Kelvin Teo
Consumption taxes like GST will actually make it harder for the poor.
A January article published by The Straits Times reported that the Singapore government is set to record a “whopping $6 billion” budget surplus after a buoyant economic performance saw an increased return in corporate, income, goods and services, and property tax revenues, with gaming levies from the integrated resorts being the “star performer”. According to the article, the government will have a considerable war chest with the surplus that can be used to help poorer Singaporeans cope with the rise in consumer prices. Earlier on, it was revealed that the Goods and Services Tax (GST) was increased to 7% to help the poor.
GST comes in different labels; the other name for it is value-added tax (VAT). It is basically a tax that constitutes a certain percentage of the purchase price of a good or service. Opponents of GST/VAT have criticised it for its regressive nature. The criticisms merit due consideration – GST is actually seen as a regressive form of tax, and affects the poorer households more than anything else. The reason is simple; the expenditure of poorer households on necessities take up a larger proportion of their income as compared to the wealthier households. Older and retired citizens who have no stream of income are also affected, especially those from the lower income group. They have considerably higher consumption needs, for instance, from healthcare to nurse their ailing health.
Joseph Stiglitz, an economics Nobel Laureate and professor at the Columbia University, rightly pointed out that GST/VAT has distortionary effects on the market. Basically, taxes including GST/VAT, encourages non-market production. This can be illustrated with a simple example. When a 7% GST is imposed, a family decides not to purchase a washing machine. They instead prefer to stay at home, hand-wash their clothes and hang them out to dry when the sun is out. This act of hand-washing clothes at home is an example of a household non-market production. This form of family labour is not taxed, whereas labour in the market, i.e. working in order to buy a washing machine, is taxed. Due to the market distortionary impact of GST/VAT, consumer behaviour is altered – they tend to consume less and at the end of the day, businesses are impacted.
During the parliamentary debates earlier this year over imposing GST cuts, Members of Parliament Christopher de Souza and Associate Professor Koo Tsai Kee insisted that GST cuts benefit the rich more than the poor. They reasoned that the rich consume more, and therefore, more GST returns can be generated from the them. However, there is a need to consider the other side of the coin. The issue is it is not that Koo and de Souza were wrong but rather, an appropriate question has to be framed. The pertinent question should be why is the poor consuming less as a result of the current GST rates, rather than the rich consuming more? The answer is already provided earlier. Because of the regressive nature of GST, the poor tend to spend a higher percentage of their household income on necessities. With the GSTs in place, they are more affected and will end up with less savings. They will tend to consume less, and resort to household non-market production where labour within the household is not taxed.
However, it was also mentioned that the purpose of the 7% GST plus taxes from other sources is meant to help the poor. There is one administrative issue which can be significant, and hence it will be elaborated upon. I do not claim knowledge over the administrative process of disbursement of financial assistance to the poor in Singapore and will make a commentary in general that may or may not reflect the current reality. In general, an administrative issue of concern is how soon the financial assistance can be disbursed to the poor, and if there are any administrative difficulties, hassles or obstacles that a poor individual faces in applying for financial assistance.
Take for example, a poor elderly man whose monthly consumption includes necessities and medical treatment for a chronic condition that he is suffering from. Given his poverty and the fact that he is not working, consumption will take up a large part of his savings. A GST hike will adversely affect this poor individual, but given his situation, he is entitled to financial assistance. The question now is when will he receive his financial package after the GST hike resulted in a further drain of his savings. It is not an ideal situation for him when he receives his package 6 months later. The more astute among us can see an analogous parallel in the working world with the predicament faced by this poor elderly man. Some jobs are project-based and require individuals to complete and deliver them. It could be that the nature of some of these projects require some form of expenditure, either in terms of transport fees or other relevant materials during the production process. Now, if the firm who awarded the project keeps delaying its completion (administrative hassles and obstacles), the individual working on the project will be receiving his payment later. Or it could be that the firm simply has the habit of delaying payment to individuals even after the project has been completed for a long time. Being paid late in such situations is definitely not ideal. The individual has to worry about how to cope with current expenses. Thus, the question in general is not only about helping the poor, but also, how soon will the help arrive?
The devotion to analysing the current state of government budget is an interesting endeavour per se. Broadly speaking, a budget surplus may reflect a healthy growth in economy, and depending on the kind of tax structures in place, increased consumption lead to increased returns from VAT/GST, or if a progressive tax policy is in place, i.e. those with larger income pay more taxes and there is a general improvement in income across the board due to an improved state of the economy. However, there are other indicators that tells us a lot about the state of economy such as Gross Domestic Product and adjusted net national income. A budget surplus may not necessarily mean economic growth, but rather the government is not spending (generally speaking, doesn’t have to be restricted to Singapore), for example in health, welfare and other areas that require public expenditure. Or another possibility is that the population is paying too much tax that goes into the government coffers. Therefore, every nature of government budget, be it surplus or deficit has its very own story to tell.
However, it is interesting to note that with we are running into budget surpluses with a 7% GST and tax revenues from other sources, with levies from the gaming industry at the integrated resorts being the star performer. The levies on entry into casinos are known as sin taxes, which are imposed on activities that society considers as vices or undesirable in general. Gambling is considered as a vice, and participation in it at the casinos of our integrated resorts results in sin tax being levied. Sin tax is actually a good fiscal tool to combat social vices. The question we should be asking is rather whether the current budget surplus is excessive that we should reduce or do away with certain sources of tax revenues such as GST? Critics of the GST cut will point out that less tax collection from GST will reduce the size of the war chest to help the poor. This criticism will be addressed towards the end of this piece.
Supporters of the current fiscal policy will assert that such budget surpluses will not be left idle, but will be invested through the vehicle of a Sovereign Wealth Fund (SWF), to grow our wealth so that the proceeds can go into helping poor Singaporeans and future generations. However, a study has found that long-term performance of SWFs generally tend to be poor due to poor portfolio diversification strategies and corporate governance, which means how well our SWFs perform in the long-term is attributed to the soundness of their diversification strategies and quality of corporate governance.
We now turn back to the rhetorical question raised in the title – will we Singaporeans be happier with a GST cut or the Grow & Share package? The thing to consider is that whatever handouts we get from the Grow & Share package will not remain in our pockets for long. As long as we consume goods and services, the tax we pay through GST will flow back into the government coffers. However, if we drastically cut GST, the impact on the population is immediate. We pay less than before for consumption, and will have more savings. While it is human nature to react with instant gratification over a handout, only a GST cut in the end with leave more money in our pockets! To address the potential criticism that GST reduction will reduce revenues collected from it, and hence size of the war chest collected to help the poor, the problem is that GST itself is considered a regressive tax, and that consumption will take up a larger part of the poor’s income. A GST cut has an immediate effect of reducing their consumption and increasing their savings. Besides, one must also consider the market distortion effects of GST in encouraging non-market production. Cutting or doing away with GST will address this distortion and encourage consumer spending on the market, and stimulate local businesses.
To conclude, yes, a GST cut is actually beneficial, and the current government would have won (open to debate for those who disagree) a stronger mandate if it had imposed the cut as compared to coming up with the Grow & Share package.
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Photo courtesy of I5 Design & Manufacture, Flickr Commons
