Tan Jee Say, formerly of Singapore Democratic Party and more recently, a Presidential candidate, achieved a substantial degree of fame for his conception of an elaborate 46-page long National Regeneration Plan covering six different areas of regeneration – industry, enterprise, schools, hospitals, community and family. During the hustings of General Elections 2011, Jee Say and his former party colleagues promoted his economic plan during rallies, and naturally received criticisms from his political rivals, but at the same time, support from those who are in agreement with his proposals. He subsequently lost in the contest at Holland-Bukit Timah GRC, but took part in the Presidential elections upon receiving his Certificate of Eligibility.
During the run up to the Presidential elections, Jee Say featured in The Online Citizen’s Face to Face forum, in which a participant, Mr Koh Seng Choon, creator of Dignity Kitchen, a food court training centre for the disabled and disadvantaged, asked all four Presidential candidates to come up with a simple idea each on how to promote active citizenry in Singapore. For his reply, Jee Say referred to one section of his plan, Creative Industries and Enterprise Regeneration whose goal is to promote the creative industries, where he believed “young Singaporeans can find traction, do well and excel” in. It is hoped that such entrepreneurial initiatives will blossom into household names worldwide such as Microsoft, Google and Facebook. He suggested that the government sets up an Enterprise Regeneration Fund that provides funds to start-ups to the tune of $1 million on the condition that they are willing to commit a non-significant sum to the venture (20%). He proposed that the government should set aside a grand total of $10 billion for this Creative Industries and Enterprise Regeneration fund, and that such a sum can be raised from our reserves or budget surpluses.
While Jee Say’s bid to promote the creative industry and therefore, targets to develop our domestic industry, is a plus point in his economic proposal, he also misses the point especially where macroeconomic tools or fiscal policies should be first-line options ahead of proposing the Creative Industries and Enterprise Regeneration Fund in promoting entrepreneurship. He also misses the point especially in failing to address issues that prevent Singaporeans from striking out on their own as entrepreneurs.
Supply side economics is a school of macroeconomics thought which stresses on tax rate incentives or reduction in tax rates that is aimed at stimulating productivity and economic growth. Christina and David Romer, an economist and political economist and husband-wife team at the University of California, Berkeley, analysed the macroeconomic impacts of tax changes within the US using narrative reports such as Presidential speeches, official documents and congressional reports. They found that increases in tax led to a reduction in investments, and a contractionary impact on the economy. Their study demonstrated that a one percent increase in tax led to a decline in Gross Domestic Product (GDP), which is slow initially followed by a more rapid fall before levelling off. The estimated maximum fall in GDP is 3%, which is considered a significant figure.
Supply side economics garnered interest in response to what was perceived to be growing dissatisfaction with Keynesian economics attributed to its inability to address issues such as inflation, unemployment, reduced economic growth and others. The difference between Keynesian and supply side economics is that the latter believes that a dollar spent by the government increases aggregate demand (total demand for final goods and services within the economy), employment and output (GDP) more than an equivalent reduction in taxes. Hence, Keynesians will recommend budget deficits, i.e. increased government spending, during periods of slack economic activity, and budget surpluses during boom periods. Supply side economics on the other hand differs in the sense that it believes tax reduction increases incentives and boosts employment and output.
To the supply side economist, high taxes are considered a deterrent to economic activity, i.e. it drives activities underground to non-taxable outlets, are barriers to production and discourages entrepreneurship. Thus, tax reduction not only leads to boost in output and economic growth, but also increased tax revenues. This argument is illustrated by the case study of Great Britain. From 1840 to 1880, Great Britain faced a period of high taxes and economic stagnation. Tax rate reductions engineered by William Gladstone subsequently led to economic growth and reduction in budget deficits. Another case study comes from the US. The maximum tax rate was cut to fifty-five percent in 1922, and subsequently to twenty-five percent in 1926. The tax cuts led to not only a period of economic growth, but also increased tax revenues because millionaires paid three times more taxes at lower tax rates.
With regards to the question of whether tax cuts do encourage entrepreneurs to hire labour, there is a study to back up this claim. Robert Carroll and colleagues studied US Inland Revenue Service data from 1985 to 1988, where the tax cuts took place with implementation of the Tax Reform Act in 1986. They found that cutting an entrepreneur’s income tax by 10% increases the probability of the latter hiring workers by 12%. Hence, this shows the impact of tax cuts in not only stimulating entrepreneurship, but in leading to increased job creation as entrepreneurs are likely to hire.
Thus, if we want to encourage entrepreneurship, we have to consider decreasing taxes, including Goods and Services Tax (GST), as a macroeconomic tool. However, as far as Singapore is concerned, there is another significantly important issue that must be addressed – the high debt to income ratio faced by Singaporeans, especially with regards to the housing loans that Singaporeans take up, thus leading Kuo How Name, President of Credit Counselling Singapore, to voice his concerns in a Straits Times article entitled “Personal debt bomb”. High Housing Development Board (HDB) flat prices led to Singaporeans taking up loans to finance the purchases.
For some young Singaporeans, they could be saddled with loans even before graduation and entry into the working world, especially among those who have to take up loans to finance their education. For those who wish to purchase their own homes, the high prices will result in them taking up loans and depleting their own savings. With the need to finance loans at the back of their minds and limited savings, striking out on their own and starting their own businesses as entrepreneurs will be the last thing on these young Singaporeans’ mind. With worry over the possibility of losing a roof over his head and limited funds, the preference on such Singaporeans’ minds is a stable job and income which take top priority. They are not as likely to plunge into a business venture, which carries a risk of failure. Therefore, the issue that has to be addressed directly is affordability of education and, homes, i.e. to make education and home costs more affordable. Yahoo! Singapore Scene has reported that the government has attempted to come up with measures to cool the property market amid growing concerns over property prices last year and this year.
Jee Say’s idea of a Creative Industry and Enterprise fund is akin to a health practitioner suggesting to treat a patient who complains of chronic tiredness with protein supplements to help him build muscle mass. When a patient comes in with chronic tiredness or fatigue, the way to treat him is to identify the underlying cause and treat it, rather than to help him build muscle mass at the first instance. Treat whatever that is causing the chronic tiredness, e.g. anaemia, heart disease, cancer, depression, etc. Hence, macroeconomic tools in the form of tax cuts as mentioned earlier, and addressing costs of basic necessities like housing which have impact on savings, are more direct and first-line approaches. Indeed, historical case studies have shown that even a supply side economics approach of tax cuts have led to a rise in entrepreneurial ventures since people end up with more savings.
Which is why Jee Say’s economic plan misses these crucial points.