The impact of a wealth tax on Singapore-Hong Kong rivalry

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When it comes to staying attractive to the rich, Asia’s two rival financial centres have always tried to play their tax policies against each other. Hong Kong abolished its estate duty in 2006; Singapore followed suit in 2008. And then after Singapore made a play for large family offices, Hong Kong, which boasts the highest population of uber-wealthy folks after New York City, started looking at its own tax code to see where it could do better.

But now Singapore wants to take a different path. It won’t be a sharp left turn, but some kind of tax on capital may make its debut—perhaps as early as next year’s budget. “You tax consumption, you tax income, you tax savings. And you should tax wealth, whether wealth in the form of property, ideally wealth in other forms,” Singapore Prime Minister Lee Hsien Loong said in a recent interview with Bloomberg’s editor-in-chief John Micklethwait, adding that effective taxation of other forms of wealth is “not so easy to implement.”

Let’s start with the easy part. Capital gains on expensive condominiums might be a good revenue target, especially if Singapore’s 7% goods and services tax (GST) goes up to 9% by next July, as some economists expect. While Singapore authorities have set aside funds to cushion low-income households, GST is ultimately a regressive levy, as the poor spend more of their income on consumption than the rich do. While a higher GST will prepare Singapore to better shoulder the fiscal burden of eldercare and climate change, it may be politically more palatable if the wealthy are also asked to make a sacrifice.

The city’s property industry has already started to evaluate what such a sacrifice might mean. Actually, not much. Close to half of the executives surveyed by the National University of Singapore Real Estate (NUS+RE) say that fewer than 10% of Singaporeans would purchase assets overseas as a result of a 10% tax on property gains, though nearly half of the respondents also believe that 11% to 30% of foreigners might be dissuaded from buying Singapore housing in the near term, according to Business Times.

None of this is particularly worrisome. Despite pandemic-related restrictions and disruptions, Singapore’s private property prices rose 1.1% from the previous three months in the third quarter, and are estimated to have firmed up further in October, recording their 15th straight monthly gain. It won’t be a bad idea to introduce additional taxation that helps the market cool down a bit.

Also, there isn’t much risk of a capital flight to Hong Kong. If anything, there is a stronger likelihood of flows in the opposite direction. The number of US firms with their Asian hubs in Hong Kong has fallen 10% over the past year to an 18-year low, whereas Chinese firms with their regional headquarters in the city have seen their ranks swell by 5%. Hong Kong has begun to align its policies so closely with mainland China’s that it’s not clear if it’s happy just being a wealth centre for Guangdong province apart from itself and Macau, the so-called Greater Bay Area.

Having decided to live with covid, Singapore is aggressively restarting quarantine-free flight links with major economies, while Hong Kong—following China’s lead—is keeping itself isolated with its seemingly never-ending policy of zero-cases. Even the head of Singapore’s central bank wants the People’s Republic and Hong Kong to open up quicker because the city-state does a lot of business with them. Still, it doesn’t look like Hong Kong is in a mood to oblige. A reader of the South China Morning Post wrote in to ask if the Hong Kong government should concede the title of ‘Asia’s World City’ to Singapore and reposition Hong Kong as ‘China’s Ordinary City’ instead.

Given China’s sheer size, proximity may still be a $3 trillion wealth-management opportunity for Hong Kong in the next five years. But to tap it, Hong Kong has to stick to the script—and leave capital taxes alone. Singapore, though, could chart a different course. The city-state’s policymakers could safely conclude that their pragmatism is worth 10% of capital gains to globally mobile millionaires and billionaires. Maybe not on stock-market or cryptocurrency gains, or anything that upsets the location choice of family offices. But pricey condominiums or bungalows might be fair game.

Buyers and sellers of residential property in Singapore already face stamp duties that are rather steep for foreigners. Being asked to share a part of the profit on property sales won’t be terribly upsetting, not for the privilege of living in Asia’s new world city.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services

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