Kelvin Teo
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.
good points. Besides these, a lot of foreign entrepreneurs have already chimed in that the current SG govt is already giving too much money to startups, some which would have failed if not for gahmen injection of funds.
Of course I thought TJS’s whole economic plan was a badly written piece of planning that a freshman at Uni could put out. Little wonder he was booted out of civil service.
Supply-side economists are darlings of the right-wing and receive considerable funding from them. They thus produce “intellectual” output that is very much in line with their patrons’ desires and promote the interests of their patrons.
The idea that reducing taxes increases the incentive to produce economic output is spurious. It sounds right but has not been seen empirically in spite of supply-side policies being put in place.
Ask any entrepreneur, they’ll say that the availability of funds is a major concern. The tax rate only matters when you’re counting how much of your EBIT you get to keep. (EBIT: Earnings Before Interest and Taxes)
To rip off Wikipedia:
…
On January 3, 2007, George W. Bush wrote an article claiming “It is also a fact that our tax cuts have fueled robust economic growth and record revenues.”[54] Andrew Samwick, who was Chief Economist on Bush’s Council of Economic Advisers from 2003-2004 responded to the claim:
“You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.”[55]
…
Cutting marginal tax rates can also be perceived as primarily beneficial to the wealthy, which commentators such as Paul Krugman see as politically rather than economically motivated.[59]
“ The specific set of foolish ideas that has laid claim to the name “supply side economics” is a crank doctrine that would have had little influence if it did not appeal to the prejudices of editors and wealthy men.[60]”
The economist John Kenneth Galbraith noted that supply side economics was not a new theory. He wrote, “Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows.”[61] Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896.
Dear Jeremy:
I do not think the claim is spurious.
If you read Pasour’s paper, he highlighted the historical examples of Britain and US about tax cuts that ultimately resulted in economics output.
I have highlighted both cases and provided the link to Pasour’s paper in the article.
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.
It is tautological that if the government took all the money I made through work I did for the money, I would not work. A continuity argument would lead to the sound conclusion that at ridiculously high tax rates, there would be little work, and the comparative statics of reducing taxes from pathologically high levels would move the equilibrium level of economic output to a higher level.
But, let’s talk about more normal circumstances where tax rates are below 50%, noting that Singapore’s top corporate tax rate is now 17%.
If one were to take a businessman’s point of view, at a high tax rate, it would pay to put in effort to reduce his tax bill, hence tax evasion, etc. The work of making as much as possible goes on as per normal. Increase the pre-tax sum, decrease the tax fraction: work intelligently.
From the entrepreneur’s point of view, he wants to maximize his cash flow. 83% or 50% of a lot of money is a sizable chunk of a lot of money. Hence, he would strive to make a lot of money. Note that he does so from the perspective of a tax-rate-taker.
Let’s add to this the fact that at non-pathological tax levels, cutting taxes does not raise tax revenue. This is empirical, counter to the rhetoric of the supply-side camp.
Portrayals of the Laffer curve have been shown to be far off the mark. Given empirical findings, it has been conjectured that if the curve took the argued form, the tax rate at which maximum revenue would be generated must be very high indeed — hence irrelevant.
… also, as for Pasour’s US example… a 73% top rate is huge. For companies, this makes risk highly unattractive with the tiny upside, especially in a setting like today’s. This, in the present day setting, would clearly be pathological and lead to tax evasion or simply moving to a more lower-tax jurisdiction.
It is really hard to attack a proposal to give entrepreneurs what would encourage them to start new ventures using supply-side proposals in a 17% top rate environment.
Would a 1% top rate make you happy? Shall we cut education funding and boost business today, to have human capital deteriorate catastrophically in future?Businesses would set up here with a 10-year exit strategy.
Dear Jeremy:
I did not totally rule out funding entrepreneurs, I just said that TJS’ proposal does not directly address what is holding entrepreneurs back.
I cited two ways to address the issue – tax cuts (corporate and private) and addressing housing, and to a smaller extent education costs. I said those are FIRST-LINE approaches.
Taxes aside, if you are a young Singaporean saddled with studies and housing loans, what are the chances of you wanting to start your own business as an entrepreneur. Tax issue, supply side is one angle, but you also cannot ignore the issue of us having high debt to income ratios. That is going to be significant.
If I were in TJS shoes, I would probably look at taxes (regressive, Value-added taxes, GST) considerations and addressing the housing costs, and costs of education. It is that simple, if one has less savings, what is the chance of starting the business?
My point is that funding entrepreneurs is not the first-line thing that I would do.
Are you for certain that businesses here start here with a 10 year exit strategy? Because this is not the sentiment I am getting when I cover events organised by entrepreneur networks and all (yes we do go to such event to cover). If you are talking about smaller businesses, the sentiment is that it can any time close down, which is why many of these entrepreneurs are complaining that it is hard for them to find willing people to work for them, as prospective employees demand a job with a stable outlook.
Probably, I would need to know what sort of businesses are you referring to with a 10 year exit strategy.
Well, if you cut the top up rate from 17% to say 9%, the economic growth as shown in the US example result in more taxes revenues, because entrepreneurs pay more taxes at lower tax rates (due to the growth).
10-year exit strategy as a figure of speech…. 5 would be more accurate. That is, if we are forced by cutting taxes to cut education spending, we’ll torpedo future human resources. Hence, the sensible thing would be to exit before the tsunami of low quality workers arrives.
While I exaggerate here, such a problem is presently hitting the public schools of the USA no thanks to Bush and supply-side economics. While it certainly queues negative effects in the pipeline for the USA, it is unclear how bad they will be.
On debt, I do agree that less debt increases risk appetite and reduces a barrier to entrepreneurship. But that seems like an obvious thing, that need not be elaborated upon. However, the piece dwells so much on the supply-side fallacy. That, on the other hand, had to be commented on.
While my goal is to argue against the supply-side fallacy, I’ll touch a little on funding.
To an entrepreneur, person debt is a first order consideration.
Similarly, another first order consideration would be how much debt would have to be raised to get a start-up off the ground.
In a business plan, there are relatively huge (and largely certain) negative cash flows early on and small positive ones until some point much later. And the positive cash flows are quite uncertain.
Funding helps. It reduces uncertainty to say the least.
Ok fine, so whats your view on the current 7% GST then?
Yeah, but if you read TJS’ plan, he is suggesting that entrepreneurs must come up with 20% at their end as one of the criteria for funding. If like you say, being indebted is a barrier to entrepreneurship, then I don’t see how young SIngaporeans are going to put savings in a risky venture.
But you have to realise that Bush entered two expensive wars right? Surely, that is going to have an effect on his budget.
In the paper you cited, a study is cited that notes that a 10% cut in income tax increases incentives to hire by 12%. That is perhaps coincidental.
After successful advocacy of supply side policies (in the Regan years), Americans did not see the promised results.
(The Cato Institute echos arguments that supply-side policies were not really tried… but seriously… http://www.cato.org/pubs/journal/cj2n3/cj2n3-10.pdf)
With the same in the George (Dubya) Bush years, the Bush tax cuts oversaw a tanking economy.
On the 7% GST… As a consumer, I hate it. From a larger perspective, it is unclear how necessary it is. I do not have visibility over the impact of cutting GST. I think each percent of GST is $1.1B from households. Not too sure, but it should be in the ball park. That’s a dent in the budget, but not a big one. My gripe with it is its regressive nature.
That exactly my point, I was advocating a GST cut..in my supply side econs argument..if it is regressive.
I’ve no issue with a 20% requirement. You need some skin in the game. It’s folk wisdom among VCs that you fund the company whose founders are all-in. So many VCs can’t have all their money riding on discredited folk knowledge, can they?
Well, Bush entered the wars and US government surpluses in the Clinton years were reversed and the debt ballooned. Fair enough. But the private sector didn’t do especially well… Don’t tell me that the wars impaired the performance of the private sector, with all the government money flowing to private sector arms and service support firms…
On the business side, GST cuts don’t affect businesses with revenues more than $1M. They claim GST on their inputs. Firms with less than $1M in revenues do not need to pay GST.
On the individual side, GST payment is a larger fraction of income for a lower income individual. A reduction in GST would reduce the tax burden of the poor substantially. (I would actually be for a revenue neutral reduction in GST even income tax rates go up.)
Again on TJS’s 20% requirement for funding. While you do need some skin in the game. Raising everything alone is too hard. Having to raise just 20% is a great help. It can make the difference between setting up and not quitting one’s day job.
I’ve seen this at work in a case with about 50% funding. Think about how much of a difference 80% funding makes.
Yeah, but my point about the 20% funding should be viewed in the context of the high debt to income ratio that Singaporeans are suffering from. I do think with limited savings, Singaporeans are still like you say, having a barrier to clear before setting up their own businesses.
The two pronged approach of cutting taxes, including income and GST, plus addressing housing, and to a smaller extent, education costs achieves to achieve one thing – increases savings of young Singaporeans. With savings, they have one less barrier to start their own businesses.
My point is that TJS’ proposals doesnt clear these barriers.
Housing is a huge barrier. I believe our model of government financing has led to the incentive to let housing prices go up and up and up. When a fraction of income is captive and the only thing you can buy with it is a necessity, there is little else you will do with it. Government land sales bring in huge revenues if supported by high housing prices. It is arguable that (multipronged) macroeconomic policies have been stimulating the rise in housing prices. In the same vein, (multipronged) macroeconomic policies can bring prices down to reasonable levels in time.
Income taxes, corporate taxes and GST, I feel do not play a major part in the decision to prepare a business plan or a resume. In magnitude, they are small compared to start-up costs and housing loans.
Receiving funding and having to stump up only 20% is a big thing for entrepreneurs. Moreover, the 20% they come up with goes into their business too, so it’s not debt. Furthermore, 20% is small enough to not be a huge pinch and big enough to matter to one being funded. We wouldn’t want to give money out willy-nilly with no accountability. If I were providing funding, I’d put in salary restrictions and reporting requirements too.
It can be said that that one segment of TJS’s plan does address a major barrier to starting up. It is a common barrier to all entrepreneurs — those who already own their own home and those who don’t.
But… this is a little off tangent to my original argument that supply-side policies do not work and have been demonstrated in relatively recent years not to work.
Purely from a macro economic view point, I would agree with your thesis. There are indeed lots of disincentives to for entrepreneurs based in Singapore but I don’t think they are necessarily more onerous than other countries – even the US and the UK.
In the US, entrepreneurs quite often relies on highly leverage funds to start-up and people are generally not too afraid to get into debt to catch that dream.
As for taxes as disincentives, well I am not sure about that. Take Sweden for example, their tax rate (personal and business) rates are high but they still generate lots of start up — I think — by comparison to Singapore. Examples include Skype, MySQL, Spotify, etc. If you compare (for a like-with-like) Sweden to Norway where business (not personal) taxes are lower, I don’t think there are as many start ups there. Admittedly, it is worth pointing out that many Swedish companies are HQ in lower tax based, e.g. spotify in UK and Skype, when started, in Luxembourg.
On this basis, I content that in the Singapore context the problem is not something that can be addressed at the macro economic level but something more deep seated — kia su-ism, perhaps?
I suppose macro economics policies could be at best a catalysis but can’t really shift mindset.
I am not really disputing TJS’ approach of funding entrepreneurs, my only dispute is on the basis that it should not be done at the first instance.
If you were in TJS’ shoes, should funding come immediately, or policies that increase savings comes first.
Anyway, to address your point about whether certain schools of economics work, much depends on the presence of noises, and the circumstance of the country..for example, tax cuts isn’t going to work when the budget is overblown and country is at risk of a sovereign debt crisis. It can only work with reduction of budget, a massive reduction. And I argue that in certain circumstances, Supply side could work, even in the US example, under President Warren Harding. He cut taxes, but also reduced defence spending, pursued through the Washington Naval Conference which aimed at Naval disarmament.
Keynesian, or supply side, Austrian or monetarist, the question of whether they work depends on the circumstances. The high debt to income ratio I believe is an appropriate circumstance for supply-side, in addition to addressing of housing costs. I am not disputing TJS, even his 20% rule, on the grounds that it shouldn’t be done at all. It is just that it shouldn’t be first-line.
Maybe let’s simplify things. If you are to govern over a nation whose inhabitants are faced with high debt to income ratio, and you want to promote entrepreneurship, what will you do FIRST? For me, income, regressive (value-added, gst) and corporate tax cuts come first so that the citizens have more savings. With savings, they have at least got something in their pockets to start their business. Supply side policies is something I want to consider first, in the context of a population facing high debt to income ratio, and addressing housing costs too.
There is a reason why supply side policies worked under President Warren Harding, just as is why supply side didn’t work any times else. Circumstances matter in which school of economics to subscribe to.
Anyway, as a previous commenter said, macroeconomic policies are catalysts. And I don’t see why catalysts should not be pursued. After all, it is catalysts that lead to desired reactions.
Dear Tan Ah Kow:
Thanks for your post. I agree to a large extent that catalysts could only do so much. But I think a catalyst is just as important in pushing for a desired reaction. After all, some reactions will not proceed or materialise without a catalyst.
However, your analogy is apt. Thanks for your great analogy.
You started off with talking about tax cuts, but since Singapore is quite lean on tax rates already, there is really not much to cut. And so you move on to debt.
But supply side economics, which you want to use as justification, has nothing to say about the effects of debt on entrepreneurship. As a simple counterpoint, US households have much higher debt than Singaporean households, and that hasn’t stopped their entrepreneurs.
I suggest you revisit the issue with a full focus on debt,
You will also want to be careful in interpreting Romer and Romer (2007), neither of whom are supply side economists. They claim that the effect of tax cuts falls largely on demand, not supply! Theirs is a story of the Keynesian Tax Multiplier.
What is your perspective of regressive taxes like Value Added Taxes like GST, if you say our taxes are quite lean?
WIth regards to Romer, they did discuss about supply and demand-side leading to GDP growth, but then again, I am aware of Christina Romer’s disagreement with Supply side, where she said that the supply side effects of cuts are modest. I just thought of including that as a reference even though it has modest effects, because I didn’t think the paper settled the debate between demand and supply siders. I wouldn’t completely rule out a supply side effect in Romer’s. However, that is all up in the air for debate.
Googling the views on Romer paper is pretty interesting. You get views from both sides. Some favour demand siders, whilst others sit on the fence. Though I see the merits in the demand side arguement, I wouldn’t be so quick to conclude. Interestingly, the Romer are New Keynesians, as opposed to the traditional one.
It is just that it is one of those rare papers that shows you the macroeconomic effects of tax cuts in the current era. This was why I quoted them