Yes to raising GST rate, but later; other alternatives exist: Letter to the Editor
The author's view is that GST rate should still be increased to raise finances for long-term fiscal planning purposes, but not while the nation is still struggling to recover from a crisis.
I refer to the article by Danny Quah ("The case for a 9 per cent GST", The Business Times, April 7)
Mr Quah made the case for raising the current Goods and Services Tax rate from 7 per cent to 9 per cent. He said that raising the rate will increase tax revenues; that GST will become the leading generator of tax revenue in Singapore; that the tax increase does not distort the market and would avoid problematic issues surrounding income tax; that GST is inherently neutral to foreign trade; that GST is a relatively easy tax to administer and enforce. He also said that the GST targets consumption rather than savings and investment, and that the burden of the tax increase to the lower-income group can be balanced out by providing more relief to these people through the issuance of GST vouchers.
He has, on the surface, made a compelling case for the GST rate increase to raise additional revenue. However, I would like to propound some alternative perspectives.
GST is portrayed as a neutral universal tax because it is broad-based and does not discriminate against consumers, suppliers, goods, and services. However, if we were to contextualise GST, it is not as neutral as believed. Consider essential goods and services that a person must consume for sustenance. Such essential goods and services for consumption should not vary too widely between the lower-income and the rest of the population. The GST rate increase will create a more significant marginal effect on the lower-income than others. The middle-income group will also experience a greater marginal effect of the GST increase than the high-income and ultra-rich, but at the same time, this is the group of people with the greatest potential to fall through the gaps because they could be deemed to be "too rich" to qualify for a higher relief through the issuance of GST vouchers.
Furthermore, GST is a tax on the consumption of goods and services borne by consumers at the end of a manufacturing and distribution cycle. GST-registered businesses could claim input tax on their business expenses to offset their GST tax payable to the IRAS and not suffer the brunt of the GST rate hike. In other words, GST is a tax that shifts the economic burden of taxes from companies to end consumers. It is neither "neutral" nor "universal" when it is visualised in its proper context.
Also, suppose we were to contextualise GST in a situation like the current economic downturn. In that case, the consumption level for non-essential goods and services typically decreases because a significant portion of the population faces income and cash-flow issues related to unemployment and cash locked up in long-term investments. Raising the GST rate does not necessarily increase tax revenues as such revenues may be offset by the decrease in consumption for non-essential and potentially even essential goods and services during an economic downturn.
While on the topic of taxes, we should also take a purposive approach to plan any rate hikes. If the purpose of raising the GST rate is to restore public finances from the unprecedented cash outlay from our reserves because of Covid, how does raising the GST rate make policy sense if the government intends to buffer the burden to the population by increasing the cash relief to its people? Put simply, the practical consequences of what the government is proposing is that it will "earn" more money from "everyone" via their consumption of goods and services to top up the country's reserves, and they will balance out the impact of the GST rate hike through the increase of cash relief to the general population. Would it not make more policy sense for the government to increase revenue and decrease public expenditure concurrently to restore its reserves?
To be clear, I am not suggesting that we should not increase the GST rate. My view is that we should still increase the GST rate to raise finances for long-term fiscal planning purposes, but not while we are still struggling to get back on our feet from a crisis. One suggestion would be to raise the GST rate only when annual GDP grows at pre-Covid or pre-GFC levels. Perhaps the better question to ask ourselves is: What should the government do to restore public finances from the aftermath of the Covid pandemic, and why?
The government no doubt has a tough job ahead to restore public finances when faced with a budget deficit and mired with the aftermath of the Covid pandemic. As mentioned above, GST is not a neutral universal tax when viewed in its proper context. The government should introduce policies to target the "winners" of the pandemic and the portion of the population who are better placed financially in restoring public finances. One possibility has already been explored in Parliament, such as a one-off excess-profits tax for the "winners" of the Covid pandemic. In the UK, for example, an excess-profits duty was introduced in 1915 to raise finances for World War I. The rate was 50 per cent tax on any trade or business to raise finances for World War I; the rate was raised to 80 percent in 1917. A similar excess-profits tax formula could be adopted and adapted to our current and local context.
There are also alternative long-term measures to restore public finances after the pandemic without directly burdening the lower and middle income. One possible measure is to introduce targeted policies at the higher-income population, such as by raising the current highest marginal personal income tax rate of 22 per cent to 24 per cent, and introducing an additional income tax bracket of an additional S$40,000 beyond the current highest income tax bracket of S$320,000 (that is, income beyond S$360,000 will be taxed at 24 per cent). Other measures have been raised by academics such as Vincent Ooi, who proposed an "automation tax" on businesses to raise public finance. This tax recognises the negative externality created by the displacement of workers due to embracing technology in the workplace. As the government encourages businesses to step up their efforts to embrace and adopt technology to improve productivity and transition to a post-pandemic business model, such forms of tax revenue are indubitably effective in raising public finance without burdening the majority of the population in the long term. Another idea would be to raise the current corporate tax rate from 17 per cent to 19 per cent. Such an increase would also shift the economic burden from consumers back to the businesses.
Singapore has survived several financial crises in the last 30 years from prudent long-term fiscal planning and ensuring that the economic burden of taxes falls proportionately and appropriately where they lie. Let us make sure that we continue to do that as a country going forward.
Hng Zhan Peng
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.