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.