SG Budget Insight (2): How the Current Tax System Hurts Middle-Class Singaporeans

I have received a lot of positive feedback from Singaporeans on my sharing of the budget insights. Hence although I was apprehensive initially about sharing financial and accounting figures, I am more confident now to share more. I will do my best to keep it simple to understand.

Building upon my previous post, you will remember that the total fiscal resources available to the Government in FY2021 is $๐Ÿญ๐Ÿฎ๐Ÿด ๐—ฏ๐—ถ๐—น๐—น๐—ถ๐—ผ๐—ป of which the total operating revenue is $๐Ÿณ๐Ÿณ ๐—ฏ๐—ถ๐—น๐—น๐—ถ๐—ผ๐—ป. I will further break down this $77 billion to give you a better idea of the kind of taxes and charges we pay.

The breakdown is shown in the pie chart below together with the following observations:

1. The direct and indirect taxes each contributes roughly the same share to the operating revenue – $๐Ÿฏ๐Ÿฎ ๐—ฏ๐—ถ๐—น๐—น๐—ถ๐—ผ๐—ป for direct taxes and $๐Ÿฏ๐Ÿฌ ๐—ฏ๐—ถ๐—น๐—น๐—ถ๐—ผ๐—ป for indirect taxes.

2. ๐——๐—ถ๐—ฟ๐—ฒ๐—ฐ๐˜ ๐˜๐—ฎ๐˜…๐—ฒ๐˜€ are levied on the income of an economic entity, be it an individual or company. It is usually progressive, meaning that the higher the income, the higher the tax rate. Currently, the lowest personal tax rate is 6% and the highest 22% (used to be more than 30% in the early 1990s) and the corporate income tax rate is a flat 17% (same). According to information disclosed in parliamentary debates, the top 20% of the income earners paid more than 80% of the ๐—ฝ๐—ฒ๐—ฟ๐˜€๐—ผ๐—ป๐—ฎ๐—น ๐—ถ๐—ป๐—ฐ๐—ผ๐—บ๐—ฒ ๐˜๐—ฎ๐˜… (๐—ฃ๐—œ๐—ง) revenue. As a result, the Government concluded that the PIT was progressive enough so further tax increases should come from indirect taxes. However, is this conclusion correct?

3. Given that the highest PIT rate is only 22%, our PIT system cannot be deemed to be progressive enough. The fact that the rich contributed more than 80% of the PIT even with the highest rate at 22% only goes to show how skewed our income disparity is between the top 20% and the rest. Hence, if there is a need to rectify income disparity, it would be better fiscal policy to raise the PIT rate of the top 10%. (However, we are not recommending any tax increase including PIT because we are of the opinion that there are enough fiscal resources in the foreseeable future).

4. Meanwhile, ๐—ถ๐—ป๐—ฑ๐—ถ๐—ฟ๐—ฒ๐—ฐ๐˜ ๐˜๐—ฎ๐˜…๐—ฒ๐˜€ are not levied on the income but on the spending of the individual or company. Since indirect taxes are flat rates, the top 20% income earners pay less as a proportion of their income although they still pay more in absolute terms because they spend more. The reverse is true for the middle income earners and below ie., they pay more as a percentage of their income hence the GST is ๐—ฟ๐—ฒ๐—ด๐—ฟ๐—ฒ๐˜€๐˜€๐—ถ๐˜ƒ๐—ฒ.

5. And again based on the information disclosed in parliament, the top 20% paid 60% of the GST together with the foreign visitors. And since DPM Heng Swee Keat has stressed many times the importance of the foreign visitors in footing the GST bill, let us assume that the top 20% income earners pays about 40% of the GST and the foreign visitors 20%.

6. Accordingly, the top 20% income earners pay 80% of the PIT revenue but only 40% of the GST revenue. So, if the Government decides to raise an additional $1 billion in revenue, the increased tax burden for the top 20% will be $800 million if it is a PIT increase but only $400 million if it is a GST increase. In other words, the middle-class Singaporeans have to pay $400 million more for the same amount of new tax revenue if it is raised through the GST hike rather than a PIT hike.

7. The above is the main reason why we are ๐—ฎ๐—ด๐—ฎ๐—ถ๐—ป๐˜€๐˜ a GST increase. If the Government really needs to increase its revenue, it should first consider direct taxes or business taxes like levies on Employment Pass holders and not indirect taxes like GST because the tax burden on the middle-class will be significantly higher.

8. Middle-class Singaporeans are already very stressed financially because of the total amount of indirect taxes they have to pay. While GST is the main indirect tax payable, there are also the motor tax, property tax and many others payable, as shown in the pie chart below.

9. In addition, there are other forms of indirect taxes that are not reflected in the operating revenues. These include the huge profits earned by PUB and SP in providing us with water and electricity, and the MediShield and CareShield premiums we pay.

10. The high property prices, high education costs (tuition and pre-school fees) and most worrying of all, the escalating healthcare costs can also be thought of as โ€œ๐˜ช๐˜ฏ๐˜ฅ๐˜ช๐˜ณ๐˜ฆ๐˜ค๐˜ต ๐˜ต๐˜ข๐˜น๐˜ฆ๐˜ดโ€ because they are at least partly the results of the government policies in the respective areas.

11. Hence, the PSP is of the view that Government ๐˜€๐—ต๐—ผ๐˜‚๐—น๐—ฑ ๐—ป๐—ผ๐˜ pressure the middle-class Singaporeans further with more taxes. Instead, it should consider how to alleviate the financial pressures on the Singaporeans so that they have more leeway to plan for their futures.

12. By making Singaporeans more resilient, financially and mentally, โ€œa thousand flowers will bloom simultaneouslyโ€ to support our transformation into the new Research, Innovation and Enterprise or RIE-based economy.

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