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.