Who should pay for the poor Singaporeans?

Random Thoughts on the GST hike

Now the news are out. Our Prime Minister has announced yesterday that the Goods and Services Tax will be raised from 5% to 7% annually starting from the next year (see Channel NewsAsia and Straits Times). The reasons offered, in his own words are,

"It will give us precious extra resources to implement social programmes like Workfare later on. Our aim is to help the lower income groups and the elderly, not to increase their burdens. When we implement the GST increase, it's not just the GST increase, it's the package which will fully offset the impact of the GST increase and begin to strengthen the social safety nets and tilt the balance in favour of the low income groups - we will not just raise the GST but we will have a comprehensive offset package."

On first glance from the layman, how does the increase of GST to 7% can help to fund welfare? After all, the daily costs for the things (from toothbrushes to toilet paper) we purchase will increase by another 2%. In simplistic terms, GST is an indirect way of taxing people based on the amount of consumption. The argument is that if you are stratified by your monthly income, you will purchase things within your spending power. So, people with higher income will tend to purchase more and in the end pay more GST in the process.

So, the case for the GST goes along this way. If there is nothing more surprising, about half of the population are paying income taxes (the reference provide information on how the individual in Singapore is taxed according to his income level). For example, my friend, Kway Teow Man can afford his mercedes because he don't need to pay income taxes. So, the problem is, how do the government find ways and means to tax him? The answer is through the things which he consumed, i.e. daily necessities and luxury goods. The obvious way to get his money is to impose an indirect tax to capture his income. The answer is our GST tax. Some people wonder why we don't increase our income taxes or corporate taxes. If we increase the income taxes, it will drive away foreign investments and also foreign talent. Singapore is well-known for low income taxes and low corporate taxes. 

The way how the Government has decided to help the poor comes to one simple solution to a difficult problem: who should pay for the poor and helpless in our society who have problems in finding a safety net? In order to do that, they have once again compensated with political capital. In the end, they decided that the people who make the payment are both locals and foreigners who work here in Singapore, and the best method to get their money is thru indirect taxation. So, it creates a choice in the consumers. You can choose to spend your money wisely and save on spending on other things. In the end, it also puts you in a "emotionally hijacked" situation that you are not helping the poor. It is quite a brilliant strategy to increase GST and puts the people on the dilemma of spending in a moral manner. I can't think of anyone who have come up with a similar idea to increase taxes that way.

Of course, that will ensure that the reserves are not touched, and at the same time, make use of the coming economy boom to compensate the poor. Of course, it is a calculated move in a way, because it is implemented at the early stage of the election cycle. Cynically, people forget about the hikes after a while. It's the natural response from voters when they become adjusted to a certain situation for some time. If you think about it, it's just taking the money back from the people to pay back the poor people.

Here is a warning sign to the redefinition of the social compact. If things will go wrong down the line, for example, foreign companies still move out of Singapore and the employment situation suffers a downturn, the middle class will be squeezed and then, we are going to take a wider social rift. Of course, the other issue is about spending. It will tighten pockets and create a more adverse risk culture. So, in the end, it will create a higher threshold for people to break out on their own to start their businesses.

Of course, our political leaders will have many brilliant advisors doing different financial models to work out the best possible solution. The real interesting question is how they can come up with the offset package to deal with the rising costs of living. What will the safety net encompass? Is it just another one off progress package again or is it some package to ensure that workfare is prescribed to these people instead of welfare?

In view of that, the Singaporeans need to think for themselves what the new social compact really mean to them. Similarly, our leaders don't find themselves with a disgruntled public in the future.

Comments

[ck]

Sales tax is regressive. Increasing it creates a heavier tax burden to low income earners.

Since the offset packages are not announced, the rumoured income tax breaks and restoration of CPF contribution rates do not benefit poor and non-working Singaporeans.

Without a sales tax, Kway-Teow Man may not pay tax, so do the poor and unemployed. While Kway-Teow Man may get away gleefully, he has to pay other taxes e.g. property taxes, vehicle tax.

Furthermore, MNCs invest in Singapore because they believe they are able to get the best returns. In fact, corporate tax collection increased due to exceptional conditions in 2005-2006. Similarly the island of Timbuku may have the lowest taxes but nil foreign investments. London (30%) has higher taxes, did it drive away FDI or foreign talent?

[tc]

KTM says reactions are a bit premature. I think reactions are useless - just be stoic - see Xenoboy. Don't react. No point. React now, react by the time the debate has started - they are all useless, isn't it?

[BL]

Confused,

Please look at my comments in Aaron's post and I attached the link here:

http://aaron-ng.info/blog/robbing-peter-to-pay-peter.html?

[SM]

It's "--more-- averse to risk". Typo error.

[Confused]

Reading both this article
http://aaron-ng.info/blog/robbing-peter-to-pay-peter.html
and this article
http://bleongcw.typepad.com/simple_is_the_reason_of_m/2006/11/gst.html

One/both/none of you must be wrong, or I am confused :-)

[Kway Teow Man]

BL,

Your example is terrible. The KTM doesn't even own a bicycle. What Mercedes are you talking about? :-)

In any case, the KTM agrees with you that a lot of the reaction to the GST announcement is somewhat premature. :-P