(Disclaimer: All opinions expressed in this article belong to the writer)
Singapore’s Prime Minister Lee Hsien Loong used the opportunity given by the traditional New Year’s address to the nation to broach the topic of the incoming increase of Goods and Services Tax (GST) in the country.
Announced in 2018 and expected to be implemented some time before 2025, the hike would take the levy up from seven to nine per cent.
Readers of my articles here on Vulcan Post may be quite perplexed, given that I reported a few times earlier this year how well Singapore is doing economically during this pandemic (here, here and here) — and how stock market rallies around the world have taken its national reserves to record heights, netting the country several hundred billion dollars.
All in all, even with somewhat opaque assets under GIC management, the estimated figure for nation’s reserves is north of S$1.5 trillion.
By all measures, Singapore is actually wealthier than it has ever been — in no small part thanks to Covid-19 and panicky reactions around the world, which led to loose monetary and fiscal policies, triggering a flood of money in the stock markets, pushing company valuations to stratospheric heights.
In many ways, it’s the crowning achievement of prudent, careful governance that — by law — bars the government from borrowing money to finance budgetary spending, which has put Singapore in this enviable position, as it reaps rewards while everybody else is really suffering (and leaving a burden of humongous debt to future generations).
So, why is it then, that despite all of these successes, Singapore has to increase its GST?
Let’s take a look at all the facts and figures.
How does Singapore compare to other countries?
Firstly, I think it would be good to establish how Singapore compares to other developed countries in terms of sales taxation — just so we get a proper perspective.
The most complete database is offered by OECD, which comprises all of the noteworthy nations:
As you can see, indirect value-added / sales taxation is actually very high across the developed (and much of the developing) world.
So much so that at the current seven per cent levied in GST, Singapore would rank second from the bottom and at the incoming nine per cent, just third — outranked only by Switzerland and Canada (and some US states, as the USA does not have federal sales taxation and its rates depend on state laws) — both of which, however, have much higher income tax rates.
The average for OECD is more than two times higher than the proposed nine per cent, and up to three times higher in the highest taxed nation, Hungary, at 27 per cent in local VAT.
Mind you, all of these countries have considerably higher debt levels than Singapore does, so in this perspective, the correct question should be not ‘why is Singapore raising GST?’, but rather, ‘how is it able to keep it so low, when everybody is taxing consumption so much higher and still struggling with budgetary deficits?‘
Singapore’s government cannot — by law — borrow money to finance spending and yet it makes do with relatively low taxation. But if it’s so good already, can’t it do any better? Or at least keep things as they are?
Why is GST going up?
The government must have reliable and adequate revenues to carry out its social programmes, said Mr Lee, adding that additional revenues are needed to fund the expansion of the healthcare system and support schemes for older Singaporeans.Lee Hsien Loong, quoted by CNA in a 31 December 2021 article
The main reason for the tax hike is no secret — it’s ageing of the society, which is a phenomenon afflicting all developed countries, as increasingly wealthier generations have to deal with added burden of expectations placed on their children.
As a result, fewer kids cost a lot more to raise and educate, compared to past generations when many entered the workplace in their teens and never acquired higher degrees.
With age comes increased needs for social and healthcare services, which accumulate towards seventh, eighth and ninth decade of life. Since Singapore offers certain public benefits and subsidies to all residents (citizens and PRs), the greater the share of the elderly, the greater the compounding effect of these services.
These trends have already been observed in recent years — as you can see in the chart comparing healthcare expenses from the national budget to tax revenues from individuals (I’ve excluded the pandemic years since they would obviously distort the picture):
Over 10 years between 2010 and 2019, public expenditures on health have increased by a whopping 162.6 per cent on a per capita basis (per resident: citizen or PR).
In fact, at the beginning of the decade, public spending on health per resident was a little over S$1,000 and 10 years later, it hit nearly S$3,000 (figures aren’t perfectly accurate due to rounding).
It has not only outpaced inflation (at around 20 per cent for the period) and median salaries (around 50 per cent), but tax receipts as well (76 per cent for personal income taxes and 50 per cent for combined GST and PIT – also on a per resident basis).
So far, the authorities have been able to cover the shortfalls with increased inflows from NIRC — returns on invested reserves — but their share is not going to grow fast enough to keep covering all of the costs in the future.
At the same time, given that part of the problem is low fertility, it is only fair that the current generations start paying a bit more for the services they are going to need in the future.
Why can’t we just tax the rich more?
At this point, many people will ask, ‘Why use GST to increase the prices of goods and services for everybody? Why not just tax the wealthy more – have them pay!’.
For the answer, let’s turn back to the tax figures:
As you can see in the two charts above and below, the rich are not only paying vast majority of income taxes in the country, but the PIT revenue has increased by over 75 per cent in the past decade, in part due to the top tax bracket increase to 22 per cent in 2016.
In fact, the top 10 per cent highest earning taxpayers pay a whopping 80 per cent of all personal income taxes. Meanwhile, 90 per cent of the Singaporeans contribute the remaining paltry 20 per cent.
The rich are already carrying the burden — and have taken on even more in the past decade. Does it make sense to keep increasing it? At what point will they start leaving the country or underreporting their income to avoid paying some or all of the taxes?
Since Singapore relies on being a financial hub i.a. for the world’s elite, it has to be very careful about trying to drain their pockets through direct taxation, which could encourage them to seek greener pastures and take all of their money there.
As you can see above, during the same period inflows, GST has increased by a mere 27 per cent, barely outpacing inflation. Since the role of the government is to manage the country in a balanced way, it has to use the tools at its disposal in a proportional manner. This is why raising GST is a better choice.
At the same time, however, it’s good to remember that even in terms of consumption taxation, it’s the wealthy who pay most of it. The top 20 per cent of wealthiest Singaporeans, foreigners, tourists et al, pay over 60 per cent of all GST.
The remaining 80 per cent pay just 40 per cent, and the government is, as ever, going to issue vouchers easing the burdens on the poorest members of the society.
Can’t we take more money from reserves instead?
Some politicians in Singapore have proposed drawing more funds from reserves or “slowing down” their accumulation to stave off the GST increase. Here’s why it’s a bad idea.
As reserves are invested, over time, their value is multiplied. And as it is multiplied, so grows the NIRC which already flows back into the budget.
New GST rate is expected to bring about S$3 billion more into the budget every year. If these funds are taken from funds that would go into reserves, it creates a gaping hole in the future reserves.
At average, annualised rate of return of 5.5 per cent reported by GIC over a 20-year period, S$3 billion is worth close to S$9 billion at the 20-year mark and S$15 billion after 30 years. This is for every single year.
It adds up to over S$240 billion less in reserves after 30 years — and this is not accounting for inflation, greater spending, higher salaries etc. In other words, drawing money from the reserves today would cost future generations a few hundred billion dollars, and the GST would still likely have to be increased at some point in time.
Secondly, reserves only serve their function if they grow at a rate higher both than the GDP and annual budgetary expenditures, both of which they are designed to support.
Only then is Singapore getting relatively richer, is able to draw a growing portion of its revenues from NIRC instead of taxation, and can keep all of its taxes low and competitive globally.
If anything, the aspiration should be to keep growing the reserves at a greater pace, to avoid any future tax hikes or keep them to the very minimum. Spending the money today would provide a temporary relief, but it would come back to bite future generations.
Why taxing consumption instead of income is the way to go
This new Ferrari F8 Spider costs approximately S$1.1 million. GST on the car is over S$70,000 — this is what the wealthy will leave in a sales tax on just one purchase. At nine per cent, it’s going to increase to close to S$100,000.
Meanwhile, a median salary earner in Singapore is paying about S$3,000 to S$4,000 in GST during an entire year. In other words, a single luxury car purchase is worth more than 20 or even 30 years of GST contributions of an average Singaporean.
What I’m trying to emphasise here is that the rich are going to pay the vast majority of the tax hike, but in a way that is not going to deter them from residing in the city or incentivise them to hide their income.
You can hide your income, but you can’t escape consumption where you live.
If the government tried to increase personal income tax rates or, heaven forbid, introduce a wealth tax, the first thing that the rich residents would do is to direct their attorneys to minimise what they owe. Instead of the government, most of the money would go to accountants and lawyers, hiding it around the world, optimising their client’s tax bill.
But if the wealthy want to buy a house, a car, go to a nice restaurant, spend money on a concert, clothes, a new watch, phone, computer and so on — they cannot dodge GST. Nobody can.
Since items bought tax-free abroad are taxable upon entry to the country, it’s hard to escape GST even at the border. You can probably get away with buying a few personal items, whose age and cost may be impossible to estimate, but other than that, it’s really difficult to save a meaningful amount of money on consumption.
If you want that Ferrari, you have to cough up the cash – all of it.
At the same time, however, the government can selectively support the poorest Singaporeans, easing the burden that even a small tax hike may have on them.
Indirect taxation provides the most leak-proof system, preventing questionable tax optimisation practices, while giving government enough control to fine tune the impact it has on all groups in the society, without jeopardising Singapore’s tax and business friendly reputation.
Featured Image Credit: Economic Times