1 Is the system fair? That’s a key question to be asked when we look at who pays and who benefits in our system of taxes and transfers. Does it benefit the lower and middle income groups? And does it also promote a dynamic economy and society, so that we keep moving forward?
2 Our whole system is designed to address these questions. When you add everything up, the system has three main features.
3 First, the overall tax burden is one of the lowest in the world. Taking together income taxes, the GST and all other taxes, the total paid by the average Singaporean are about two-thirds the taxes paid in the United States, and significantly lower than that in other developed countries.
4 Second, the system is pro-growth. Income taxes are low and the majority of the workforce doesn’t pay income taxes. It rewards effort and enterprise, and supports the constant urge to move up.
5 Third, the system is fair. Those who are well-off pay the bulk of the taxes, and the lower and middle income groups receive the bulk of the benefits.
6 The GST on its own is a flat tax, not a progressive tax. GST therefore takes up more of the pay of those with low incomes than those with high incomes. But what we have introduced is not just the GST but ‘GST plus’: the GST plus Workfare and other schemes targeted at helping the less well-off.
7 When we raised the GST from 5% to 7% in July 2007, we did two things. We provided a substantial package of GST offsets to help take care of the higher costs for the lower income group for several years. On top of that, we introduced permanent programmes to help the lower income group. As a result, a lower income family would have received new and additional benefits worth five times their increase in GST costs since it went up to 7%. (See Chart 1)
Chart 1: Lower Income Household: Additional Benefits Received Significantly Exceed the Extra GST Paid Each Year (2008 - 2010)
Figures refer to an average Singaporean household in the 2nd lowest decile of incomes. Source: MOF
8 Middle-income households received roughly five years of full offsets for their higher GST costs. And for all Singaporeans, the GST was part of the fiscal changes we made to enhance Singapore’s competitiveness and promote income growth. We invested in building capabilities, reduced corporate taxes and encouraged investments. This year, we also cut personal income taxes, especially for the middle income groups.
9 How does it all add up now? If we look at all taxes and transfers today, not just the changes since we raised the GST, how does it add up for different income groups? For the lower income household, GST is a significant component of the total taxes they pay. But the permanent transfers that they receive through Workfare and other schemes are far in excess of the GST they pay. And if we include all taxes and transfers, the result is the same - they receive significantly larger transfers than the total taxes they pay. (Chart 2 shows this for those within the 10th to 20th percentile on the income ladder.)
10 The reverse is true for the upper income group, and that is as it should be. They pay much higher taxes than the benefits they receive. Chart 2 shows the picture for those in the 81st to 90th percentiles on the income ladder. The picture will be greatly accentuated if we were to look at the top-most decile of incomes.
Chart 2: Taxes Paid and Transfers Received Each Year (Averages for 2008-2011)
11 So it is a highly progressive system. A fair and efficient fiscal system does not and should not mean that every tax is progressive. It means that taken together, our system of taxes and transfers should provide significantly more benefits for the lower and middle income groups. It should also do so whilst rewarding work and promoting income growth across the board, in other words, ensuring that we retain a dynamic economy and society.
Our sustainable finances are a key advantage
12 We were able to arrive at this fair and efficient system because of two important changes to our revenue structure that we made in recent years. Besides increasing the GST from 5% to 7%, we amended the Constitutional rules for drawing income from our reserves, for spending on the budget. The new ‘Net Investment Returns’ framework gives us an income stream of around 2% of GDP per year. It is a significant source of revenues.
13 We were fortunate to have made these changes in time, before the global economic crisis. No one anticipated a crisis of such depth. Our revenue structure allowed us not only to meet the immediate needs of our people and businesses, but to keep investing for the long term. Without a strong revenue base, a larger draw on our past reserves would have been necessary.
14 The comparison with the developed countries is stark. Their fiscal systems are under severe strain, not just because of the crisis but because they have postponed changes for too long. They will go through wrenching adjustments in the coming decade.
15 With our strengthened revenue structure, we will also be able to fund the plans we have for the next five years. Our expenditures are increasing. We are building new capabilities and infrastructure for Singapore’s future - in education and training, health and long-term care, transport, housing and neighbourhood rejuvenation. We are also enhancing our support for the lower income groups through Workfare and other schemes.
16 With the changes we have already made to our revenue structure, we will be able to meet our expenditure needs over the next five years. We have a sustainable fiscal system, and that’s a real advantage in today’s world.