’s move to remove such a tax in 2006. See Gupta, B. & R. Rajan (2021), “Time to Consider a Wealth Tax for Singapore,” The Straits Times, Sep 14.
 The separate seller’s stamp duty is also applicable for properties held for less than 3 years. However, the rates applied as not progressive, and its purpose is more to discourage real estate speculation, rather than for redistribution.
 Burroughes, T. (2021), “Hong Kong Could Leapfrog Switzerland as a Cross-Border Wealth Hub,” Wealth Briefing Asia, Jun 14.
 Hansard 95(40), Oct 5, 2021.
 Chia, W-M., M. Li & Y. Tang (2017), “Public and Private Housing Markets Dynamics in Singapore: The Role of Fundamentals,” Journal of Housing Economics 36: 44–61.
 In Singapore, these thresholds would amount to an estimated $3.9 million and $13.5 million, respectively. See Harley, F. (2021a), “How Much Wealth Gets You Into the Global Top 1%?” and Harley, F. (2021b), “How Deep Do Your Pockets Need To Be To Get You In the Top 0.1% of the World’s Wealthiest?” Knight Frank Intelligence Lab, Singapore: Knight Frank.
 Saez, E. & G. Zucman (2020), “Progressive Wealth Taxation,” Brookings Papers on Economic Activity 2019: 437–533.
 O’Donovan, N. (2020), “One-Off Wealth Taxes: Theory and Evidence,” Wealth and Policy Working Paper 107, London: Wealth Tax Commission.
 Adam, S. & H. Miller (2020), “The Economics of a Wealth Tax,” Wealth and Policy Working Paper 103, London: Wealth Tax Commission.
 Rappeport, A. & L. Alderman (2021), “Global Deal to End Tax Havens Moves Ahead as Nations Back 15% Rate,” The New York Times, Oct 8.
 PwC (2020), Singapore: The Location of Choice for Asset and Wealth Management in the Asia Pacific, Singapore: Pricewaterhouse Coopers.