Every country in the world is facing the same dilemma – how to pay for their respective responses to the pandemic.
Low interest rates made government borrowing easy (and copious), but it all has to be paid back somehow.
Raising taxes across the board will never be popular with the electorate, neither will cutting back on spending.
But one ‘solution’ being touted time and again is a wealth tax – most recently in Singapore.
A tidy profit
In a speech on 22 July, the managing director of the Monetary Authority of Singapore, Ravi Menon, said there may be an argument for introducing a property gains or inheritance tax to address wealth inequality in the city state.
Local newspaper The Straits Times cited Menon as saying that a shift away from taxing income towards taxing wealth would promote a more inclusive society.
He placed particular emphasis on the rapid increase in property prices, which he believes will worsen the wealth inequality.
“In very few countries do most citizens have the opportunity to enjoy capital appreciation in housing assets as we do in Singapore,” he is quoted as saying.
Not plain sailing
But there is a considerable history of failed or botched wealth taxes littering the landscape to make implementing one more than a little bit challenging.
Something of which Menon is aware, as he referenced the dozen European countries that levied an annual tax on net wealth in 1990.
Fast-forward to 2018, he said, and two-thirds of them had abandoned the tax – citing high admin costs, risk of capital flight and failure to achieve the goal of wealth redistribution.
Menon said: “This is not necessarily a reason for not imposing a wealth tax, but a strong caution that designing a good wealth tax is not a trivial exercise.”
And it is striking a balance between raising sufficient revenue to make the exercise worthwhile, without spooking the wealthy population that will determine the success or failure of any wealth tax.
Redistribution strategy
“The truth is that wealth taxes can be extremely useful,” AAM Advisory chief executive Eryk Lee tells International Adviser.
“Singapore, like most of the world, has an ageing population that will require more and more tax revenue to pay for an ever-increasing cost of care.
“A wealth tax looks to be an attractive method of filling that revenue requirement.”
But, like the watchdog, Lee is aware that there are “feasibility issues” around implementing a wealth tax.
“First, there’s the question around design. A tax on wealth can come in many different shapes and sizes. What exactly will the government consider to be wealth? And what rate will it deem appropriate for the levy?
“Then there’s the big question of implementation. How will the government value all the assets it considers to be ‘wealth’, and make sure the valuations are accurate? How will the government deal with people who face an immediate wealth tax bill for an illiquid asset?
“For example, someone inheriting a property may need to sell the property to pay for the inheritance tax.”
Financial navigator
Lee continues: “For the wealth management sector, the introduction of a wealth tax may have a silver lining in the sense that it may well boost opportunities for wealth planning. Financial advisers are in the best position to help people navigate whatever is thrown at them post-pandemic – a wealth tax or otherwise.
“For society as a whole, the effectiveness of a potential wealth tax will be dependent on whatever strategy is in place to redistribute the money raised from the levy. A prime target could be the often overlooked sandwich generation, who need to care for elderly parents, young children and themselves, and who may be struggling to meet the ever-growing cost of living in Singapore.
“Redistributing wealth and tackling wealth inequality is not just about the low income group, the sandwich generation must be included in this process,” Lee adds.
