Lower direct taxes

For many individuals and households, there is little available by way of bank credit. For them, their cash stream comes from employment income and savings. If recession deepens, subsistence may become an issue with any widespread job cut. Social spending will clearly be one of the biggest challenges to the Government. Since this group of people pay very little or no tax, tax relief and tax cuts do nothing to help them.

However, a cut in personal and corporate income tax rates will clearly reduce the cash burden of those who are paying taxes. In a recession, especially in a recession that some say will rival even the Great Depression, the behavioural inclination is to hoard the cash from tax savings rather than to spend these. There is of course this other issue even if these tax savings are spent - some 60 per cent of this spending will likely leak to other economies. So we get into this paradox - one country spends the money but helps jobs creation or spurs demand in another country!

With the stimulus packages already announced by many countries, including China's US$586 billions, arguably some of the benefits will trickle into the Singapore economy as well. Although not a zero sum game, our sense is that if more and more governments act in unison on stimulus packages, the leakage from our own economy is arguably lower than the current estimate of 60 per cent. But if tax savings fuel cash hoarding, then it calls to question the economic stimulant effect of any sizeable tax cuts.

So the question is whether the tax savings will be hoarded rather than spent. Again, our sense is that there will be some degree of hoarding. But this is unlikely to be hoarding for hoarding's sake. More likely than not, it is to stretch the dollar for as long as possible. We therefore see this hoarding akin to slowing down the cash burn rate, increasing sustainability and therefore survival, both for individuals and businesses. If our sensing is right, then cutting taxes could be an option on the table.

Since the aim is to put cash in the hands of individuals and businesses, cutting taxes is only one of a number of available options. Another obvious tool is to give a one-off tax rebate for both corporate and individual taxes. Yet another is to offer a programme to allow a far larger number of instalments for tax payments. Between cutting taxes through rates cut and rebate, we vote for rebates.

Any corporate and income tax rates cut from their present level will signify a change in the longer term tax rates structure. Once changed, it is difficult to reverse course even if economic conditions later support this. A tax rebate offers the advantage of releasing cash into the economy but leaving the present tax rate structure unchanged. To create hope and instill confidence, this rebate needs to be large, and should cast over a longer horizon of two years, rather than for only one year to allow for greater cash predictability.

The present crisis is fear-induced and the main fear is cash availability. This rebate ought to help both individuals and businesses stretch their dollar for as long as possible. The intent is to soften the fall and help buy time to get into a period of better stability and normalcy. No matter how difficult the recession might be, the storm will one day blow over. When that happens, the lesser the casualties the better the economic combativeness of our business communities and our people, and the faster it is to gear up for the up-swing.

Clearly tax rebates alone will not be enough to ensure survivability with no casualties. And the intent is clearly not to advocate a bailout, but to give businesses the maximum support possible to weather out the storm.

There is in fact a far more radical option. This is the switch to a current year tax system and coupled with a one-off 'tax holiday' for everyone. Currently, tax is paid only on the income earned in the year before. Changing this to a current year system means tax is paid as the income is earned. And in the present economic condition, a current year system takes away the cash flow pressure of having to pay tax in a bad year on the income earned in a good year.