Comments, opinions and an occasional ramble
Part 2 of thoughts on Budget 2007 – Is there a need to increase GST?
“Building capabilities for the future, strengthening our social security system and providing for the needs of older Singaporeans will require Government to spend more in future. This means we will need additional revenues. We cannot raise direct taxes. Countries the world over are reducing corporate and personal income taxes. To continue to attract talent and investments, and maintain strong incentives for our people to excel, we will in fact have to lower our direct taxes further over time.” — Extracted from Budget Speech 2007
I had argued in an earlier entry that it is not necessary to increase GST because countries with higher corporate and income taxes than Singapore still enjoy economic growth. I also argued that countries without GST, for example Hong Kong (I was corrected by someone that USA has consumption tax, but it’s not at federal level, so the earlier entry was inaccurate in this respect) isn’t in a state of economic stagnantation without income from GST. I’m going to review these 2 propositions that were made a few months back.
Regarding Hong Kong, while it is true that they don’t have GST, I forgot one very important thing, and that is Hong Kong is a part of China. Hong Kong has a really big brother to fall back upon should anything happen. Unfortunately, we don’t have such a luxury in Singapore. If Singapore wants to compete with Hong Kong in terms of corporate taxes, our government has to make up for the shortfall somehow because we can’t stretch our hands to someone and ask for a bailout. Who will give us money if we run into trouble? Malaysia or Indonesia? I’ll be glad if our neighbours don’t cut off our water and sand supply.
And, while there are many countries with taxes higher than Singapore progressing economically, that is true historically. With regards to the future, I’m not too sure. If it is indeed true that countries all over the world are cutting taxes, then I’m afraid Singapore won’t have a choice but to follow suit. However, I can’t comment more until I see updated figures on the tax rates of other countries over the next 1 – 2 years.
All said, I think I’ll tentatively agree with the need to increase GST. It is important that we keep our economy competitive so that Singaporeans will have jobs. I think that it is a very natural thing to try and match competitors when it comes to business, because failure to do so can mean death. But, I think that the government should explore other alternatives other than to increase the GST to make up for loss of income from cutting corporate taxes. I think that there’s a limit to how much GST Singaporeans are willing to pay. The PM has earlier hinted at the possibility of increasing the GST further. I would like to hint back that the next GST increase could be would be an expensive political price that might not be worth paying. There’s a limit to the threshold of tolerance from Singaporeans.
In anycase, the GST is a done deal. It will happen, no matter what. At the very least, the offset package was reasonable enough. As citizens, what we can do is to monitor the effectiveness of this policy over the next few years. If swallowing the bitter pill doesn’t yield the future benefits that the government is presently so convinced about, I’m not going to vote the PAP at the next General Elections.
| Print article | This entry was posted by Aaron Ng on 16/02/2007 at 1:39 am, and is filed under Ramblings. Follow any responses to this post through RSS 2.0. You can leave a response or trackback from your own site. |
about 3 years ago
Well said…on paper it seems to be a good move…however as the paper happens to be Today i think i will take it with a pinch of salt…esp since its full of positiveness…and i happen to be a cynic…
hmmmm…i wonder where that John guy went too…
about 3 years ago
Dear Aaron
3 points:
1) Hong Kong can fall back on China?
- Pls elaborate. Hong Kong is run pretty automomously from China. Yes, HK has the great hinterland of China to outsource manufacturing and as a market to sell their goods/services but isn’t that the same for Singapore? I.e. Malaysia is also a hinterland but we tend to frack up the relationship with them that SAF is here to invade them to defend our economic sovereignty?
You assume China will bailout HK economically if it fails. Does China bail out its own depressed rural communities? I do not quite agree with the comparison.
2) Cutting corporate tax rates
- this is measure that addresses the hygiene factor of attracting investments to Singapore. As it is now, EDB is already offering many different type of economic incentive schemes e.g. OHQ etc that allows concessionary tax rates way below that of the standard corporate tax rates.
Hence, using corporate tax rates as the main tool in attracting investments will hit the law of diminishing returns eventually. When that happens, what will we do? Decrease it to zero?
3) Round-tripping
- Tax first, give back more
- Question: why take back if you’re going to give back.
- Analogy: I want to give you $2, but I take from you $1.90 first then give you later $2. Shouldn’t I just not take the $1.90 from you first and give you net $0.10 if that is my intention? Imagine the administrative costs of administering the GST credit package.
We get the govt we deserve. Thanks to all who voted for the MIW.
about 3 years ago
Dear Hello Kitty,
Thanks for the critical insight. I’ll respond point by point.
1) You are right that I am assuming that China will bailout HK if it fails economically. I cannot be sure that China will definitely bail Hong Kong out, but I can be fairly certain that will happen. Yes, Hong Kong is autonomous for now, but the power of Beijing is quite obvious, for example considering how the Basic Laws were changed relatively arbitarily. Hong Kong isn’t as autonomous as we like to think.
Also, it is not in the interest of China to see Hong Kong fail. It will affect the entire Shenzhen area, which is experiencing very high economic growth right now. And, yes, we can sell things to China as well, but who will be preferred? Would China prefer to deal through Singapore, or Hong Kong? If I have something that’s so good at home, it is only logical for me to support and use that. Further, we don’t even need to talk about official bailouts. Because Hong Kong is part of China now, things are easy to arrange. Hong Kong can be given preferential treatment in China’s domestic market compared to Singapore.
Lastly, I think it’s unfair to compare rural communities with the urban cities. China too has a limit to the amount of funds it has. I think it would be more logical to bail out Hong Kong or Shanghai than to bail out Inner Mongolia or Tibet. Ultimately, I think that Hong Kong is more economically secure than Singapore because it is part of China, and China still has vast amounts of potential.
2) I totally agree with you on this. There is only a limit to how low we can go regarding corporate taxes. However, that is not a problem now because we are not looking at cutting corporate tax from say 5% to 3%. We need to look at the competitors now. If people indeed are cutting down their corporate tax rates, we don’t really have a choice right? If McDonalds sells cone ice-cream for 50cents, KFC would not be able to sell their cone icecream unless it is similarly priced.
I did note in my previous article, and I still stand by the last part of it, that we cannot compete on cost alone. Yes, we have to lower corporate taxes if everyone is doing it because that’s just the way life is. However, we have to increase the value of the non-tangibles. We need more creative people, we need to be able to stomach challenging conventions, we need to be more receptive towards alternative ideas. The PM talked about a more inclusive society. I think we are progressing a little slow on that front. If we don’t do that fast enough, there’s nothing left to differentiate Singapore from other countries if we ever come down to 0% taxes.
3) Yes, there’re administrative costs. However, the administrative costs are incurred only for 5 years max. Unless we can cut the GST, in future, it’s here to stay indefinitely. What’s 5 years of admin cost compared to indefinite years of income? I think the government is providing the offset package to buy time for people to get used to the idea of 7% GST. However, like I mentioned under point 1, the additional 2% increase in GST is not a problem if our increase in wages is far above that. It is up to the government to make sure that happens.
about 3 years ago
I personally think that there will be no political price to pay for increasing the GST further in the future…yes while some of us may delve into such issues…the rest of the singaporeans are more concerned with the never ending pursuit of the 5 Cs. Thus, due to the greater percentage of apathetic singaporeans…i feel that the lightning bolt will still reign supreme when my hairs have all turned white
about 3 years ago
Hi Aaron
The easiest way to test your arguments
1. would be to email editors at South China Morning Post that China will “take care” of Hong Kong.
2. tell your macro-economics lecturer that macro-economics is like selling ice-cream. and that we need to match corporate taxes of *competitor\tax heaven of choice* or perish.
Btw, what is your reason that GST is nccessary again? what was the reason given for the GST hike again?
Anyway, a balanced article here on economics and welfare if you have time (not directly related to SG budget of course but interesting reading)-> http://delong.typepad.com/sdj/2007/02/martin_wolf_see.html.
(Replace “America” with “singapore” )
about 3 years ago
Well Stark,
Let’s wait and see. Miracles can happen.
about 3 years ago
NoName,
1. I don’t think South China Morning Post editors will have an answer. I’ll try Hu Jintao.
2. I don’t have a macro-economics lecturer. In anycase, if I ask 100 macro-economics professors, I probably will get at least 10 different answers. Who should I believe?
Why do I agree with the GST hike? See the reasons given by the government. By the way, if you read my entry properly, it’s a conditional agreement. Conditional on the premise that the move will result in a stronger economy in future. I don’t think that it’s too late to change the government at the next GE if the promise of delivering fails.
about 3 years ago
I get your point on GST, Aaron, but I cannot get your Hong Kong argument. It’s true that Hong Kong is now ‘part’ of China, but it became so only in ’97. Hong Kong had achieved so much even before this transfer to China from Britain. Was it then relying on UK then? My point is that it achieved so much success because of its good policies and not necessarily the ‘luxuary’ of being part of China.
about 3 years ago
Hi Heng,
I think you misunderstood me. I never claimed that Hong Kong’s success was not due to its own efforts. In fact, it is just as you pointed you, Hong Kong made its own success.
I just saying Hong Kong has some form of “insurance” in the form of China, and previously, the UK. If somehow Hong Kong has problems in future, there’s someone to fall back on. We don’t have anyone to back us up. That was really what I meant. The link to the GST is that since we cut corporate tax, we need to somehow balance the books (which is through the GST in this instance). Hong Kong can cut their corporate tax but it will not have the same pressure to introduce a GST because they have China to go to for help if they really cannot cope.