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Exploring the Viability of Implementing a Wealth Tax

Some Singaporean wrote in to Straits Times to indicate that something should be done for HDB that are sold for $1 million dollars and above. 

His point is that these flats are heavily subsidized. There are those lucky ones who managed to ballot and got really good locations such as Queenstown and Tiong Bahru. It is as if they struck the jackpot. They got their flats for $400,000 to $500,000 and the transacted price is north of $800,000.

I am not sure what is a better way to manage this system. 

I suppose a fair way is to reduce the land lease to 30 or 50 years. This would mean that these flats are in prime location and attractive enough for those who are willing to pay for convenience to stay near to where they work. Yet the land lease is short enough that this would cap the price people are willing to pay for the home. 

A lot of the time, there is a tinge of jealousy between those who have and those who do not have. To some, they felt that this jackpot have made some Singaporeans winners and the rest not winners. 

These flats would be passed down at least one generation, giving the next generation a leg up. They could choose to sell it and take the liquid cash asset and deploy as they deemed fit. Some crazier folks would deploy this into a Dimensional Fund Advisors DFA World Equity Fund and annually withdraw 3.5% of it. There will be those that would switch these prime property into a portfolio of REITs to cash flow them much better. 

The rich or those winners get a massive leg up. 

I think there is a lot of truth in that. 

This is especially so in a country which is trying to enhance its position as a wealth management hub. We give you incentives to make Singapore your headquarter and you get to enjoy a very competitive corporate tax rate versus other country. Not just that, the infrastructure is good enough for you to operate here.

There are no individual withholding tax, with a 10% withholding tax for partnerships and companies. There are no estate duty or inheritance tax. Our dividend tax is one tier at the corporate level and there are no capital gains tax.  

If you own a property, and keep it after 3 to 4 years, you do not have to pay seller stamp duty.

For those with resources, life looks to be pretty good. 

Those who lament about the growing inequality in the country, would bring up that it might be worth while to implement estate duty. After a certain exemption amount, your estate would be taxed 20-50% of the asset value. That amount should be recycled back into society and create some checks and balances, to ensure that those who are wealthy, not get so wealthy. 

The problem with estate duty is that, for the rich, they could possibly structure their trust in such a way that it avoids or pays very little estate duty. 

In that case, the amount that the government take from estate duties, might not be significant enough.

 Some weeks ago, I picked up something interesting in a podcast that I listened to.

The content is on financial independence, in a European context and the guest on the show who was from Netherlands explained their wealth tax to us. This is the first time I came across a tax on wealth and it is interesting to see how it works.

In the Netherlands, their taxes can be divided into three Boxes:

  1. Box 1: This is a income tax on the income you earn at work or income tax on  your property. This consist of income tax as well as payment into their Premium National Insurance (which is the premiums for their social security). This could come up to 36.55% to 51.95% of their gross income
  2. Box 2: This is a tax on a company you form or own. The tax rate is 25%
  3. Box 3: This is the wealth tax. Your savings, property and investments worldwide is taxed. There is a 30% tax paid on fictitious profit which is weighted depending on the amount of declared assets. There is an exemption of first 30,000 Euros. The people end up paying either 0.61%, 1.3% or 1.6% tax on the value of their assets. 
  4. They still have their Value added tax (VAT), which is similar to our GST which is 21% and a lower 6% on food, medicine and other selected items
  5. Corporate tax of 20% for first 200k and 25% on remainder
  6. Dividend withholding tax of 15%

The first thing I notice are the amount of taxes that can be levied on citizens. You start wonder if you can pursue financial independence in a climate such as this.

And apparently, there are folks that explain to us that it is still possible. The way you build wealth is different ( the kind of financial assets), the expenses that you cater for, and the amount of wealth you need to accumulate would be different. A frugal could can make do with an annual expense of 15,000 to 18,000 over there. These are numbers that Singaporeans would find ridiculous. 

If you are a citizen of Netherlands, or an expat working there (when you failed to qualify for partial non resident status), your savings, and investments would be tax. 

As you become more affluent, you contribute more to the government coffers. So if you own $500,000 in savings in bank accounts, brokerages, property, you might get taxed 1.3% annually, which comes up to $6,500. Those with $5 mil  would pay $65,000 in taxes. The good thing is that if you pay this wealth tax, you do not have to pay any withholding tax, capital gains tax or equivalent, since you already pay the wealth tax already.

I think a lot will depend on how easy for folks to structure or not declare their assets in other parts of the world. 

This tax would also change the wealth building dynamics. I often said that you do not know the returns you will get, but you can be sure the costs are deducted away from you. 

So if your index fund’s rate of return over the long run is 7%, and your total expense is 1.2%, a further wealth tax on your assets of 1.3% will shrink the returns to 4.5%. 

The current net rental yield for private property is approximately 2.5%. People will see a 1.3% wealth tax as shaving the net rental yield to 1.2%. That is even lower than local savings rate. But wait! There is tax on your savings as well. With those kind of rental yield, we are really hopping for great capital appreciation because the net cash flow returns is just not worth it.

In this climate, I wonder if there is motivation to put money away to build wealth. 

It would also put a question mark over our long term viability as a wealth management hub.

You would probably tax the rich, but they might have a way to avert. Those who cannot avert, are the small fries like us, who are disincentivise to put our money away. 

But I felt that this might destroy the rent seeking culture in Singapore so that people can find creative ways in starting own business to build some wealth.

In any case, they could always not implement a 1.3% tax on the value of asset but a smaller amount. 

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Sinkie

Saturday 9th of February 2019

Govts can always tweak, find a balance between the wealth builders & social aspects e.g. safety nets.

For e.g. when S'pore still had the Estate Duty, the threshold limit was high enough such that probably less than 1% of S'pore families will be hit with this tax. And yet they removed it.

Netherlands implement their wealth tax with a very low threshold of 30K. You can always tweak it to 300K or 3M or whatever direction you want your country to emphasise on.

US has estate duty, income tax on dividends & bond coupons & savings interests, capital gains tax etc. And yet it has high income inequality (slightly lower than S'pore), but this also doesn't stop US from having the environment for innovation, for wealth building, for generating young millionaires & billionaires.

It's all in how much tweaking & tilting to suit a society's emphasis & direction.

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