7% GST

No no no, before you peeps thinks that i'm at it again ranting about my disatisfaction about the government, i'm not. What i want to achieve in this post is simple. After reading the CNA report, there are some confusing facts that I think is worthwhile highlighting (in bold)

GST to be raised to 7%: PM LeeBy Farah Abdul Rahim, Channel NewsAsia Posted: 13 November 2006 1832 hrs

SINGAPORE: The Goods and Services Tax will be increased to 7 percent from 5 percent presently. This was announced by Prime Minister Lee Hsien Loong in Parliament on Monday. However, when the rise will be implemented, will be decided later. Speaking in Malay, Mandarin and English, Mr Lee explained that the hike was necessary to finance the enhanced social safety nets, needed to help the lower income group and he emphasised that the offset package would more than counter the rise in GST. While Singapore's current model to tackle the widening income gap is sound, Mr Lee said the government would take on two approaches to deal with the new environment - to strengthen the safety nets and tilt the balance in favour of the lower-income groups who do not benefit from the fruits of economic growth. To do this, government spending will have to go up. The government now spends some 15 percent of its GDP - one of the lowest in the world. "This is inevitable over the next 5 to 10 years. Infrastructure investments will cost money - R&D is to cost $5b over the next 5 years; as medical technology improves, people age and more will go to hospitals to get more treatment, so spending is bound to go up. As we tilt the playing field across the board, the lower income will be getting another boost, not just once in a while. Therefore its better to start building resources now so that when we spend more, we have the means to do so," said Mr Lee. To finance this, indirect taxes or the Goods & Services Tax will have to go up. "It will give us precious extra resources to implement social programmes like Workfare later on. Our aim is to help the lower income groups and the elderly, not to increase their burdens. When we implement the GST increase, it's not just the GST increase, it's the package which will fully offset the impact of the GST increase and begin to strengthen the social safety nets and tilt the balance in favour of the low income groups - we will not just raise the GST but we will have a comprehensive offset package," said Mr Lee. This package will be weighted more to the middle and the low income groups, especially the elderly, and it will more than offset the GST increase. "It is not just an offset package to deal with the GST. It is a whole set of measures which we are taking in order to tilt the playing field in favour of the lower income group, which is what we have to add and tally in the balance, and my purpose is to help the lower income group. For the middle income, it will be generally about ok; for the higher income, I think the higher income should end up paying more overall. It's part of being one society. I'm not going to tax 15% on income tax, I'm not going to tax 25% from GST the way the Scandanavians do, but I have to make the adjustments of 2% which I think is fair and I think Singaporeans will support," added Mr Lee. He explained that it is better to do the increase now when the economy is doing well, rather than wait till later. This will give the government time to see how this adjustment can be managed, and to cope better with the unknown forces of globalisation over the next 5 to 7 years. More details of the GST increase will be announced on 15 February 2007, which is Budget Day. Mr Lee added that Second Finance Minister Tharman Shanmugaratnam would deliver the Budget speech. Another change will be the amending of the Constitution to allow the government to tap the capital gains received from investing the national reserves. - CNA /dt

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Question to ponder 1

"It will give us precious extra resources to implement social programmes like Workfare later on. Our aim is to help the lower income groups and the elderly, not to increase their burdens"

From my limited knowledge of economics, GST is a form of indirect taxes and indirect taxes are regressive. They do not help the lower income groups but serve to widen the income gap. This is because GST is like a widely cast fish net. The rich and poor alike will have to buy a packet of rice. If 2 persons needs 100 dollars worth of food to stay alive in a month, an increase in GST will meant that they would have to pay $107 dollars. if the rich earns $10,000 and the poor earns $800, a $7 dollar increase will mean an increased expenditure on food for the rich from 1% to 1.07% of monthly income. However, the poor will experienced an increased in expenditure on food from 12.5% to 13.4% of their monthly income. The rich pays 0.07% more but the poor pays nearly 1% (0.9) more. 1% vs 0.07% ! The poor pays 14 times more than the rich to stay fed. So, on this bombshell, how does a regressive tax scheme like the GST really help the poor?

Question to ponder 2

"we will not just raise the GST but we will have a comprehensive offset package," said Mr Lee. This package will be weighted more to the middle and the low income groups, especially the elderly, and it will more than offset the GST increase. "It is not just an offset package to deal with the GST. It is a whole set of measures which we are taking in order to tilt the playing field in favour of the lower income group, which is what we have to add and tally in the balance, and my purpose is to help the lower income group. For the middle income, it will be generally about ok; for the higher income, I think the higher income should end up paying more overall."

What is this "comprehensive offset package"? does it include tax bracketing? It sounds like a scheme similar to tax bracketing considering that the PM state that the higher income should end up paying more. But, like my first question, GST is a widely cast net, so how is this "rich pay more, poor pay less" works? Let's hope it's really something concrete and not another Progress Package" which is utterly useless.

Question to ponder 3:
"He explained that it is better to do the increase now when the economy is doing well, rather than wait till later. "

The last GST increase was 4 years ago, from 3% to 5%, during the 2002 recession. And if i remember correctly, that GST hike was deemed necessary to counter the bad economic times. But moving forward to 2006, if you look at the above statement quoted from our PM, he is now singing a different tune. He says now, that since the economy is doing well, it is deemed necessary to increase the tax rather then wait until the economy is bad. So... that means bad economic times we need to raise GST. Good economic times we also need to raise GST. I dunno about you but this logic of reasoning sounds more like a convenient excuse to raise GST then anything else.