Recent reports in the international media suggest that the US tax collector has received an unusually high number of queries from wealthy people about how to 'come clean' about their undeclared overseas wealth.
Breaking the law can rarely be condoned and this is not one of those 'Gandhian civil disobedience' moments. But the pandemic of Americans hiding money from their government does raise questions about the structural benefits of various tax regimes.
Offshore banking centers have come under pressure from the US tax man recently
Any crisis always presents opportunities for constructive change.
For Singapore, it might be the correct time to revisit the Goods And Services Tax (GST) rate of 7% and consider reducing it to, say, 5%. The natural economic distortion created by the GST, which is an indirect tax, is decreased and domestic consumption will be given a fillip.
It is intuitive to suggest that an efficient tax regime will not only generate high taxes but also encourage capital to be properly utilised.
Singapore's direct income tax system is easy to understand and simple to implement. Importantly, there is no tax on an individual's foreign earnings until the moneys are repatriated to Singapore.
Practically speaking, a friendly direct tax arrangement makes it easier for wealthy individuals like Jet Li or the financial guru Jim Rogers to relocate to Singapore. It means people do not have to pay taxes on their entire overseas income streams, only on the amount which they bring into and spend in Singapore.
Such stipulations encourage wealth to gravitate to Singapore. When you couple a low tax system with the other benefits of living in Singapore then it is no surprise people will be happy to live (and spend their money) in the city-state.
The inflow of wealthy and economically active individuals benefits all Singaporeans.
Poor most affected by GST
Indirect taxation, as represented by the 7% GST, is another matter. The GST scheme itself is an acceptable tax instrument but at 7%, Singapore's GST rate is higher than necessary.
GST is a form of regressive taxation. Like all forms of indirect taxation, GST has a greater impact on the less well-off sections of society than on the more affluent.
For example, a five dollars GST paid monthly by a typical cable television subscriber is more valuable to a person with a monthly income of SGD 2,000 versus someone with a monthly income of SGD 15,000.
It is a tax on consumption and, at least in theory, encourages savings and discourages consumption. However, consumption at a basic level is inelastic and comprises of basic necessities.
People with lower income levels are unfairly penalised because they have to spend on basic necessities, which is affected by the GST as well. There is only so much one can save by reducing consumption of rice and basic clothing.
Based on official figures, in 2005 approximately 40% of the labour force earned less than SGD 2,000 monthly. This large segment of the population will pay limited, if any, direct taxes but even a slight reduction in the GST will positively impact their consumption and savings dramatically.
Possible to permanently cut GST
During the years 2003 – 2008, Singapore's population has increased by 18% to 4.8 million (the increase in Singapore's labour force will typically be much lower than the 18% population increase).
In the same period, personal income tax revenue has risen by 53% from SGD 3.9 billion to SGD 5.9 billion. Takings under the corporate income tax head swelled by 43%.
Prima facie, the numbers indicate that current personal and corporate income tax rates are not acting as a drag on economic activity. After all, both personal and corporate income tax revenues have grown considerably faster than the rate of population growth.
This suggests that the reliance on GST revenue can be tempered as proceeds from corporate and personal taxes continue growing as the economy expands.
Since the introduction of GST in 1994, it has become a significant source of revenue for government coffers. In 2008, the GST will provide an estimated SGD 6 billion while personal income tax is expected to come in at SGD 5.9 billion. GST now delivers approximately 17% of total government revenue versus 12% in 2003.
GST is and will remain important to the government's budgetary process.
But Singapore has already accumulated reserves of over SGD 200 billion and generally manages a budget with an operating surplus. In this context, the focus for the taxation regime must be to increase economic efficiency in the employment of capital.
The only two certainties in life: death and taxation
Future taxation revenues should be underpinned by sustainable advances in domestic economic activity.
Ordinary Singaporeans have worked extraordinarily hard to contribute to government coffers for the last 44 years. The current economic crisis might just provide the best opportunity for the Ministry of Finance to evaluate a permanent reduction in the GST rate.The above article first appeared in The Online Citizen on August 28, 2009