Three budget deficits in a row, and concerns about inequality being bad politically, appear to have prompted Singapore's government to impose higher taxes on top earners, among other measures. The Asian city-state has a delicate balancing act: attracting investment against maintaining domestic cohesion.

Singapore has been rolling out the red carpet for family offices and other entities catering to ultra-high net worth individuals, but the jurisdiction is moving towards imposing higher taxes on its wealthiest inhabitants. The Asian city-state’s finance minister late last week unveiled measures including increasing certain taxes to plug fiscal deficits caused by the pandemic.

Finance Minister Lawrence Wong said that planned changes were aimed at delivering a “fairer revenue structure.” “That means everyone chips in and contributes to a vibrant economy and strengthened social compact, but those with greater means contribute a larger share,” Wong was quoted by media reports as saying. Budget measures take effect from 1 April.

Singapore, which in some ways has benefited while rival financial hub Hong Kong has endured severe anti-COVID measures, reportedly expects to post its third straight budget deficit, with a shortfall for the coming year of S$3 billion, equal to about 0.5 per cent of gross domestic product. 

Bloomberg and others said that among taxes to hit the richest residents, the top marginal personal income tax levels will be raised — peaking at 24 per cent for income over S$1 million ($744,000) — and levies will be adjusted on some properties and vehicles. That said, such rates are low when set against rates of almost 50 per cent or more in certain developed nations.

Around the world, governments – sometimes to the anger of their “natural” political supporters – are pushing up taxes, as is the case in the UK where the Conservative-led government has put up corporate rates, increased payroll taxes (National Insurance) and left inheritance and income tax rates on the top earners unchanged, which has the effect of dragging more people into the tax net. 

Local media commentaries noted that in this year’s Singapore budget there is a shift towards taxing wealth, even though the jurisdiction hasn’t quite explicitly gone for a wealth tax by that name – at least not yet. Wealth taxes are controversial and while a number of countries have imposed them down the years, several such as France and Sweden have rescinded them because of the damage caused. It raises the age-old debate about whether steeply progressive taxes bring in more or less revenue than flatter ones. Some commentators, such as US economist Arthur Laffer, one of the doyens of “supply-side” economics, argue that higher marginal rates are self-defeating because they blunt incentives to earn and invest. (This publication has examined the controversies on incentives in this book review.) Singapore has a balancing act to perform: it wants to attract high net worth and ultra-HNW individuals, while maintaining a cohesive society that could be hit by wide inequality. As far back as December 2020, it was reported that Singapore wanted to adjust its variable capital company regime to suit single-family offices.

An issue for even a fiercely pro-capitalist financial centre such as Singapore – an independent nation state since 1965 – is that huge central bank credit expansion (quantitative easing) and the way that COVID-19 benefited Big Tech have widened wealth inequality. Singapore has for long prided itself on a high measure of social cohesion in the midst of great wealth and change, so policymakers appear keen to avoid problems further down the line. 

Taxes on high incomes will increase: income of more than S$500,000 per annum is now taxed at a rate of 23 per cent and income over S$1 million will be taxed at a rate of 24 per cent. Previously the highest rate of income tax was 22 per cent.