Beware downsides of wealth taxes.

Beware downsides of wealth taxes.

MR CALVIN Cheng is to be lauded for his perspicacity in pointing out that the marginally wealthy in Singapore, like those earning about $160,000 annually, assume a disproportionate tax burden while also not qualifying for most governmental handouts ("Tax the wealthy more, not the high-wage earners"; Monday).

Their earned income is minuscule compared with the diverse sources of income of the truly ultra-high-net-worth individuals. 

To lump the first group with the true Midases seems truly regressive.

Still, I don't agree with the imposition of capital gains or estate taxes. These are not as progressive as they seem.

A capital gains tax is fair only if tax deductions are also offered to capital losses, a situation that happens often in business and investment. To have the former without the latter stifles entrepreneurial risks and financial derring-do, qualities already lacking in our culture.

Capital gains involve risks, which must be recognised and rewarded, as compared with income derived through work.

While estate taxes appear fairer because they seem like windfall taxes and are apparently progressive (applying only to those who are affluent enough to leave assets behind), they discourage saving and financial prudence, while incentivising the development of sophisticated and manipulative tax planning, which the truly rich have easy access to.

To avoid estate taxes, people may decide to just spend the money, instead of saving it for the next generation.

Before the abolition of Singapore estate taxes in 2008, there was an exemption threshold of $9 million for dwelling houses. 

Much of the capital gains in houses have come about directly through inflation. Any new reimposition of estate taxes must take this into consideration.

If, as Mr Cheng cites, the top 1 per cent of Singapore's rich possess 25 per cent of the country's private household wealth, then this should be the group returning their wealth to the community and not those who have small plots of land bought decades ago, whose values have appreciated simply because of inflation, but who are still impecunious otherwise.

The Straits Times / Forum Letters                 Published on Wednesday, 18 March 2015

By Yik Keng Yeong (Dr)