In whose best interests?

There's a blog post here about how raising consumption taxes is the best way to go about financing help schemes for the poor. It's written by an economist, and it raises the point that consumption taxes do not distort price signals and hence do not add "excess burden" onto the economy. The contention is that everyone is taxed equally, but only the poor receive the help packages, so overall they are better off.

I think these contentions miss the point. As I stated in my letter, these help schemes won't be indefinite, and I doubt they will be around for as long as the tax increase will be. But going further than that, we have to recognise what is best for the economy may not be what is best for the lower-income. The widening income gap already suggests this as the poorer section of society is being left behind as the rest of the economy develops. So, if we want to help the poor, we should be looking at what works best for them, not what works best for the economy. We have to accept that what is best for the lower-income may not be good for the economy.

A widening income gap is undesirable for reasons other than economic ones. We have to be aware that this issue encompasses more than just economics, and we have to keep in mind the rationale for the increase - to help the lower-income. All the arguments for raising the GST I've seen so far are about how its best for the economy, how it lets us remain competitive and stuff like that. None of them address the reason why this is an issue in the first place - what is best for the poor?

More questions, but I don't have any answers

My letter has been published, and it's more or less there in its entirety. They only thing they removed was the comparison I did, and I think the essence of what I wanted to say was very much preserved. Oh, and they used "Government" when I used "government".

Today, there is another article in the Straits Times where our defence minister Teo Chee Hean re-iterated the point that the government's (no capital "g") intention is not to hurt the lower income. I don't doubt that, but I do believe the consequences of the GST hike will be exactly that, for reasons I have already outlined in the letter.

The argument that a growing economy will help them to shoulder this burden is, in my opinion, iffy at best. For one, there is the widening income gap, which already shows that the poor are getting left behind as the rest of our economy grows. This better ability to pay taxes doesn't apply to them. If the government can come up with the figures to show that GST is not regressive, or if they have concrete figures to show how their help packages will help this group of people, not only in the short term, but also in the long term, then I stand to be corrected. But as it stands, I don't see how we are going to be able to help the lower-income when they are going to be the ones paying for it.

So, if not the lower-income, who is going to pay for it? Something's got to give, and if we want to help this group of society, we are going to have to finance it somehow. As I mentioned, exempting necessities from GST might go some way into mitigating the burden on the poor. It will also however, affect tax revenues. So that means we might have to end up paying even higher GST. Without figures on tax revenues and government spending, I do not know if this is necessary. But I do feel that if our government wants to increase GST, it should at least have some figures back up its claim.

Also, I think that any increase in GST should be carefully considered. Have studies or surveys been carried out to map out the spending of the various income groups in our society? If so, where are they? And if not, then they should be undertaken. If spending patterns can be determined, then we will be able to gauge how regressive the GST really is, and how effective exempting necessities will be it mitigating that effect. In addition, it would also help us determine how our various taxes should be structured so as to help the lower-income.

As for cuts in income and corporate taxes, how much revenue does the government generate from these 2 sources, especially in comparison with revenue from GST? Teo Chee Hean mentioned that reducing income and personal taxes would encourage individuals to innovate and create business. I'm assuming that the logical extension is that this innovation and business will in turn be beneficial to Singaporeans.

The question is, how much of the benefits of greater innovation and businesses really go back to the lower-income? Furthermore, how much of an impact does lowering taxes really have on innovation and business anyway? When people want to start up businesses here, is it really the corporate tax structure that they view as a hindrance? Or are there other factors like red tape which might play a bigger role in discouraging people from doing so? In effect, what I'm asking is how much of a disincentive is the rate of corporate and income tax in reality?

These are just some of the questions I feel should be asked when we are considering the best way to finance help for the poor. There probably are other things to consider as well, but this is just off the top of my head. For now, I'm just waiting to see if there will be an official response.

The GST increase

It has been a while since I last posted anything, and part of the reason is that I've been swamped with midterms. There has been a temporary let up, and I've done better than I expected on some of my midterms. Much as I bitch and whine about being so busy, maybe it does bring out the best in me.

Anyway, I've read about the GST hike, and I do have some things to say about it. Quite a bit actually. So much so that I decided to write a letter into the ST Forum. I have no idea whether it will be published, and even if it does, it will probably be edited, so here it is as I sent it.

I refer to the article "GST will go up to 7 percent" by Lydia Lim (ST, Nov 14). According to the report, PM Lee justified the Goods and Services Tax (GST) increase by saying that the tax hike would be used to finance social measures to help lower-income Singaporeans. While it is heartening to know that the government has made plans to help this group of people, financing help schemes by increasing GST seems counterproductive.

The GST is a consumption tax. That is, people are only taxed on the portion of their income that they spend. It is a regressive tax, placing a greater burden on the poor, given that the lower-income households have to spend a larger proportion of their income on necessities, increasing GST would only serve to increase the tax burden on these households.

If person A earns $5000 a month, and person B earns $100 a month, and bot spend $800 on necessities, both individuals would have to pay $56 in taxes. As a percentage of income, person A would be spending 1.12% of his monthly income on taxes, while person B would have to spend 5.6% of his income. Person B is paying 5 times more of his income in taxes in percentage terms than person A.

It may be argued that the GST is not really regressive as the rich are able to spend more, and thus will be taxed more. However, even if we assume person A spends $1600, twice that of person B, the amount paid in taxes ($112) would still only be 2.24% of his monthly income, less than half that of the percentage of income person B spends on taxes, even though person B's consumption in absolute terms is lower. Furthermore, this neglects the fact that the poor usually spend a larger proportion of their income than the rich.

Increasing GST to help finance measures to help the lower-income households would only serve to place a greater tax burden on these families. The article also mentioned that PM Lee had pledged that the government would "put in place a comprehensive package to fully offset the impact of the GST hike". However, one would imagine that these measures would only help to alleviate the burden for a finite period of time, after which lower-income families would have to find ways to cope with higher taxes.

A look at the Ministry of Finance website also shows that from 2005 - 2007, income taxes for the highest tax bracket would have gone down by 2%, from 22% in 2005 to 20% in 2007. For the lowest tax bracket, the decrease is just 0.5%, from 4% to 3.5%. If the government is seeking to reduce the burden on lower- and middle-income families, why is the reduction in tax rates in the lower brackets lower than that of the higher tax brackets? This is especially given that PM Lee said that he wanted to "tilt the balance in favour of the lower income Singaporeans".

In addition, the government's simultaneous consideration of lowering corporate taxes to make Singapore more attractive to foreign investment seems to do this at the expense of Singaporeans. While it might not be the case, it seems that increasing the consumption tax has been effected so that corporate taxes can be reduced in future. This raises the question of whether the government is shifting the burden of tax from companies onto individual Singaporeans, and specifically, lower-income Singaporeans.

If the balance is to be tilted in favour of this group of Singaporeans, it would seem more prudent to mitigate the regressive nature of GST by exempting basic necessities from it so that the lower-income households would not have to bear a greater burden of taxation when they are already struggling to make ends meet.

While I applaud the fact that the government is looking into ways to help the lower-income group in Singapore, the means by which these measures will be finance appear to put a greater burden on the very group of people they are supposed to help.

The link to the MOF webpage on personal income taxes is here.

There is also a further analysis of income tax versus consumption tax here. The analysis in my letter only highlights the burden of GST on the lower-income, but the link that I've provided gives further proof that increasing GST is going to hurt the poor because it compares the total taxable income of lower-income households versus higher-income households.

Lastly, a disclaimer. I am no Economics major. I am merely using JC-level econs analysis. I know there are other factors to consider, stuff like price elasticity of demand, that could have effects on how regressive GST really is. Even so, I think my basic point is valid.