Wednesday, January 04, 2006

*On the abolition of estate taxes*

Interesting enough, this is the first time I've ever had someone who was interested in hearing what I had to say on a topic in my blog i.e. Ted in comments in previous post.

In a nutshell, my position is that given a)the various taxes that are currently present in society, b) my belief in progressive taxes i.e. that the rich should probably cross-subsidise the poor and c) in consideration of who are actually taxed, on balance, I would not advocate the abolishing of so-called death taxes.

There are very strong arguments for the abolishing of the estate duty in Singapore. Most notably, taxes have already been paid on the estate (it's a legal term referring not just to land but personal property as well), so in effect, estate taxes are a form of double taxation and are unfair. Similarly, there have been arguments made that a progressive tax is unfair and contrary to the notion of meritocracy because there seems to be no logical or moral reason and is in fact arbitrary to tax a person more because he earns or has more.

But first, keeping those arguments in mind, what does the IRAS have to say about taxes in general. Why do we pay taxes and where do they do to? Well, the IRAS has the following to say about the collection of taxes here. And very worth a read too. But to summarise, "Taxes are the price we pay for a civilised society." Economic theory demonstrates why certain goods are unlikely to be produced by a free market (due to the free-rider problem) e.g. lighthouses and military defense. Or consumed at sub-optimum societal level e.g. education. Hence taxes are spent either to produce these goods or to subsidise them (thereby making it cheaper) so that more people consume them.

So why should the 'rich' pay more? Well the flippant answer would be, "because they can". But underlying this notion is that $1 is worth less to someone who has a million than someone who has $2. As a result, the marginal cost on a progressive tax rate is still equivalent in a utility sense.

But at the same time, there is also John Rawl's argument of the "veil of ignorance". Before we are born we do not know what we would be. With that (lack of) knowledge, design a tax system. If so, then the arguments above would tend to substantiate a progressive tax system. Connected to this is the argument that one does not get rich outside of society. In that, generally one gets rich because of the society (and the attendant infrastructure) and not in spite of it (if that were so then I would guess that the tax collecting capabilities of the state are at best marginal).

An alternative argument is that it is in the interest of the rich to foot a higher burden of the tax bill in order to maintain social equality and stability. It's been statistically proven that the higher the Gini coefficient, (a measurement of income inequity within a country where 0 reflects perfect equality and 1 reflects perfect inequity i.e. one person owns all the wealth), the more economically regressive the state is likely to be with attendant social resentment to boot. Progressive tax policies are premised upon a form income redistribution so therefore, a progressive tax policy is more likely than not to reduce income inequity. This is NOT a guarantee but a tendancy.

Now, I do not believe in socking it to the rich and there have been eras where the marginal tax rate have been so high, that to earn that extra dollar, you pay $1.20 in taxes. That I think is ridiculous perhaps. But at the current tax rates, I think the tax brackets are sensible. (Anyone doing a statistical analysis of marginal tax rates please feel free to correct me).

So we come to perhaps the crux of the issue, how immoral is the estate duty? Well, the first question to ask is, who gets taxed. Here, let's turn to IRAS for the exemption amount.
1. Dwelling houses worth less than $9 million
2. All other assets (including CPF balance) less than $600,000
3. If the CPF balance exceeds $600,000, what is exempted is the excess of $600,000.
And also, for deaths occurring on or after 25 February 2000, dwelling houses used partly for the following activities also qualify for exemption:
a)Small business activities allowed by URA or HDB under their respective guidelines.
b)Home Office approved by HDB or URA (This scheme has replaced the EDB Technopreneur Home Office (THO) Scheme)

So with that, we can safely say that it's not just the rich but the very rich that get taxed. As to whether it is 'fair', we have talked a little about progressive taxes.

But lest we forget, who pays the estate tax? Well the estate pays for its own tax and the people who get it are the inheritors of the estate. As such, an argument could be made that if we believe in the concept of a meritocratic society, then estate taxes are a must if we do not wish to perpertuate a system of the rich having an advantage from birth. Something akin perhaps to the notion of an aristocracy.

Which is why there are a number of prominent wealthy who are willing away the majority of their estate not to their heirs but to charities because they do not believe that their children should get such a massive advantage. Bill Gates comes to mind and perhaps it is because he built himself to that particular position that he believe his children should do so as well.

What then about double payment? Well the truth is, tax loopholes are created by the rich who can afford the lobbying power to either create them, or to purchase the knowledge that exploits them. Sadly, this is not really a caricature for anyone who has followed the travails of the US Tax Reform and the recent smackdown of one of the Big 4 Accounting Firms for selling tax evasion funds.

But even with all that in mind, the question that cinches it for me is this. Why abolish the estate tax when I could abolish other taxes that generate greater social equity or even wealth? I feel that the letter in the ST was argued in a vacuum. While those arguments might make sense if one was deciding whether to implement as estate tax, it doesn't work when one is contemplating whether to abolish them in a modern tax system. So the argument should be whether given the ranges of taxes, estate tax should be abolished. Now, I do not know how much estate taxes bring in (after accounting for administrative cost) but those monies could be better used to fund other frivolous things such as education and healthcare or to provide subsidies for them. Of course, conversely, if the administration of the estate tax costs more than it brings in then that's a good argument to reform it perhaps but not to abolish it.




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