GST Hike: Sugar-coating backfired? Look again and spot the trojan horse.

Just as Wee Shu Min slid off the Technorati charts, the GST hike focused Singaporean bloggers on the elite/lower-income divide again. PM Lee sugar-coating of the bitter pill as an "offset package" appears to have backfired - the widespread knowledge that GST is regressive has riled bloggers into exposing what seems to be a "robbing Peter to pay Peter" scheme. I think the center of gravity of the issue has been misplaced. The lower-income group has been politicized as a red herring. We need to clarify our thoughts. We should separate the issue into its two dependent, yet distinct constituents: first, the GST hike should help Singapore's economy improve its competitiveness and second, the government should offset the regressive effects of GST. And while we've been so busy arguing about the GST hike, did we just let something slip past us? (more on that later)

Lower-income group used as a political tool
During elections, the opposition parties frequently painted the PAP as a party that neglected the lower-income group. In return, the PAP drills new recruits into acting like nuns, making sure their resume includes the item community service. The handshakes made in wet-markets and other photo-ops involving MP+lower-income person is PAP's way of saying "we care."

Bloggers, use our collective wisdom...wisely

Bloggers have been flailing their hands (on keyboards, no less), churning out data, writing to the ST Forum to show how regressive GST is. Bloggers form a tremendous source of intelligence in Singapore - I hope we will stop chanting "GST is regressive" (because we all now it is true) and dig deeper for more problems/solutions. Anecdotal evidence is really flimsy, the other camp has a Finn saying he left his welfare state to come to Singapore and did that convince you? PM Lee already stated how he is going to tackle the regressive problem. Is GST the best way forward for our economy? Let's discuss that.

The GST hike is economically sound
Let us leave the minefield of social policies for a while and look at the other issue - economics. I am of the very few, but certainly neither the first nor the second, who believe that the GST hike is economically sound. The general understanding is that raising the GST creates room to lower the corporate tax rate and attract foreign direct investment, which should eventually benefit all involved in Singapore's economy.

A blogger erroneously concluded that only Hong Kong has a lower corporate tax rate than Singapore. I say that because Reuters already reported that Slovakia's is lower. However, he is right to focus on Hong Kong because Hong Kong is what we are worried about. I found an OECD report that states "corporate taxation has a non-negligible impact on FDI location choices" while emphasizing that other legislative and fiscal policies are equally important in determining FDI. Singapore is on an all-else-equal situation with Hong Kong, (even air quality has become equally bad in both cities) and corporate tax might decide which is favored. The bigger act PM Lee might be trying to achieve is to tilt the FDI balance towards Singapore. The last lines of the Reuters report implicitly praised Singapore as being prescient. In another part of the same article, he succinctly argued that "the lowest-wage earners might not take so kindly to a S$2 increase in their S$100 electricity bill. Yet if people don't have jobs, electricity will be expensive at any price."

On a somewhat related note, Germany aims to lower its corporate tax from 39% to 29% in response to globalization (from IHT).

The GST hike might not be the best way forward
We have PhD in economics candidates arguing about this issue, so I hope we'll see more academic discussion being pulled in. Today, one of the greatest economists of all time died. Coincidentally, Milton Friedman championed one of the most innovative taxation and welfare policies. His idea was to have a "negative income tax" that involves a flat tax (like GST) coupled with reimbursements based on income. He argued that it was a progressive tax while not being dragged down by (inefficiencies of) bureaucratic welfare systems. A paper from Johns Hopkins on NIT is available here. The government needs to explain to us why the GST hike is the best way forward, compared to the alternatives like NIT.

Trojan Horse
The GST hike has featured so prominently that we seem to have let a greater sum of money pass by without being debated. The Channel News Asia report on the GST hike ended with these words

"Another change will be the amending of the Constitution to allow the government to tap the capital gains received from investing the national reserves."
If you remember ex-President Ong Teng Cheong, arguably our President who did the most to act as an agent of checks-and-balances against the government, you will remember that he ran into most trouble using his Presidential power vested by the Constitution to investigate the use of our national reserves. I haven't investigated how much "capital gains from investing the national reserves" amount to, but I suspect the GST money will appear to be peanuts. (Disclaimer: I am not an elitist, the GST hike is painful and involves lots of money).

I would deeply appreciate feedback on this blog post. Thank you for reading.

20 comments:

Aaron said...

Well, you've nicely summed up the various dimensions concerning the issue. I am most interested to find out what's your stand? You mentioned the NIT. Is this your recommendation? I'm more pro income tax versus consumption tax because of the regressiveness of consumption tax. If there are alternative ways to tax without having to tax income or consumption, I would like to hear about it. If at all possible, an in-between solution would be the best.

tim said...

I'm the one who sent in the letter to the ST Forum, but I think you've misunderstood the point that I was trying to make in the letter.

My intention was to merely highlight that the GST was regressive, and that it hits the poor the hardest.

I think the issue that is really at hand is - what are we doing this for?

If it's for the lower-income, then it is counterproductive, because it is going to hurt them the most. There have been people who have argued, as you mentioned, that GST is the best way forward for the economy. While that might be true, it fails to take into consideration the reason why this increase is being mooted. They are arguing for what is best for the economy, not what is best for the lower-income families.

In the letter, I also noted that income taxes had gone down more for the higher-income than they have for the lower-income. Again, this does not seem in the interests of the lower-income.

That's basically the point I am trying to make. What's best for the lower-income group may not be best for the economy, and vice-versa.

So the question is - whose interests should we be looking out for? The poor, or the economy?

kwayteowman said...
This comment has been removed by the author.
kwayteowman said...

Aaron,

Sounds to the KTM that Fabian hasn't quite made up his mind yet. :-) The current situation is exceedingly complex.

Even the fellas with PhDs (and PhD wannabes) also cannot anyhow decide. Most people also dun have all the facts and data available to them, so it's not simply a matter of being smart.

The KTM is truly amazed that we have so many people out there claiming that they have the GST all figured out.

Fabian,

At the end of the day, this is a zero-sum game. The poor are supposed to be getting more freebies than what they are going to be paying for in additional taxes. To balance the equation, some people must be getting less freebies than they are paying in increased taxes.

Perhaps an important question that should be answered is: who these fellas are exactly and how is the new tax regime going to affect them? The KTM believes that economics alone cannot answer this question (but he could be wrong). :-P

fabianlua said...

Hi aaron
thanks for your comment.

I wouldn't call my ideas my "stand" because when we frame the discussion as a polemic me-vs-PAP or me-vs-you, there tends to be just angry people who don't listen to each other.

If done right, I think the NIT will have the triple benefits of being efficient (not expensive to implement), progressive (as opposed to regressive) and still encourage people to work hard. The danger of social assistance schemes (with GST) and taxing income is creating disincentives to work as hard(incentives to work less hard).

fabianlua said...

I'm also concerned about the broader issue of media freedom and communication between the government and the people. Controlled media in Singapore seems to have led to the ST/CNA vs blogs syndrome, and blogs seem to be so suspicious of anything the government does, even speculating in conspiracy theories like GST hike is because of Temasek-Shin. The old/mainstream media is how the government communicated to the people in the past, but unfortunately for the PAP, that is no longer the only/dominant mode. I believe the government needs to loosen control on mainstream media to achieve some kind of balance and regain trust of (especially younger) Singaporeans.

It would be nice to hear someone from the MoF explain to us why GST is the best scheme. Would also be nice if one of the economics professors from NUS/NTU/SMU would write an editorial for ST/Today and let us know what they think.

fabianlua said...

thanks tim and KTM. I think both of you are focusing on something right - in this redistribution of money, who's paying for it? what should the government do to ensure no singaporean's hurt by this?

first, the game is not zero-sum for singapore, even if it is zero-sum within singapore. being more economically competitive means that our overall pie grows larger. economics is always about better-than-zero-sum for everyone. a focus on the economy is a focus on the poor.

second, the focus on the lowest-income group is political. as my friend J.L. argues, the lowest-income group will qualify readily if there are assistance schemes. compare this to the lower-middle group that might not qualify for schemes yet get hurt by the GST. in other words, the lower-middle might be the ones getting the fewest freebies.

economics is not a narrow field constrained to academics and theories expounded by professors who mumble to themselves. look at milton friedman and what impact he had on the US politics. we need our singapore economists to stand up and talk about this issue. where are those from our highly ranked universities?

gecko said...

Hi Fabian,

We only need to recall what consequence Tharman suffered on his accidental/unintentional release of key economic data years ago.

Our Singapore economists are no fools - speaking up for the GST measure is the only approach acceptable to the government. There have been those who have spoken up before and suffered hard knuckled raps on the fingers.

tc said...

gecko is right. The anti-gst professors are limited to writing blogs only. They are not allowed to create mischieve or encroach on the ministry of commmunication's / Bhavani commandments. Over the next months the mainstream media and 80 PAP MPs will have its role cut out - convince more of us that gst is really good for the poor. Can you expect the 80 PAP members to say otherwise after PMs speech in parliament? I wish some of the PAP members will resign soon if they are convinced in their heart that the poor will be worse off.

Robert HO said...

http://i-came-i-saw-i-solved-it.blogspot.com/

The major reason why LKY PAP can do anything he/it likes is that LKY is an election-rigging govt and therefore illegitimate and even criminal.

My blog, url above, proves that LKY rigged the Cheng San GRC 1997 elections, eyewitnessed by 2 people, one a former Police Inspector and former senior executive of the PSA; the other, his lawyer friend. That is why after 1997, Cheng San disappeared from the electoral maps. LKY lost Cheng San and could never contest there ever again.

Read my blog.

Robert HO
S0197974D

fabianlua said...

Hi gecko and tc
Now that you mentioned it, I remember the restrictions on professors engaging in Singapore politics. Wasn't that why Warwick didn't set up campus in S'pore?

---

I think it is unfortunate that we keep framing the hike as a matter of the lower-income group. That group has been used as a political tool, both by the PAP and people against the PAP.

There should be more transparency in the social assistance programs though.

Samuel said...

Fabian, is politics restricted to politicians only? This is the over-arching success that LKY has achieved - the severing of all political leanings from all professions. The bottomline is:

A [insert-your-choice-of-profession] may not be a politician unless he belongs to the PAP.

kwayteowman said...

Fabian,

First, you have several university professors who are MPs and NMPs. CSJ was also a one-time lecturer and MP. Therefore, the claim that professors cannot be involved in politics is actually unsubstantiated.

Second, talking about the GST is not necessarily domestic politics. It's an interesting question in economics and also politics (as in political science politics). It is perfectly understandable for local professors to talk about the GST even if they have no interested in domestic politics.

Third, regarding your question on why nobody has written an ST editorial, the KTM would venture to guess that it's because it takes time to do research. Kay poh bloggers can open their mouths without using their brains or doing research with impunity.

Professors have their reputations and future careers at stake. This means that they probably need to get their facts straight before the open their gaps. :-) Dun kuncheong and be too hard on them lah.

It's only been days since the GST hike was announced. While it is not completely unexpected that GST would be raised, the timing took MANY (probably including the professors) by surprise.

Fourth, redbean claims to be an economics professor, so it's not entirely true that the academics are not speaking up. :-)

fabianlua said...

Hi KTM
I guess I was too kancheong for someone to come up with a less rash analysis... just that I was disappointed so many of the SG blogs with "authority" (in the technorati sense) just kept rehashing the same issue that GST is regressive and lowest-income pay the most tax. We need to look at the overall picture - lowest-income are helped most, even though they pay most tax. Bloggers keep ignoring the part that lowest-income are helped most. For me, I think a lot of people have been writing/trying to represent lower-income people with anecdotal evidence or whatever comes to their minds.

---

I'm going to sound like I'm contradicting myself, but I don't think you need to be an economics major/phd/prof to be analytical about this issue. I was just hoping some MoF/prof would speak up because they would move the debate away from "GST is regressive." I have no idea what your real background is, but since you call yourself the KTM, I'll say that sometimes a KTM can argue as well as a Econ prof.

fabianlua said...

and a belated response to Mr. Robert Ho:

I don't suppose you usually get responses when you post your somewhat spam like comments, but here goes: I hope you'll respond to the blog post content instead of cutting-and-pasting your conspiracy theory. I'll be more inclined to listen to what you have to say if you actually responded to my post.

Gerald said...

Fabian,

Good post.

You wrote, "I haven't investigated how much "capital gains from investing the national reserves" amount to, but I suspect the GST money will appear to be peanuts."

For what it's worth, TODAY's article "Bigger war chest for battles ahead" (Nov 15) reported that:

"According to February's Budget statement, the NII for this year is projected to be about $2.39 billion.

'A lot of Government holdings tend to be long-term, and when the disposal happens, the gains are usually very substantial ... I won't be surprised if the NII doubles once you incorporate capital gains,' said Dr Chua Hak Bin, economist of Citigroup."

So according to Dr Chua, the NII revision could potentially bring in another $2.39 billion into the govt coffers. The Finance Ministry told Straits Times that every 1 percentage point increase in GST is expected to generate an additional $750 million in revenue. So this 2% hike should generate $1.5 bn. Yes, it's less than the additional NII.

But keep in mind the govt is looking to bring in TWO additional sources of revenue. So since they say it's for the poor, let's wait and see if we'll see a $3.89 bn package for the poor next year. I highly doubt so.

You've rightly pointed out that we bloggers have been beating up the "regressive tax" horse pretty bad. (I'm one of the culprits.) However most educated people I've talked to don't even know what a regressive tax is (I too had to Wikipedia it just to make sure I got all my facts right). If the govt is going to try to drum into our heads that "GST hike = tilting balance towards the poor", the least the alternative media could do is highlight (more than once) that this in counter-intuitive.

Yoyo said...

This is what happens to academics when they put out figures which are contradictory to the Govt's.

http://www.findarticles.com/p/articles/mi_m0BJT/is_7_11/ai_109402853

Nine in 10 new jobs in Singapore go to citizens and permanent residents, acting Manpower Minister Ng Eng Hen said in rebuttal to a university study saying foreigners took 75 per cent of new jobs, the Straits Times reported - Singapore - Brief Article
Business Asia, August, 2003
Nine in 10 new jobs in Singapore go to citizens and permanent residents, acting Manpower Minister Ng Eng Hen said in rebuttal to a university study saying foreigners took 75 per cent of new jobs, the Straits Times reported. Ng referred to the study by economists at Nanyang Technological University as "sensationalist, irresponsible and unprofessional", the paper reported, citing a meeting he held with reporters. The economists, Chen Kang and Tan Khee Giap, replied with a written statement saying they based their study on publicly available figures from the ministry's website, the paper said. The Ministry said its conclusion that 90 per cent of new jobs in the last five years were filled by locals was based on classified data, the paper reported. It said the economists were wrong to rely on Labor Force Survey data that didn't include construction workers living on worksites and workers who commute daily from Malaysia, the paper reported.

fabianlua said...

Hi Yoyo
thanks for the info.

KAI said...

As long as we are looking to the government to help the needy, taxation is the most efficient scheme to raise funds.
There's no taxation scheme that does not hurt across the board.

Even the rich tai-tai will be very angry at being deprived one more Prada bag.

Sure GST is regressive and hits the poor most. But how much taxes would be raised? Isn't that good enough to help the poor? The REAL poor?

Issues on the distribution / management of the monies is a separate issue and should not be used to confuse the main goal of raising gst.

fabianlua said...

Kai, indeed, we should separate the issues. I guess the mixing of the two issue started with PM sugar-coating the hike, and well, there's no end in sight...