Consider indexation of income tax to inflation

For decades, the income tax rates in Singapore have been based on nominal income.

When real income levels increase due to inflation, a bracket creep may occur.

A bracket creep is a situation where a household is moved into a higher tax bracket due to increases in nominal but not real income.

This results in higher taxes being paid although the level of purchasing power remains relatively the same.

This decreases the material standard of living of taxpayers.

Perhaps, to increase the material standard of living of taxpayers, Singapore can adopt indexation of income taxes to inflation.

Indexing income taxes matches one's tax rates to one's real income level.

Taxes that are not indexed can lead to distortions of the tax incentives for people to work, save and invest.

Inflation is not necessarily harmful to the economy, as it stimulates investments and consumption in our economy.

However, the possible lower savings and investments caused by the lack of indexing means lower economic growth, which is a true cost of inflation.

I understand that our country is striving to achieve a high and sustained economic growth.

Therefore, considering the use of inflation indexation can potentially protect our economy from the above-mentioned distortions.

Clarice Chow Xuan Ting (Ms)

A version of this article appeared in the print edition of The Straits Times on March 19, 2018, with the headline 'Consider indexation of income tax to inflation'. Subscribe