Singapore looks to more progressive tax policies to address inequality
As Singapore marks 50 years of independence this year, there is much to celebrate, given the country’s exceptional economic rise.
Fraught with challenges ranging from a chronic absence of natural resources to a population divided along ethnic and racial lines, it has survived against all odds to become the thriving metropolis it is today.
But this exceptional economic performance has unfortunately come at a price. Singapore’s Gini coefficient is among the highest in the world, making it one of the most unequal countries.
In some ways, Singapore is a victim of its own success. Land scarcity, a tight labour market and regional competition from low-cost countries have steered it increasingly towards the higher end of the global economic value chain. Manufacturing, which over a decade ago accounted for 28% of the economy, has seen its share fall to 19%. Singapore’s orientation towards services in the form of finance, banking and wealth management has been pronounced in recent decades, resulting in the development of a highly educated segment of the workforce geared more towards financial markets than factory floors. This has contributed to an ever-deepening income gap between the white-collar and blue-collar workers.
Singapore certainly does not lack financial means. Thanks to the Central Provident Fund (CPF), the savings rate enjoyed by Singaporeans is extraordinarily high at almost 50% of the country’s GDP. The country enjoys healthy current account and fiscal surpluses. This has resulted in healthy reserves under the prudent management of its two sovereign wealth funds, the Government of Singapore Investment Corporation (GIC) and Temasek Holdings.
Inequality issues are, in fact, more nuanced. The CPF system, while successful, has become increasingly complex over the years. Added to this is the looming scenario that many retired Singaporeans may not have sufficient savings to tide them over in their greying years given the increasing cost of living in Singapore. A second potential pillar of prosperity, home ownership, is unlikely to provide much comfort, given that Singapore’s public housing serves more as a store of wealth rather than a source of income for its owners, although efforts are now being made to ensure there are ways for retirees to monetize this asset as well. In short, Singapore faces the problem of dealing with an ageing society that will increasingly feel more cash-strapped in its retirement years.
So what can be done, apart from addressing the twin pillars of CPF and public housing?
A potential solution
Singapore’s tax policy may offer some potential solutions here. It is well known that Singapore’s tax system is not the most progressive. It does not have a capital gains tax regime or inheritance taxes. Its top marginal individual income tax rate, even after a recent rise, is at a comfortable 22%. The Goods and Services Tax that it levies is by nature a regressive tax, imposed equally on all segments of society, regardless of income or wealth.
More recently, however, the Singapore government has started to take steps to make the overall tax system more progressive. Over the past two years, the property tax system has been tweaked to make it more progressive such that properties with higher values are subject to higher progressive rates of taxation – in effect a form of wealth taxation. Together with the more recent move to increase the top personal tax rate by 2% to 22%, these are examples of measures being taken by the government to engage in fairer and more progressive taxation policies aimed at achieving a more equitable distribution of wealth.
A time for reflection?
There is no doubt that Singapore has much to celebrate in its jubilee year, given the success it has carved out from its humble beginnings. As it gazes towards the next 50 years and contemplates its future challenges, it should take a moment to reflect on the type of society it wants in the coming years and to ensure that the playing field is indeed level for all segments of their society. Inequality is the scourge of many of an advanced nation and if Singapore is to avoid its most regressive effects, it will need to ensure that its existing and future tax policies are enlightened enough to guard against inequality’s most corrosive aspects.
For more information, contact:
Lam Fong Kiew
Nexia TS, Singapore
T: + 65 6534 5700