LINDA LIM (University of Michigan) and TEO YOU YENN (Nanyang Technological University) argue that gains from attracting ultra-high-net-worth individuals are overstated. The benefits of private philanthropy are outweighed by forgone tax revenues and distract from the state’s responsibilty to look after its citizens.
The influx into Singapore of ultra-high-net-worth (UHNW) individuals and families has been much remarked upon, often positively, even proudly, as an endorsement of our country’s stability, security, competitiveness, and high living standards. The associated explosion in “family offices” gives a fillip to our already thriving wealth management industry, while the increased demand for high-end housing and services such as education, healthcare, food, transport, and retail expands those sectors; for some Singaporeans — particularly owners of land and private housing — these trends represent a windfall.
Despite growing global consensus that tax evasion practices and tax havens are problematic, local popular discourse rarely gives serious consideration to how Singapore’s policies facilitate these trends and what costs they impose on society and polity. A recent news article, for example, focused instead on how rich foreigners could moderate any public display of privilege to minimise social frictions, and “contribute to Singapore” through job creation and philanthropy.
Such prescriptions — urging the uber rich to display modesty and magnanimity — may indeed improve the optics of the red carpet that Singapore has rolled out for UHNWs. What remains unquestioned, however, is the cost to the public of using low taxes and other financial incentives to woo the wealthy, and whether these costs are outweighed by the promised benefits. The discussion so far obscures the critical role of taxes as instruments for equitable distribution and legitimises the under-taxation of the wealthy. The official and mainstream media hype around potential philanthropic dividends is equally troubling — passing the buck for redistribution and equity to the private sector.
Taxation, redistribution, and public good
Low taxes are at the heart of the global phenomenon of the footloose ultra-rich — key to understanding their very existence as a category, as well as their existence in large numbers in specific places like Singapore. A major reason for the recent expansion in the ranks of the ultra-rich and the skyrocketing of their share of global income is the sharp drop in personal income, corporate, inheritance and other tax rates in most of the developed world since the 1980s.
The ultra-wealthy, who derive most of their income from the ownership of capital, also benefit from the lower preferential rate at which capital gains are taxed in rich countries, with the top capital gains tax rate in the US, for example, being 20 percent compared with the 37 percent top rate for ordinary income.
With the help of expensive and savvy lawyers and accountants, the ultra-wealthy are able to take advantage of legal loopholes and complex “tax dodges” to slash their tax obligations well below statutory rates, to as little as zero (as former President Donald Trump did for many years). “Tax havens” play a key role in this for corporations, individuals and families, including by providing for secrecy. They are particularly popular with the ultra-wealthy from lower-income countries, which often have high tax rates and high rates of corruption.
In the relentless global hunt for locations to park wealth, Singapore has emerged as one of the world’s top tax havens for the ultra-wealthy seeking to avoid taxes in their home countries. This alone would explain much of the country’s popularity with the globally mobile super-rich. Other attractions that current discourse prefers to refer to, such as the country’s political stability and high standard of living, are just the cherry on top.
Besides being unfair and inequitable — imposing a lower tax burden on capital-owners than on the average worker — the ultra-wealthy’s tax avoidance practices harm their home countries by reducing the tax revenues available to fund the provision of much-needed public goods and services. This is especially impoverishing for poorer countries, but also debilitating for advanced industrial countries straining to keep up with social needs.
The international community has worked hard and long to minimise tax avoidance by multinational corporations. These efforts produced the OECD’s 2021 global tax deal, signed by 130 countries accounting for over 90 percent of the world economy. Healthy tax revenues can enable the global community and individual countries to tackle large-scale problems such as protecting the climate and mitigating future pandemics more effectively.
Tax havens’ policy of attracting the global ultra-rich by facilitating their tax avoidance is thus detrimental to the economies and welfare of their home countries, and of other countries where their capital might otherwise be invested. But, the successful tax haven is not necessarily a winner in this game either. Since Singapore offers the rich comparatively low income tax rates, plus freedom from wealth, capital gains and inheritance taxes, their contribution to local tax revenues — necessary to fund the security, infrastructure and other public amenities that the wealthy too enjoy — must also by definition be low. The fact that the country is forgoing tax revenues voluntarily does not insulate it from associated problems.
Lower revenues from the rich mean that other members of society have to pay more in income or regressive consumption taxes. The alternatives are to cut public spending or chalk up larger budget deficits, which would impose debt burdens on governments and citizens that constrain private as well as public sector growth, as rising interest rates “crowd out” private investment.
The argument most commonly used to justify low or reduced taxes — that they spur economic growth by increasing private incentives to work, save and invest — does not have strong empirical support. It is clearly contradicted when growth-promoting public expenditure (particularly on education and infrastructure) is reduced because of lower tax revenues. Under-taxing the rich also contributes to extreme wealth and inequality, the negative social, political, and economic impacts of which are well recognised, including in Singapore. Large inequalities are damaging to society on a wide number of fronts — affecting public health outcomes, education equity, housing security, poverty, political functioning, and so on.
It is often claimed that much government expenditure is wasteful, inefficient and with high leakage through corruption. This anti-tax argument is particularly weak in Singapore, where the government is regularly lauded for contributing to strong economic performance.
Jobs and philanthropy
While it is clear that ultra-rich foreigners do not contribute much to tax revenues, it has been claimed that they are beneficial to Singaporeans in other ways — the most commonly mentioned being job creation and philanthropy.
With respect to job creation, Singapore is well known to be a full-employment economy chronically and severely short of labour, skills, and talent. It is therefore likely that the jobs “created” by UHNW investors will be filled by foreigners, thus increasing rather than reducing dependence on them. At the “low end” of the labour market these will be disproportionately personal service workers, while at the “high end” they will be disproportionately financial, legal and IT professionals facilitating tax avoidance and “wealth management”.
In both cases, the cost of living and the cost of doing business will be raised for others, including local and multinational, individual and corporate, employers, and other more “productive” and less “footloose” sectors of the economy. Where resources are scarce—as land, labour, skills and talent are in Singapore—there is always an opportunity cost that is borne by others in society.
As for philanthropy, the amounts donated by the ultra-rich are everywhere a tiny fraction of what their normal tax obligations would be — at much below 1 percent of annual income, compared with the 24 percent paid by an average taxpayer in rich countries and the 40 percent paid by high-salaried (but not ultra-rich) taxpayers. Charitable donations — which themselves attract tax benefits — thus do not make up for the loss in tax revenues resulting from tax avoidance abetted by host states. Instead, the tax revenues forgone by privileging the ultra-wealthy amount to a drain of financial resources from the public to the private sphere.
Any shift from taxation to voluntary donations also raises important issues of political representation and voice. In democratic societies, tax revenues and public expenditures are ultimately accountable to citizen taxpayers through their elected representatives. In contrast, philanthropic donations are not directed at democratically selected social needs but instead reflect donors’ personal preferences, including their prestige considerations. The granting of bursaries and scholarships to “deserving students”, for instance, may be very appealing to the individual sensibilities of donors and benefit some recipients, but do little to alter larger problems of equitable access that can only be addressed through government policies. Who counts as deserving (in this case of a good education) and how one decides are important questions that should be settled collectively through democratic processes, not by donors far removed from the problems their philanthropy purports to address.
Over time, the rise of philanthropy as a substitute for well-resourced public agencies has agenda-setting effects, directing attention toward mitigating certain inadequacies and away from structural problems and solutions. The problems of “underprivileged” or “disadvantaged” students, to return to this example, are usually deeply embedded in interlocking problems their families face: poor work conditions, inadequate wages, housing discrimination and insecurity, care gaps, inadequate nutrition and healthcare, and yes, educational disadvantages.
The required interventions are correspondingly broad — in wage protections, housing regulations, healthcare financing, care infrastructure, school reward systems. Donor-funded bursaries and scholarships, while welcome, may distract from the full constellation of issues requiring concerted attention. A philanthropy fetish may thus reinforce the Singapore state’s long-standing conception and framing of social problems and solutions — eschewing broad welfare and diluting commitments to large-scale, collective policy responses in favour of the “Many Helping Hands” of charities and “self-help” groups.
In some countries, like the US, donations are geared specifically to change policies and politics. Where the wealthy are able to direct their monies toward specific causes or in support of particular policy positions, they also gain disproportionate political voice and power without appropriate checks by the electoral process. The risk of such political capture cannot be dismissed.
Philanthropy is thus both not enough and also too much. In material terms, it pales in comparison to lost tax revenues and what those pooled resources can do to mitigate the harms of inequality and improve wellbeing for everyone. Where private charity substitutes for (or “complements”) public provision of social goods, it discourages and absolves governments from spending that they should rightfully undertake for their citizens. Where the ultra-wealthy have been able to gain disproportionate influence on major decisions, philanthropy has crowded out the political voice of ordinary citizens. Overall, framing philanthropy as a key rationale for attracting the ultra-wealthy to Singapore is somewhat naïve.
Status quo is not good enough
Many of the ultra-rich themselves, well aware of the favoured tax treatment they receive from local and national governments, and the increasing resentment and hostility they face from the general public in some countries, have called for governments to raise taxes on them, with a group of over 200 billionaires doing so in 2022 and again in 2023.
This is not charity. Higher taxes on the ultra-wealthy will right the present unfair imbalance in the post-tax returns to capital versus labour, while reducing inequality and its pernicious effects. Stemming the private capture of shared resources can reduce the tax burden on average citizens and go toward funding projects that promote broad societal well-being. It can mitigate the disproportionate and undemocratic influence of elites, including global ones, who already wield disproportionate market power, on key decisions that affect all in society.
Singapore’s discussions of the rise of the ultra-wealthy must catch up with global discourse and seriously examine both cause and consequence. That Singapore is attractive to so many UHNWs (and multinational corporations) indicates that our policies enable the avoidance of tax obligations elsewhere. We should not be blind to what our actions mean for other societies. Locally, as we witness the wealthy’s entry into public life through philanthropy, we would also do well to consider how this intensifies rather than alleviates problems of inequitable distribution and power imbalances.
– Economist LINDA LIM is Professor Emerita, Stephen M. Ross School of Business, University of Michigan Ann Arbor. Sociologist TEO YOU YENN is Associate Professor, School of Social Sciences, Nanyang Technological University, and author of This Is What Inequality Looks Like. They are both editors of AcademiaSG.
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