Widening the tax net?
A distinctive feature of Singapore’s fiscal policy is to fund current and future expenditures while building up the reserves. A balanced budget must come before that journey can begin. While the planned GST rate increase to 9% by 2025 can help cover some of the forward expenditure, it is clearly not enough.
In recent times, about half of the net investment returns contribution (NIRC) is used to fund current spending needs. Drawing further from the NIRC to fund spending can impact Singapore’s economic robustness in the future.
Singapore has traditionally focused more on taxing income and consumption. There is also taxation on assets, such as property taxes and stamp duty, although estate duty was abolished in 2008.
In recent years, the calls for wealth taxation, in Singapore and globally, have grown louder. After all, moving toward a more progressive and equitable form of taxation is in line with promoting an inclusive society.
Almost a decade ago, Prime Minister Lee Hsien Loong shared that Singapore faced a choice of either “low taxes and targeted welfare benefits, or high taxes on all and comprehensive welfare”. A high-tax model is unlikely to sit well with the general income tax-paying population. It could even chip away at the economy’s competitiveness.
While higher-income earners and wealthier individuals can afford to bear a greater share of the tax bill, Singapore is balancing this against the impact that taxes on wealth can have on its position as a wealth management hub and international financial center. During the recent 20th annual Morgan Stanley Asia Pacific Summit, Finance Minister Lawrence Wong said: “If you're not careful, you [could] have a tax in place that doesn’t actually end up collecting very much money, [and] it’s counterproductive because the wealth just moves around to other places.”
Courage to rethink and reboot
The pandemic has accelerated structural shifts. It has also forged new mindsets. To face a new notion of normality requires the courage to do things we do not lightly do or even slaughter sacred cows that we have steadfastly avoided.
Singapore’s tax system has served us well for the past decades. But shifting priorities dictate changes to our tax system. Among other pressing needs, many sectors are seeking government support, not just to stay afloat but also to rapidly adapt and grow in the new normal. This transition to the future takes time, during which the types of government support will need to transform as well. New taxes may be inevitable. Yet with these changes, we take on the burden to invest in our future generations. We pay it forward for our children, and their children.
Should we rethink or even reboot the tax system, the challenge lies in finding that sweet spot: where fair and progressive taxes are palatable, while generating enough revenue for sustainable and inclusive growth.