Budget 2013 leaves more room to be progressive: economists

Economists and finance analysts on Thursday evening questioned the extent of the progressiveness of government’s proposed budget, noting that there was still a lot more room to increase tax rates for high-earners, in particular.

A panel made up of four economists, two finance experts and a tax partner, including forum moderator Donald Low, shared their views at a forum organised by the Economic Society of Singapore on Thursday, with several also expressing doubts over the potential effectiveness of measures to improve labour productivity and help lower-income workers.

OCBC Bank’s head of treasury, research and strategy Selena Ling described the government’s efforts at making Singapore’s tax system more progressive as “tinkering at the margins”, noting through charts that the country’s fiscal surplus has for several years been larger than projected.

“I don’t think we’re quite there (at Robin Hood level) yet... we’re just taxing a little on the wealth part, and the government sort of channels a bit more into the lower-income levels,” she said of the budget unveiled by Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam on Monday.

Ling also noted that the government so far dedicated about $300 million to the Workfare Income Supplement (WIS), which is targeted at helping low-income workers, each year since it was introduced in 2007, adding up to about $1.5 billion to date, as compared to $3.6 billion that it is projecting to spend over three years on its new Wage Credit Scheme, which would benefit middle-income workers.

“So it’s only going to be a fraction of what the Wage Credit scheme is... (and) I think as far as the WIS goes, more actually can be done,” she said.

“As far as the progressive tax structure is concerned, I think they’re only tinkering at the margins,” she added. “We haven’t really done the next step, which is to raise tax rates for the top marginal earners.”

Assistant economics professor at Nanyang Technological University Giovanni Ko, who spoke on the progressivity of key budget incentives, noted that although the 30 per cent across-board income tax relief is beneficial, the $1,500 cap kicks in for people with chargeable annual incomes of about $95,000 (for those under 60) and about $75,000 for those 60 and over.

“For lower income groups, these (provide) just proportional help,” said Ko. “It would be better to have an absolute component as well to improve progressivity.”

Speaking of this measure, Ko also said taxing the highest earners more is “the simplest way”, as opposed to the government’s choice of a “dual route” involving consumption tax — in the form of the additional registration fee for cars — as well as making property tax progressive instead of flat as it was in the past.

“Property tax is a progressive tax on wealth, but is not comprehensive because other forms of wealth remain untaxed,” he pointed out, citing financial assets as an example.

Both Ko and his colleague, Winsemius Chair professor of economics at NTU Ng Yew Kwang, endorsed the new moves on automobile purchases, however, saying imposing heavy taxes on new cars “is consistent with economics”.

“Cars give rise to numerous negative external costs: congestion, pollution, accidents, noise, and the conspicuous consumption effect, which means that the use of cars and petrol should be very heavily taxed,” said Ng. “All cars should be taxed, but expensive cars should be taxed more.”

Higher wages = higher productivity?

Would the wage credit and PIC scheme help to boost productivity? The panel was divided about this, although many attempted to tackle the issue, as well as this new measure.

Transaction tax partner at Ernst & Young Solutions Russell Aubrey wondered about the impact of the PIC on productivity.

“I think there’s a question mark as to whether or not you can force productivity growth through tax measures and grants,” he said. “The jury’s still out. Certainly it reduces the cost of buying equipment or giving training, but whether or not it yields any incremental increase in (productivity) remains to be seen.”

Turning to the wage credit scheme, economist at United Overseas Bank Francis Tan said he believes it is for longer-term structural purposes, but noted that margins will suffer and compel some firms to exit their industries.

“Productivity growth in Singapore has been very low and the local workforce knows it has no competitiveness with foreign workers, and have no incentive to increase productivity — thus firms are hesitant to raise wages,” he said.

“(As the policy) lasts for only three years, firms may take a wait-and-see approach this year and not jump onto the wage increase bandwagon immediately,” he continued. “We suspect most of the firms will still likely be cautious and demand better show of work performance before justifying a wage increase, so the same problem arises.”

Ling noted further that given Singapore’s full-employment situation, “there is little more we can squeeze out” from part-timers, retirees, housewives and others who are not participating actively in the workforce.

“So when you’re at full employment and you’re ratcheting up the curbs, quotas, and levies on foreign workers, whether the guy is more productive or not, you still may need to give that increase because you want to retain him, so you may end up with everyone competing to give that increase, but productivity may not go up,” she said.

“So to me, because of the situation right now, to a certain extent we may be putting the cart before the horse, because the assumption is you give the wage increase, the worker will be more productive.”