Raising taxes "is not a question of whether but when", said Prime Minister Lee Hsien Loong at the PAP Convention last November. This not only raises the issue of which taxes need to be raised - but also of which new ones can be introduced, and which, if any, can be cut. Some issues on the expenditure side of the ledger are worth examining as well.
The need to raise taxes stems from the fact that the government has some huge bills to pay.
Mr Lee mentioned some of the big ticket items that remain to be funded, including the high-speed rail to Kuala Lumpur, the rail terminus in Jurong, surrounded by a new lake district, and a doubling of air and sea-port capacity.
Then there are expensive ongoing projects, including the $4.5 billion industry transformation programme, the building of the Jurong Innovation District, the upgrading of the MRT, the expansion of the medical infrastructure through the building of 17 new healthcare facilities and enhanced spending on security, which Finance Minister Heng Swee Keat has indicated will be a "major spending item" in this year's Budget. Spending on healthcare, education and training also needs to go up.
When it comes to choosing which taxes to raise, let's focus on the big three which collectively contribute 75 per cent of total tax revenue. They are corporate tax (which accounts for about 29 per cent), GST (24 per cent) and individual income tax (22 per cent).
Raising corporate tax is a tempting option. At 17 per cent, Singapore's corporate tax is the lowest in Asean and among the lowest in the world. Economists estimate that even a 1 per cent rise would yield an extra $800 million.
But especially after the US tax reform passed in December, which will slash US corporate tax rates from 35 per cent to 21 per cent this year and which other countries might emulate, there is increased pressure on economies like Singapore, which need foreign investment, to maintain a competitive corporate tax rate. Raising it at this stage would amount to swimming against the tide. It would also send the wrong signal.
Hiking personal income tax rates - especially for the top bracket - is barely a better option. It would make the tax system more progressive, but would not yield much additional revenue. The 2015 Budget raised income tax rates for the top 5 per cent of taxpayers. But income tax collections rose by just $260 million in 2017 or less than 0.07 per cent of GDP. So raising personal income tax rates further seems hardly worth the trouble - except as a symbolic gesture aimed at inequality.
While cutting personal income tax would cause revenue losses, there is a case for enhancing earned income tax reliefs, which for taxpayers below 55 have remained stuck at $1,000 for several years. Significantly enhancing this relief - which is only available to those who work - will not only boost consumption but also incentivise more people to join the workforce and thus help raise the workforce participation rate, particularly for women. Higher reliefs for older workers may also help them stay in the workforce longer.
RAISING THE GST
As a revenue-raising move, hiking the GST is the best bet. Even a one percentage point hike would raise tax revenue of about $1.6 billion, equivalent to about 0.4 per cent of GDP.
Several economists have recommended raising GST by 2 percentage points over two years. This sounds reasonable. Our current GST rate at 7 per cent is among the lowest in the world and has not been raised since 2007. Even at 9 per cent, it would be much lower than most other countries. The average rate in developed countries is close to 20 per cent. The government could raise even more revenue if it lowers the threshold for GST registration from the current $1 million in taxable turnover to $500,000. In most countries the threshold is even lower than that.
The GST is, however, a regressive tax which penalises lower-income groups disproportionately. But the regressive effects can be mitigated by providing GST offsets to low-income groups as in the past, and zero rating essential items like basic foods and medicines.
Among other potential sources of revenue, much has been said about possible wealth taxes - that is, taxes on property and capital gains as well as estate duties.
As revenue earners they will not be significant compared to GST. For example, property tax (which was already raised with effect from 2015) accounts for only 9 per cent of total tax revenue. A capital gains tax would be a big negative for the financial services industry as well as the property market, which is already subject to cooling measures, including additional buyer's stamp duty (which is not included in property tax), and is faced with interest rate hikes.
Nor have estate duties been high revenue earners. During the period 2000 to 2008 (when estate duties were scrapped), they yielded an average of $136.8 million a year. Re-introducing estate duty would simply lead to more creative tax planning on the part of the wealthy, some of whom might also choose to move their family offices and tax residence out of Singapore. In short, raising wealth taxes aimed at soaking the rich, while high on symbolism, is likely to bring little joy in terms of revenue.
SUGAR AND E-COMMERCE
Finally, on new taxes, the case for a sugar tax is as compelling as the case for a tobacco tax. Singapore has the second highest incidence of diabetes in the developed world, according to the International Diabetes Federation, with one in 9 residents already afflicted.
The government has declared war on diabetes but has taken no fiscal measures to combat the disease. This needs to change. With several countries having introduced sugar taxes in recent years, there is now evidence that it has been effective in reducing consumption of sugary drinks - for example, in France, Mexico and several cities in California.
A sugar tax would also help reduce the costs of treating diabetes. If it is to move the needle on consumption, it should be hefty - just as it is on cigarettes. A good role model is the UAE, which has a 50 per cent tax on sugared soft drinks.
A tax on e-commerce transactions has also been much discussed. There is a clear case for this - brick-and-mortar merchants have to pay GST, but overseas online vendors do not. However, there are major practical problems with implementing such a tax, including the fact that many online merchants do not have a local presence, difficulties with verifying taxable transactions and collecting the tax. These issues would need to be resolved before an e-commerce tax can be imposed.
THE EXPENDITURE SIDE
On the expenditure side, besides the big-ticket infrastructure related items, there are a few ideas worth flagging. One relates to defence spending, which at more than $14 billion last year is the highest expenditure item in the Budget - and also the least transparent in terms of how the money is spent.
While it goes without saying that defence is critical to national security, the security challenges facing Singapore have changed in recent years. The key threats are terrorism, cyber attacks, piracy at sea and violent extremism - all of which require expenditures of a different type than conventional defence spending on big weapon systems.
Moreover, while Mindef would continue to play a key role to protect against such threats, the spending needs to be spread across several ministries. In light of this change of emphasis, a case can be made that defence spending needs to be capped at a lower level or even reduced in real terms. This would free up resources for social expenditure, where the needs are pressing.
Within social expenditure, health and education get the biggest share. While health spending will automatically go up with the expansion of insurance coverage, there is need for more tightly enforced limits on medical fees and charges, which are often arbitrary and excessive.
If price controls are unworkable, the government must find other ways - for example, higher deductibles on insurance - to prevent overconsumption of health services. To reduce the burden on the state, some health spending can be shifted to firms by enhancing tax deductions for medical expenses that they incur. Individuals can also be encouraged to take up private health insurance by making premium payments tax deductible.
SPUR TO INNOVATION
In education, there needs to be a shift of emphasis from funding formal, institution-based learning to more vocational education, including through short courses that will enable workers to more quickly retrain for new jobs. Higher tax deductions for training expenditure by companies will help. But this would only apply to company-sponsored training. One problem holding back the life-long learning programme is that companies do not give enough time off for self education, especially in a tight labour market.
While we have leave for maternity, paternity, sickness, childcare and even adoption, not many companies grant education leave. This should be mandated for at least some approved courses.
When it comes to incentives for innovation, a key challenge for the government will be to address the gap created by the expiration this year of the Productivity and Innovation Credit (PIC) scheme which provides generous tax deductions and cash payouts for activities that spur innovation and has had a good take-up rate.
Among the options proposed are to limit to PIC to only R&D spending, or enhance tax deductions for R&D and other desired activities. Another measure is to provide tax incentives to encourage companies to create "sandboxes" for innovation in fields other than the financial sector - where the Monetary Authority of Singapore has already created such a facility.
But perhaps the most important step the government can take to boost both innovation and growth would be to relax curbs on skilled foreign workers. Many companies have pointed out that the biggest obstacle to innovation that they face is not the lack of incentives or capital but the shortage of skilled workers. In some areas, such as data science, cyber security and artificial intelligence, the shortages are acute.
With the working-age population projected to decline from 2020, relaxing curbs on the import of, at least, skilled workers would also be the most effective way to deal with our demographic challenge in the short to medium term.
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