Piketty meets pragmatism in Singapore tax hike

February 24, 2015

By Andy Mukherjee 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Thomas Piketty has met pragmatism in Singapore’s higher tax rate for top earners.

The city-state has just announced that those taking home more than S$320,000 ($235,294) will pay a top tax rate of 22 percent from 2017, up from 20 percent today. Smaller increases will apply to earnings over S$160,000.

Singapore’s departure from three decades of progressively lower taxes for the wealthy is a nod to French economist Piketty’s polemic on inequality. It’s also a bet that the rich value clean air and social stability as well as money.

The government estimates the hike will bring in an extra S$400 million a year. State investor Temasek will also contribute by handing over as much as half of the expected real returns on its S$223 billion investment portfolio. The two measures combined are expected to boost revenue by the equivalent of 1 percent of GDP annually over the next five years. This should cover a planned ramp-up of investment that includes more hospital beds for an ageing population, as well as a new airport terminal.

Ten years ago, the Singapore’s preferred choice would have been to raise its goods and services tax. Levies on consumption are easier to collect and less flighty than the incomes of high-earning expatriates. But that option is now politically infeasible. The People’s Action Party, which has ruled Singapore throughout its 50-year history as an independent nation and must call an election by January 2017, is wary of upsetting voters.

What’s more, Singapore’s rich don’t have many attractive alternatives. Even at the higher rate, someone earning S$1.5 million will still pay less than 20 percent of their overall income in tax. Hong Kong takes an even smaller slice. But the rival financial centre has worse pollution and faces increased social unrest caused by China’s tightening grip.

The bet is that Singapore’s wealthy will sacrifice a few extra percent of their income for what remains a stable and safe low-tax haven. In a vastly unequal society, the elite could hardly have hoped for a less strenuous marriage of Piketty and pragmatism.

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