This is why Singapore can’t keep on hiking taxes for the rich

Tax rate hikes are not sustainable.

At this year’s Jubilee Budget, the Singapore government revealed that it is increasing the top marginal personal tax rate to 22% next year. Although the move showed a distinctly progressive shift in government policy, analysts at PwC argue that Singapore simply cannot rely on higher taxes from top earners to support its burgeoning social spending needs.

Another tax rate hike for top earners will hurt Singapore’s competitiveness, particularly against neighboring rival Hong Kong, PwC said.

“When the rate increase was announced at this year’s Budget, tax practitioners quite naturally made comparisons with Hong Kong, which has a top personal income rate of 17% but with a much less progressive structure. While the personal tax burdens in the two jurisdictions are currently comparable, it would seem that Singapore is near the end of the road on future personal tax rate increases, if it wants to remain competitive with Hong Kong for global talent,” PwC noted.

Singapore can hardly afford to raise corporate tax rates, either, as such a move might spook multinationals into pulling out their investments altogether.

“On the other hand, increasing the corporate income tax rate is increasingly becoming difficult for Singapore for competitiveness reasons. Globalisation amid slow global economic growth has given rise to greater competition for investment dollars among countries,” said PwC.

Developed countries, in fact, are all rushing to decrease their headline income tax rates for corporates.

“Quite the contrary, a reduction to the corporate tax rate may be necessary. In Singapore the effective tax burden may be reduced below the statutory 17% tax rate by the system of incentives and super deductions which have been a key lynchpin of Singapore’s tax policy through much of its developmental years,” PwC said. 

“As the economy matures with slower growth, these should continue to serve as the bedrock of a deliberate tax policy to continue to attract new investments and cutting edge technologies which will benefit other related sectors of the economy. If well executed, this should grow the economic pie for everyone to bring in more tax revenue despite the lower corporate income tax rates,” PwC noted.