Budget debate: Lawrence Wong rebuts proposals by Workers' Party to raise revenue in lieu of GST hike

(From left) Finance Minister Lawrence Wong rebutted alternative proposals by WP MPs Louis Chua and Jamus Lim to raise revenue. PHOTOS: GOV.SG

SINGAPORE - Singapore needs a good mix of income, asset and consumption taxes to ensure its revenue base remains diversified and resilient, but also fair and progressive, said Finance Minister Lawrence Wong.

In a speech to round up the Budget debate on Wednesday (March 2), he rebutted alternative proposals by the Workers' Party to raise revenue, and said the options were not feasible to replace the upcoming goods and services tax (GST) hike.

"We cannot just ignore consumption taxes and put the entire burden on income and wealth taxes," he said.

Mr Wong noted that all jurisdictions rely on these three forms of taxation and pointed out how the OECD (Organisation for Economic Co-operation and Development) jurisdictions have much higher value-added tax rates - the equivalent of GST here.

The GST increase from 7 per cent to 9 per cent by 2024 is expected to generate an additional $3.5 billion of tax revenue annually.

On the suggestion to raise personal income tax rates, the minister said Singapore would have to increase the tax rate for top earners from 22 per cent to 42 per cent to generate the same amount of revenue from raising the GST.

This higher rate would apply to everyone with chargeable income of $320,000 or more, he said, adding that this is assuming the number of people paying taxes remains unchanged.

On Feb 18, Mr Wong had announced that those with chargeable income in excess of $500,000 and up to $1 million will be taxed at 23 per cent, while chargeable income above $1 million will be taxed at 24 per cent.

This is up from the current 22 per cent tax levied on chargeable income above $320,000.

Don't use global tax rule changes 'as reason to avoid raising GST'

Mr Wong reiterated that it is hard to be definitive at this juncture about the overall tax revenue impact from changes to the Base Erosion and Profit Shifting initiative or BEPS 2.0, a landmark deal that provides the framework to reform international tax rules.

He noted how Workers' Party MP Louis Chua (Sengkang GRC) had said that the impact of Pillar One of BEPS 2.0 - which seeks to reallocate profits of the largest and most profitable multinational enterprises (MNEs) from where activities are conducted to where consumers are located - will be limited because it covers only around 100 companies.

But this is a premature conclusion, Mr Wong said, adding that while the number of MNEs affected is small, these are the largest and most profitable enterprises.

"Any reallocation of profits away from Singapore will have a significant revenue impact."

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Mr Chua had also suggested that raising the corporate tax rate to the proposed global minimum effective tax rate of 15 per cent, under Pillar Two of BEPS 2.0, could also potentially generate $71.5 billion of revenue - seven times the corporate income tax paid by profitable non-SMEs (small and medium-sized enterprises) currently.

To this, the minister said: "Mr Chua should have paused at this huge number for a reality check. He says it is purely hypothetical. But he should have said it is wishful thinking."

The purported figure of $71.5 billion is the total amount of revenue Singapore collects from all taxes, Mr Wong said.

While implementing the minimum effective tax rate would mathematically mean higher tax revenue, the eventual impact of the BEPS 2.0 initiatives will depend on how governments and companies respond, he added.

With tax incentives less of a factor post-BEPS 2.0, Singapore will need to find other ways to stay competitive, he noted. This means that even if the country can generate additional revenue overall from the tax rule changes, these would need to be reinvested to ensure its competitiveness and to attract investments, he said.

"I would therefore caution against jumping to conclusions or believing wild guesses on how much more revenue we can get from changes in global tax rules and use that as a reason to avoid raising the GST."

Sharp increase in personal income taxes would be untenable

On generating additional revenue through personal income taxes, Mr Wong said there is a limit to how much Singapore can raise personal income tax rates for the top income brackets without touching tax rates for the income brackets below.

The top 10 per cent of income taxpayers currently account for about 80 per cent of total personal income tax revenue, he said, adding that at 24 per cent, Singapore's future top marginal personal income tax rate would be higher than Hong Kong's top tax rate of 17 per cent and closer to the Asian average of a top marginal tax rate of 28 per cent.

Elaborating, he stressed that a sharp increase in personal income tax rates to raise the equivalent revenue to a GST hike would be untenable and badly damage Singapore's competitiveness and jobs for its people.

The reality is that to match the revenue from a GST hike, personal income tax rates would need to be raised for a broader group including the middle income and upper-middle income groups, Mr Wong said.

He referenced Nominated MP Hoon Hian Teck's observation that as Singapore's economy matures and population ages, a bigger share of the population will become economically inactive. In turn, Singapore's tax base for income-based taxation will shrink.

"So we cannot rely only on income-based taxes alone if we want to maintain a resilient and future-proof revenue base."

Property and other wealth taxes

Mr Wong noted how WP's Mr Chua had said more could be done on the wealth taxes front, especially on property taxes.

In contrast, other MPs such as Mr Chong Kee Hiong (Bishan-Toa Payoh GRC) had raised concerns about the impact of higher property taxes on retirees and senior owners of private residential properties.

"So again, we have to find a balance. In fact, the changes we've made to property taxes this time around are not insignificant at all. But we have structured it in a highly progressive manner."

He pointed out that all owner-occupied Housing Board flats, as well as two-thirds of private residential properties such as condominiums in suburban areas and lower-value landed properties, are not affected by property tax rate increases announced at the Budget.

Rather, the changes affect higher-end properties and investment properties, with increases more significant for the upper end.

If Singapore wanted to raise property tax revenue to eliminate the need for a GST rate increase, it would have to tax all non-owner-occupied residential properties at a significantly higher rate, Mr Wong said.

And as taxing all non-owner-occupied properties at a flat 36 per cent would still not be enough, tax rates would need to be substantially increased for owner-occupied properties as well, including HDB flats, he said.

In a pointed reply to Mr Chua's characterisation of the property tax changes - which will generate an additional $380 million a year - as "tokenism", Mr Wong noted that the total property tax revenue from all residential properties is about $1 billion.

"To raise another $1 billion from just property tax alone, property tax rates may very well need to be doubled across the board. I suppose that's what the Workers' Party is proposing."

Replying to Mr Saktiandi Supaat's (Bishan-Toa Payoh GRC) suggestion of estate duties, which was abolished in 2008, Mr Wong said this tax had disproportionately affected middle and upper-middle income individuals compared with the wealthy, who found ways to avoid it through tax planning.

He also addressed Mr Chua and fellow WP MP Jamus Lim's (Sengkang GRC) suggestions of a net wealth tax, reiterating that this would be very challenging to do in practice, as many forms of wealth are mobile.

In response to Prof Lim's proposal to raise sin taxes, such as for tobacco and gambling, Mr Wong pointed out that taxes like that on tobacco are regressive, with lower-income groups paying a bigger share of it.

"The Workers' Party had expressed such strong concerns about the regressivity of the GST, but does not appear to be least concerned about regressivity here, why the double standard?" he said.

"In any case, we do not levy sin taxes for purposes of generating revenue but for deterring consumption, and we will review and adjust these taxes from time to time."

Watch Finance Minister Lawrence Wong's full speech in Parliament:

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