CAPITAL GAINS TAX : SHOULD SINGAPORE INTRODUCE IT?

Abstract

In recent years, several East Asian countries have experienced severe asset inflation. Asset prices in Singapore have also been rising sharply over the last few years. In particular, the prices of properties, stocks and cars have risen above what fundamentals such as rising incomes, higher population growth rates and economic growth may warrant. The two main implications of the asset inflation are misallocation of resources and the widening of income gaps. Lately, the government has also expressed concern over asset inflation in Singapore in view of the economic consequences on the whole economy should an asset deflation follow. It is against this background that this study examines the possible role of capital gains tax (CGT) in addressing the issue of asset inflation in Singapore.

The The main arguments in favour of CGT are to improve the income distribution and the efficiency in resource allocation. However the adverse implications on the financial sector of the economy is a strong argument against the introduction of such a tax in Singapore. Moreover, unlike in most countries, the government in Singapore has in place several controls to guard against excessive asset inflation on top of a sound macroeconomic management system. These considerations lead to the conclusion that CGT should not be introduced in Singapore.