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(Note: All opinions expressed in this article are those of the author)
Singapore Prime Minister Lee Hsien Loong took advantage of the opportunity to give the nation a regular New Year’s speech to address the issue of the rise in the Goods and Services Tax (GST) in the country.
Announced in 2018 and expected to be implemented before 2025, the increase would raise the rate from seven percent to nine percent.
Readers of my Vulcan Post article may be quite confused, as I reported several times earlier this year on this economic pandemic in Singapore (here, here and here) – and how the stock market rallies around the world have brought their national reserves to record hundreds of billions of dollars.
Overall, although they are relatively opaque assets under GIC management, the estimated national reserve figure is $ 1.5 trillion north of S $.
By and large, Singapore is richer than ever before – thanks in large part to Covid-19 and panic reactions around the world, which led to the release of monetary and fiscal policies, leading to a flood of money in the stock market. company ratings up to stratospheric heights.
In many ways, it is the highest achievement of a prudent and caring government — by law — that prohibits the government from borrowing money to finance budget spending, which puts Singapore in an enviable position, bearing fruit while everyone else is really suffering (and a huge debt to future generations). leaving).
So why is it that despite all these successes, Singapore needs to increase its GST?
Let’s look at all the data and data.
How does Singapore compare to other countries?
First of all, I think it would be good to establish how Singapore compares to other developed countries in terms of sales tax in order to get a proper view.
The most comprehensive database is provided by the OECD, which includes all the relevant nations:
As you can see, indirect value added / sales taxes are very high in developing countries (and in developing countries).
So much so that where the GST is charged at seven percent today, Singapore would be in second place from the bottom and ninth percent of the entry, third, more than Switzerland and Canada (and some U.S. states, which the U.S. does not). Federal sales tax and its rates are subject to state law) – both of which, however, are much higher income tax rates.
The OECD average is twice the proposed average of nine percent, and three times higher in the country with the highest tax rate, Hungary, at 27 percent of local VAT.
Keep in mind that all of these countries have a considerably higher level of debt than Singapore, so in this view, the right question should not be “why does Singapore raise GST?”, But “how is it to keep it so low when everyone is consuming much higher and still struggling with budget deficits?‘
The Singapore government cannot, by law, borrow money to finance the expenses, and yet it is fixed with a relatively low tax. But if it’s already so good, can’t it be better? Or at least keep things as they are?
Why does GST rise?
The government needs to have reliable and adequate revenue to run its social programs, Mr Lee said, adding that additional revenue is needed to fund the expansion and support schemes for Singapore’s elderly health system.
Lee Hsien Loong, cited by CNA Article 31 December 2021
The main reason for the tax increase is no secret: it is an aging society, and this is a phenomenon that afflicts all developed countries, as increasingly wealthy generations face the added burden of expectations placed on their children.
As a result, it costs a lot more to raise and educate children than many previous generations, many of whom entered the workplace as teenagers and never got a higher education degree.
With age, the need for social and health services increases, accumulating in the seventh, eighth, and ninth decades of life. As Singapore offers a number of public benefits and subsidies to all residents (citizens and PR), the higher the share of the elderly, the greater the combination effect of these services.
These trends have already been seen in recent years – as you can see in the graph comparing health care expenditures in the national budget (I have ruled out pandemic years, of course, because they would distort the picture):
From 2010 to 2019, in 10 years, public health spending has increased by 162.6 percent per capita (per resident: citizen or PR).
In fact, at the beginning of the decade, public spending on health per resident was just over S $ 1,000 and 10 years later, it reached almost S $ 3,000 (figures are not entirely accurate as a result of rounding).
In addition to exceeding inflation (about 20 percent) and average wages (about 50 percent), it has also surpassed tax receipts (76% of personal income tax and 50% of combined GST and PIT). per resident).
So far, the authorities have been able to cover the shortcomings with the NIRC’s large revenues – the benefits of the reserves invested – but their share will not grow fast enough to continue to cover all costs in the future.
At the same time, given that part of the problem is low fertility, it is fair to start paying a little more for the services that current generations will need in the future.
Why can’t we tax the rich more?
At this point, many people are asking: ‘Why use GST to raise the price of goods and services for everyone? Why not pay more money, let them pay! ‘
To get the answer, let’s go back to the tax figures:
As you can see in the graphs above and below, not only do the rich pay the majority of the country’s income tax, but over the last decade PIT’s revenue has increased by more than 75 percent, partly as a result of the top tax. the gap rose to 22% in 2016.
In fact, the top 10 percent of taxpayers pay a whopping 80 percent of all personal income tax. Meanwhile, 90 per cent of Singaporeans support the remaining 20 per cent.
The rich are already carrying the burden, and have taken even more in the last decade. Does it make sense to keep growing? At what point will they start leaving the country or avoid paying some or all of their tax-deductible income?
Since Singapore is based on being a financial hub for the world’s elites, care must be taken to drain their pockets through direct taxes, which can encourage them to look for greener pastures and take all the money there.
As you can see above, at the same time, the inflows of GST have risen by only 27 percent, almost exceeding inflation. Since the role of the government is to manage the country in a balanced way, it must use the tools at its disposal in a proportionate manner. That’s why raising GST is a better option.
At the same time, however, it is worth remembering that those who pay the most are also the richest in terms of consumption tax. 20 per cent of Singapore’s wealthiest, foreigners, tourists, etc., pay more than 60 per cent of all GST.
The remaining 80 per cent pays only 40 per cent, and the government, as always, will issue bonds to alleviate the burdens of the poorest members of society.
Can’t we take more money from the reserves instead?
Some Singapore politicians have proposed withdrawing more funds from reserves or “slowing down” the accumulation to prevent a rise in GST. Here’s why it’s a bad idea.
As reserves are invested, their value multiplies over time. And as it grows, so does the NIRC, which is already returning to the budget.
The new GST rate is expected to bring in $ 3 billion more annually in the budget. If these funds are taken from the funds that would go to the reserves, a vacuum will be created in the future reserves.
The average return rate of 5.5 percent reported by the GIC over a 20-year period is close to S $ 3 trillion at the 20-year limit and S $ 15 billion over 30 years. This is every year.
In 30 years, it will add more than S $ 240 billion in reserves, which does not take into account inflation, higher spending, higher wages, etc. In other words, taking money out of today’s reserves would cost hundreds of billions of dollars for future generations. and GST should still increase at some point.
Second, reserves fulfill their function if they grow at a steady pace above rather than both GDP and annual budget expenditures, both are designed to support.
Only then will Singapore get rich, be able to get a growing share of its revenue from the NIRC instead of the tax, and keep all of its taxes low and competitive around the world.
If so, there should be a desire to keep the reserves growing at a faster pace, to avoid future tax increases or to keep them to a minimum. Spending money today would provide temporary relief, but it would return to bite future generations.
The way is to tax consumption instead of income
This new Ferrari F8 Spider costs around S $ 1.1 million. The car’s GST is more than $ 70,000 – which is what the wealthy will leave in the single sales tax on a single purchase. At nine percent, it will approach S $ 100,000.
Meanwhile, an average salary in Singapore is paying around $ 3,000 to $ 4,000 in GST all year round. In other words, buying a luxury car is worth more than 20 or 30 years of contributions from the average GST in Singapore.
What I’m trying to emphasize here is that the rich will pay the majority of the tax increase, but in a way that won’t prevent them from living in the city or pushing them to hide their income.
You can hide your income, but you can’t escape consumption where you live.
If the government were to try to raise personal income tax rates or, to ban the heavens, impose a wealth tax, the first thing wealthy residents would do would be to focus on reducing what they owe to their lawyers. Instead of the government, most of the money would go to accountants and lawyers, hiding around the world, optimizing the client’s tax bills.
But if the rich want to buy a house, a car, go to a nice restaurant, a concert, clothes, a new watch, a phone, a computer, etc., they can’t avoid GST. No one can.
As tax-free items purchased abroad are taxable upon entry into the country, it is difficult to escape the GST even at the border. You will probably get to buy some personal items, which may be impossible to calculate their age and cost, but other than that, it is very difficult to save a significant amount of money on consumption.
If you want that Ferrari, you have to cough up money, everything.
At the same time, however, the government can selectively support the poorest people in Singapore, easing the burden of even a small tax increase.
Indirect taxation provides an unfiltered system, avoids questionable tax optimization practices, and gives the government enough control to consolidate its impact on all groups in society without compromising Singapore’s tax and corporate reputation.
Featured Image Credit: Economic Times
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