High-wire act for Budget

As spending increases, how can the Government find ways to raise funds, without resorting to over-taxing the middle and higher income?

Singapore has long been regarded as a place where the annual tax bill is easy enough on the pocket - for companies and individuals alike.

But the winds of change are in the air, driven by the exigencies of an ageing population and a desire to inject even more of a progressive tone into the tax system.

This has led to taxes on the rich being increased in recent years, seen in hikes in taxes on expensive properties and cars.

At the same time, middle-income earners have been spared the brunt of higher taxes needed to fund increased social spending.

The 2014 Budget is expected to continue in this vein.

Analysts predict higher tax revenue from corporate and personal income tax, and stamp duty this year. The Government will likely end up with a healthy surplus for Financial Year 2013 - the period from April 1 2013 to March 31 2014. Bank of America Merrill Lynch economist Chua Hak Bin recently projected that the Budget surplus will come in above government forecasts, at about $6.3 billion, or 1.7 per cent of gross domestic product.

A strong fiscal position helps pay for programmes such as the three-year $3.6 billion Wage Credit Scheme starting in 2013, where the Government co-funds some wage increases by companies.

As Singapore moves towards building a more inclusive society, by restructuring its economy to rely less on foreign labour and to increase the average wage, there will be more calls on the public purse.

Demographics will also put pressure on state coffers, as an ageing population will have higher health-care spending.

While higher taxes raise revenue to fund spending, there are limits on how much the state can tax the rich heavily, as talent and capital are both highly mobile.

The challenge for the Singapore Government lies in how to raise more money to fund programmes that benefit a large proportion, without frightening the rich away and without over-taxing the middle income.

Changes in recent years have made the tax system more progressive, by making the better-off bear a larger burden of paying taxes. In personal income tax, additional income bands were introduced to differentiate the higher income tiers and tax them more.

Property taxes have gone up for those living in higher-end homes or those with investment properties.

There is also now a tiered registration fee structure for cars with high open market values - another more progressive feature of the system.

Limits to income tax hikes

Where would the other revenue sources come from as the Government recalibrates the tax system?

The latest Budget numbers are not out yet but looking at the estimated revenue and expenditure numbers given last year gives an idea of the tax picture.

Corporate income taxes continue to be a significant contributor, projected to bring in nearly $13 billion, nearly a quarter of the Government's projected $55 billion revenue.

(On top of this amount, the Budget is further supplemented by the net investment returns contribution from sovereign fund GIC and Singapore investment agency Temasek Holdings.)

The Government can't raise corporate taxes too much, as firms are already facing rising wage bills as the tap on inflow of cheap foreign workers is being tightened. Singapore also needs to maintain its advantage as a business-friendly destination.

A large contributor to revenue is the goods and services tax (GST) which is forecast to bring in over $9 billion in FY2013.

However as the GST is a regressive tax, meaning it hits the poor disproportionately harder, it is unlikely to be raised further just yet. The Government said in 2011 it would not raise GST for five years.

Lower-income Singaporeans have traditionally been the biggest beneficiaries of the tax system. Those with an annual income of less than $22,000 a year need not file a tax return.

Lower-income earners not only pay no taxes; they benefit from special transfers and redistribution of income. An estimate is that low-income families get $4 in transfers for every $1 they pay in taxes.

In a speech last August, on being conferred an Honorary Fellowship by the Academy of Medicine, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam had talked about funding social safety nets.

He had noted that Workfare, where the Government tops up the wages of lower-income workers, gives older and lower-income employees the equivalent of an income tax credit of about 20 to 30 per cent.

Coupled with housing grants, low-income couples at the 10th percentile of the income ladder get benefits equal to about 30 per cent of their lifetime incomes.

However, some middle-income earners grumble that they don't qualify for subsidies and special transfers and feel that they are being hit disproportionately harder by the tax system.

Mr Tay Hong Beng, Partner, Head of Tax at KPMG in Singapore, believes that the coming Budget may see more moves to lower the taxes of the so-called sandwiched class of taxpayers.

Lowering taxes for middle-income taxpayers makes the system more progressive, but it will not, of course, help with the goal of raising more revenue.

More tax revenue could be generated by raising income taxes for the rich, which would also tick the box for making the system more progressive.

But bear in mind that Ernst & Young tax consultants have estimated that each marginal 1 percentage point rate increase - from, say, the current 20 to 21 per cent - would add only between $110 million and $120 million to the coffers.

That's a tiny fraction of the estimated annual revenue of about $55 billion.

To raise more serious amounts of revenue would entail stiff tax hikes on the higher-income - but that would make Singapore less attractive a place to do business in, compared to Hong Kong and other low-tax centres.

Other revenue sources

How about raising taxes on wealth? Could the Government further raise property taxes and stamp duty on property transactions?

In theory, this sounds like a good way to beef up tax coffers yet keep the tax system progressive.

But the recent property tax hike has already led to complaints from the middle class. At the upper end, the luxury property market is already slowing to a trickle.

The current projections are for assets taxes and stamp duty to bring in over $7 billion of the revenue, while motor vehicle taxes and vehicle quota premiums are projected at around $4 billion.

These are likely to come in higher than projected. If so, eventually this may be one area where taxes will be raised significantly.

Fortunately, there is also a key source of income apart from taxes: the net investment returns (NIR) contribution.

This comprises up to 50 per cent of the net investment returns on the net assets managed by GIC and the Monetary Authority of Singapore, and up to half of the investment income from the remaining assets (which includes Temasek).

In FY2012, NIR came up to $7.65 billion. In FY2013, it is estimated to be $7.7 billion.

Does this comprise the full amount the Government can use? Or is there room for more? This hasn't been disclosed publicly.

Or should the cap be raised? Still, raising the cap should not be the only solution to generating more revenue.

So while Budget 2014 looks set to remain in a healthy position, the pressure to raise revenue to fund increased social spending while keeping taxation progressive will build up.

All this while keeping Singapore attractive to business and investors, and achieving a greater sense of fairness for all Singaporeans.

That's a high-wire balancing act for Mr Tharman and the Government each year.


This article was first published in The Straits Times on Jan 28, 2014