A positive approach towards taxation

Tan Kin Lian

Many countries waste too much resource in a complicated tax system. They collect income tax, consumption tax and a variety of other taxes and have complicated rules on the items to be taxed and the reliefs that are allowed.

These rules have many loop-holes, which are usually exploited by tax avoidance and evasion. I wish to give a positive approach towards taxation.

Collective purchase

Tax payers dislike paying tax and prefer a low rate of tax. I suggest a different way of looking at this matter. We should look at taxation as collective purchase of services needed by the members of society.

These members need education, health care, security, law and order, infrastructure and other necessities of life. Most of these social services can be provided more effectively and at lower cost by the state and paid through taxation. If they are not provided by the state, they have to be purchased privately at a higher cost or at a lower standard.

How much tax?

If we analyse the necessities of daily lives can be provided more effectively through collective rather than individual purchase, we may arrive at a figure of 25% to 40% of our earnings. This still lives a large part of the earnings available for our private consumption.

A tax rate of 25% to 40% is acceptable, if it is translated into useful social services that are provided more cost effectively through collective purchase.

Efficiency

Some people have the idea that the state is usually inefficient and will provide the social services inefficiently. They argue that it is better to let the people buy these services privately from the market.

Recent events have shown the failure of the market in many sectors of the economy. An example is in savings for the future. During the past two decades, the people were told to save and invest on their own, rather than depend on social security. The financial services expanded rapidly to cater to this need. The market was deregulated and risky financial products were introduced that caused the collapse of the global financial system.

Another example is the private market for health care in America. The cost has ballooned to an unacceptable level. Many other countries, which have a large part of their health care that are provided or regulated by the state, have achieved better outcomes for the people.

Critics can point out to examples of government programs that are run wastefully and inefficiently. However, there are also examples of government programs that are run well. It is a better to create the right  governance structure to ensure that the correct decisions are taken, rather than to leave these matters to the market.

How to tax?

What is the best way for the state to collect sufficient tax to pay for the social services and the cost of running the government?

Many countries have introduced the following types of taxes:

• personal income tax, on earned income, investment income and property income
• consumption tax, such as goods and services tax
• specific taxes on purchase of specific items, such as cigarettes and liquor and other targetted items
• tax on property, land and car ownership
• inheritance tax

The taxation system in most countries is complicated and wasteful. It requires a lot of effort to determine and collect the tax and results in avoidance and other leakages.

I suggest a simpler and fairer system of taxation. It is a flat rate tax collected at source.

Flat rate tax

I propose that a flat rate of rate of tax be determined based on the national budget and the taxation base. The tax should be imposed on the wages, investment income, property income and business profits that comprise the tax base and be deducted at source.

Here are some specific details:

• employers should pay the flat rate on the wages earned by the employees above a threshold and be paid monthly, similar to contributions to a retirement fund.
• investment income should be deducted at source by the financial institution
• business profits should be taxed on its profits.
• small businesses having a turnover below a threshold are allowed to pay a licence fee and will be exempted from paying tax on profits.
• properties and cars should be taxed based on its annual value as determined by the state.

Tax should be abolished on the following:

• rental income on property, as the property has already borne tax based on its annual value.
• tax on dividends paid to shareholders, as they are paid out of profits that have already borne tax

It is possible for the flat rate tax to be lowered, if the state has other sources of revenue, such as the sale of land, vehicle taxes and tax on gambling, cigarettes and liquor.

Consumption tax

Consumption tax, such as the Goods and Services tax, should be abolished. It is wasteful and unproductive. A person can only spend according to its income, which has already borne tax at the flat rate. Why is it necessary to have any layer of tax (on the portion of the income that is consumed) that is costly to administer and collect?

Mitigating impact on lower income group

The flat rate tax may appear to cause hardship to those at the lower income levels. This can be alleviated in the following ways:

• establish a minimum wage
• provide an income allowance to the sick, disabled, unemployed or the poor
• require the employer to pay the tax on behalf of workers earning below a threshold

The current consumption tax already imposes a burden on families with low income. The flat rate tax may actually reduce the burden, especially if it is supplemented by the income allowance.

Singapore economy in 2008

I have extracted the following figures for Singapore to calculate the flat rate that that is needed to pay for the government expenditure.

Consumption Amount % Private consumption $105 b 80% Government consumption $27.5 b 20% Total $132.5 b 100%

Income Amount % Salaries $115 b 49% Business Profits $119b 51% Total $234 b 100%

If the total government consumption of $27.5 billion is to be paid by a flat rate tax on salaries and business profits, an average tax rate of 11.8% would be adequate. This tax rate could come from salaries and profit, and not from consumption tax. The Goods and Services Tax should be abolished. If income from property is added, the flat rate tax can be lowered.

As the profit level is quite high that it is possible for the employer to bear the tax on behalf of the employees – at least for the lower income levels.

This calculation does not take into account the cost of building the infrastructure of the country. This cost can be spread over the life of the infrastructure and the annual cost be added to the budget. This could increase the Government consumption and require a higher tax rate.

If the state were to provide more social benefits, such as higher subsidy for health care and a pension for elderly persons, the tax rate has to be further increased.

However, the increase in cost could be offset by a reduction in our expenditure on national defence or by offset the significant revenue from the sale of state land or development charges.

Conclusion

I prefer a flat rate tax that is deducted at source on wages, investment income and business profits. I like to see consumption tax abolished as it is wasteful. I like to see higher taxes that are used to pay for useful social services needed by the people.