'No one model that we need to follow'

Deputy Prime Minister Tharman Shanmugaratnam.
Deputy Prime Minister Tharman Shanmugaratnam.ST PHOTO: ONG WEE JIN

The system of heavy taxation to provide a social safety net in Scandinavian countries is not "the only model", Deputy Prime Minister Tharman Shanmugaratnam said last night.

Singapore has managed to lower its Gini coefficient with redistribution without increasing the tax burden by as much, he said at a lecture organised by the Economic Society of Singapore.

More importantly, the middle-income group is heavily taxed there, while in Singapore, it is the rich who bear the load.

The Gini coefficient is the standard indicator to measure inequality: 0 means an equal distribution of income while 1 is the most unequal.

"The reduction in inequality that these countries see, goes hand in hand with a very heavy burden of taxation on their populations," said Mr Tharman, who is also Finance Minister .

"It's not just about taxing the rich. It's the broad middle class in these societies that pay very high consumption and income taxes, to generate tax revenues which the state then uses for redistribution."

The income tax rate on the average worker in Denmark is about 36 per cent, and in Finland, 23 per cent. In comparison, the income tax rate on the average worker here is 2 per cent.

Singapore's focus is on using its tax revenues in a fair and progressive fashion, while also keeping the burden of taxes on the middle-income group low, Mr Tharman said.

This must be combined with maintaining a culture of responsibility among individuals, in the government, and within communities, he added.

Extensive redistribution in some advanced societies has led to a weakening of civic culture - community organisations are less robust than they were a few decades ago, and voluntary activity is also down.

"That's not a better society... We have to keep a culture of everyone being responsible, and a civic culture where we all feel involved."

Mr Tharman noted that all countries strive to temper income inequality while also raising incomes for all and maintaining social mobility. However, few of them have succeeded on all three fronts.

For a period of two decades after World War II, the United States and many Western European countries were able to achieve rapid income growth, a sense of social mobility, and significant reductions in inequality.

But this lasted for only about two decades, and "things began to stumble by the late 1970s".

"Incomes began to stagnate, social mobility faltered and inequality has risen significantly.

"I don't say this because we think we are superior to them, but because what happened to them can happen to us... It's a challenge for every country and we have to keep working hard at it."

Singapore must remain confident in its own system, even as it continues to improve on it and experiment where possible.

"We should not think that there's only one model that we need to follow," Mr Tharman said.

A version of this article appeared in the print edition of The Straits Times on August 15, 2015, with the headline ''No one model that we need to follow''. Print Edition | Subscribe