The Singapore government seems to have concluded that only way to decrease income and corporate taxes while increasing funding for social assistance to help the poor is through a GST hike. Although I have no doubt that the Ministry of Finance and the Cabinet went through much deliberation before arriving at this conclusion, it seems to be a less-than-ideal solution to helping the poor, for the reasons I explained in Part I and Part II of this series.
But if the GST isn’t increased, how are we going to find the money to “tilt the balance in favour of the poor”? I explore a few possible alternatives, and I invite readers to comment on them and add their suggestions.
1. Use the capital gains from Net Investment Income (NII)
Currently, the Constitution defines Net Investment Income (NII) as the dividends and interest earned from investing past reserves. Just before announcing the GST hike, PM Lee announced that the government will amend the Constitution and seek the President’s approval to re-define NII to include capital gains.
The NII for this year is projected to be almost $2.4 billion. Citigroup economist Chua Hak Bin told TODAY (15 November) that he “won’t be surprised if the NII doubles once you incorporate capital gains”.
This could mean an additional $2.4 billion into the government coffers — almost 60 per cent more than the extra $1.5 billion that the GST hike is expected to reap. It is almost 3 times the entire operating expenditure of the Ministry of Community Development, Youth and Sports in 2005. Is $2.4 not enough to help the needy?
2. Further increase vice taxes
Although smokers know that each budget speech usually brings bad news for them, they may not be aware that Singapore actually has a lower cigarette tax burden than many other developed countries. In Denmark, Ireland, the UK and Portugal, the cigarette tax is upwards of 80 per cent, while in Singapore it is just over 50 per cent. [Note: These were 1999 figures. The cigarette tax has probably gone up across the board since then.]
Cigarette taxation has been proven to be one of the most effective ways of preventing young people from picking up the habit and helping smokers kick the habit by making cigarettes less affordable.
There is also scope to increase liquor duties further, especially for hard liquor. The Singapore Armed Forces (SAF) should also abandon its provision of duty free beer to servicemen.
In the same vein, betting taxes on 4-D, Toto, Singapore Sweep, soccer betting, private lotteries and fruit machines in private clubs should also be increased to discourage people from gambling away their family money.
The annual revenue gain from the 2005 increase in tobacco duties was about $158 million. Similarly, the increase in liquor duties in 2003 resulted in an annual revenue gain of $9.4 million.
Given the benefits of vice taxation to Singaporeans’ health, the savings on healthcare and social service expenditure, the reduction in drink driving and the increase in government revenue, there is no reason why Singapore should not aim to top the world with its taxation on vices.
3. Collect more taxes from tourists
Currently, just 1 per cent cess tax is levied on cessable items sold by tourist hotels, tourist food establishments and tourist public houses. Cessable items include hotel rooms charges, food and beverage, corkage charges and cigarettes sold at hotels.
Cess could be increased to at least 3 per cent or more. In addition the number of cessable items could also be increased to include telephone and Internet charges, the hire of vehicles, tour guide charges and services of dance hostesses (yes, the last item is currently non-cessable!).
The government collected $30.46 million in cess last year. A threefold increase in cess could therefore net an additional $60 million, even without factoring in the increase in tourist arrivals envisaged in the coming years.
Currently, tourists may claim a refund of the GST paid on their purchases under the Tourist Tax Refund Scheme. The government should also eliminate this scheme. Although GST refund schemes are practiced by several other countries, there is no pragmatic reason for Singapore to follow suit. Canada recently announced that it will end its GST refund programme next April.
Some may argue that these moves could discourage tourists from coming to Singapore. But isn’t the main benefit of tourists the money they bring? If some el cheapo tourists were to really shun Singapore because of excessive cess or no GST refunds, then I don’t think they are the kind of tourists we should be courting.
4. Impose a luxury tax
A luxury tax is any tax on the sale of items not considered to be essential to a reasonable standard of living. Items such as high-end cars, fine dining and expensive entertainment could be subject to this tax. Compared to income tax, this would be a fairer way of taxing the rich, yet not penalising those who work hard but are prudent in their spending on luxuries.
5. Stop giving election handouts in cash
On the eve of the last two elections, the government saw it fit to disburse a total of $7.8 billion in cash to Singaporeans through New Singapore Shares (NSS), the Progress Package and Economic Restructuring Shares (ERS). Although less well-off Singaporeans were given larger packages, high income earners still received at least $200 to $400.
Several ruling party MPs had questioned the fiscal prudence of this generous give-away. For the rich, a few hundred dollars did not make much of an impact on either their bank books or their voting patterns. A friend of mine who is a successful investor in the financial services sector even asked me last month, “What is the Progress Package?”
These handouts were given in the form of cash deposits in one’s bank account or CPF account. Although they were meant to cushion the impact of economic restructuring, many less frugal Singaporeans saw it as ang pow money to be spent immediately on luxuries. The longer-than-usual queues at ATMs all over town and the extra long store hours in Orchard Road on the day the Progress Package was disbursed were suggestive of where many “struggling” Singaporeans had spent this money.
The government should have been more prudent in this respect. The money should not have been wasted on giving to the rich, who have no need for cash assistance from the government. It would have been better if it spread out and given in the form of vouchers for essential items rather than in one lump sum cash payment. This would have ensured that the money was not frivolously spent.
6. Reduce government administration expenditure
The government wants to reduce the tax burden for the rich (including MNCs) so they won’t pack up and leave. However it will be impossible to increase revenue without taxing the rich more, either directly or indirectly. This is because most of the tax burden in Singapore already falls on them. If the government wants more money to spend but does not want to make life more expensive for the rich, the best solution would be to reduce on government administration expenditure.
This is not a new
proposal, and indeed the government has already set up a Cut Waste Panel to look into this matter. The Panel has received almost 3,700 suggestions from the public but has agreed to implement just 91 of them – a 2 per cent take-up rate. For the remaining suggestions, government ministries have claimed that they are either already being done or “have been addressed in current policy/practice”.
Assuming that most Singaporeans who wrote in to the Cut Waste Panel had genuine observations and concerns, it is surprising that only 91 suggestions were deemed implementable.
One of the most politically contentious issues is salaries. Manpower costs make up the largest component of government administration expenditure.
Even if one were to completely accept the government’s anti-corruption and talent retention arguments for paying our ministers and top civil servants the highest public sector salaries in the world, is it really necessary to pay them so much more than their counterparts in the richest countries? (The Singapore President earns 3.7 times more than the US President, and the Singapore Prime Minister earns 6.4 times more than the British PM.)
Recently Minister in charge of the civil service Teo Chee Hean said that civil service salaries would rise next year in order to retain talent. Senior Minister Goh Chok Tong also hinted at a rise in ministerial salaries. KTM has pointed out that increasing the Staff Grade salary benchmark will mean that the salaries of the hundreds of Superscale officers will increase. This would cost taxpayers millions of dollars, on top of the already sky high salaries that the ministers and top civil servants earn.
Is this really the most effective way to retain talent and prevent corruption? Human resource practitioners know that salary is not the most important reason why talented employees stay on the job. In fact, a high salary often succeeds in retaining non-performers while having a marginal influence on retaining talent. Having previously worked in the civil service, I know that there are many other reasons besides salaries that result in such a high turnover rate. The government cannot keep throwing money at a problem without solving the root cause.
And if exceedingly high pay can prevent corruption, why is it that so many African dictators continue accepting bribes even when they already have billions stashed away in Swiss bank accounts? Greed knows no boundaries. The Singapore Civil Service has managed to stay relatively corruption-free not because of its very high salaries, but because of the very heavy penalties imposed on offenders.