SINGAPORE - It is never popular to raise taxes, let alone the goods and services tax (GST), but the Government has to do the right thing to uphold sound management and stewardship of the country's finances, said Finance Minister Lawrence Wong on Friday (March 11).
His remarks come as two weeks of debate on the Budget drew to a close and Parliament approved $109 billion in planned spending for the coming financial year.
In a Facebook post, Mr Wong noted that the most debated aspects of the Budget were the revenue changes, and various alternatives to the GST increase were suggested. "Unfortunately, the sums in these alternative proposals do not add up, and they will not generate enough revenue to close our funding gap," he said.
The revenue from the GST rate increase is meant to cover necessary and unavoidable government spending on healthcare and other social spending.
In his Budget speech on Feb 18, Mr Wong announced that the planned goods and services tax hike would be delayed to Jan 1, 2023, and the rate would be increased by one percentage point from 7 to 8 per cent then, and to 9 per cent on Jan 1, 2024.
During the debate, opposition MPs had objected to the tax hike and proposed alternatives, such as more taxes on the wealthy and on large companies, or to draw more from the national reserves.
In his post on Friday, Mr Wong pointed readers to explainers on the Ministry of Finance (MOF) website, which recap points he had made in rounding up the debate on the main Budget on March 2.
The ministry said that the Government had studied all options to address the funding gap and decided on a three-pronged approach.
First, the GST rate increase will yield $3.5 billion in revenue yearly.
But the bottom 30 per cent of Singaporean households will not be impacted, as the increase will be covered by offsets, said MOF.
Second, top income earners - the top 1.2 per cent of those who pay personal income tax - will pay higher sums from 2024 as the top marginal personal income tax rate increases from 22 per cent to 24 per cent.
While some have suggested further raising personal income tax rates for more revenue, the MOF said there is a limit to how much more can be done in this manner.
"For instance, to raise the same amount of revenue of $3.5 billion as the GST rate increase, we will need to raise the top marginal personal income tax rate from 22 per cent to 42 per cent for chargeable income in excess of $320,000," it said.
This assumes the tax base remains unchanged - meaning that people do not relocate. "But that is not realistic. Such a sharp increase in personal income tax is untenable and will badly damage our competitiveness," said the ministry.
"In reality, to raise the same amount as a GST increase through higher personal income tax, we would end up having to raise the personal income tax rates for a broader group of income earners, including upper-middle-income and even middle-income earners."
The third prong to generate revenue is through higher wealth taxes, mainly in the form of property tax.
MOF noted that the Government has been raising wealth taxes for residential properties and cars over time - as announced in the Budgets in 2010, 2013 and 2018.
This year's Budget included measures to collect additional $380 million yearly in property tax from all non-owner-occupied residential properties and the top 7 per cent of all owner-occupied residential properties, as well as more fees from buyers of high-end cars.
While the Government continues to study all options to tax wealth effectively, there remain challenges in doing so. Some have suggested a net wealth tax, but this is difficult, as many forms of wealth are mobile, and as long as there are differences in wealth taxes across jurisdictions, such wealth can and will move, said MOF.
This is why many jurisdictions have abolished their net wealth taxes - only three Organisation for Economic Cooperation and Development jurisdictions now have a net wealth tax, it added. These are Norway, Spain and Switzerland.
The middle- and upper-middle-income individuals may also be disproportionately affected compared with the rich who can find ways to avoid paying net wealth taxes through tax planning, said MOF.
"We welcome ongoing feedback on how to make a suggested net wealth tax work in practice in Singapore's context, when almost all our competitors in this region and worldwide do not levy such a tax," it said.
MOF added that other alternative taxes are also not viable solutions.
It said an increase in corporate tax is difficult as at this stage, it is premature and difficult to determine the eventual fiscal impact of the BEPS 2.0 - a framework to redesign the international rules for corporate tax. Singapore must also expect global competition for investments to intensify in a post-pandemic future, said MOF.
"Even if we can generate additional corporate tax revenue from BEPS 2.0, the revenues will have to be reinvested into enhancing our overall competitiveness, so that we can continue to attract our fair share of investments and create good jobs for all Singaporeans," it said.
Taxes on externalities are also not viable to close the funding gap - the carbon tax increase as announced in Budget 2022 is meant to be channelled towards decarbonisation and sustainability efforts, while alcohol and tobacco duties are meant as deterrents and not for revenue generation, said MOF.
Another suggestion raised was to draw more from the reserves or use more from land sales. "That means using more from the reserves today and leaving less behind for future generations. This will translate to a heavier tax burden for our children and the next generation of Singaporeans," said the ministry.
It said that in a scenario where Singapore were to have 20 per cent less in reserves than it has today - had its predecessors chosen to spend more from the reserves years ago - "our GST would now need to increase to 11 per cent instead of 9 per cent".
"We should keep faith with future generations and ensure that they too will always have access to sufficient resources to meet any emergencies, as well as a steady stream of income for their future needs."