SME-friendly taxation for fairness: Tharman

SME-friendly taxation for fairness: Tharman

Policymakers have to be especially friendly to small and medium-sized enterprises (SMEs) when designing policies to boost innovation and productivity, said Deputy Prime Minister Tharman Shanmugaratnam at a high-powered meeting over the weekend.

Mr Tharman said this was one way to ensure tax policy can support income growth in an inclusive manner.

"Studies in the US and some other places show that a fair amount of the inequality in our workforces is about inequality between enterprises - people employed by SMEs tend to get paid less than people who work in the same jobs in large firms," he said.

Thus he cited how tax allowances are given for investments in innovation and skills upgrading, but with a dollar cap. This means SMEs can benefit proportionately more, said Mr Tharman, who is also Coordinating Minister for Economic and Social Policies. He was speaking at a tax symposium at a meeting of finance ministers and central bank governors from the Group of 20 (G20) countries, held in Chengdu, China.

Mr Tharman noted a central challenge of tax policy. Income taxes can be kept low to support growth and innovation. But on the other hand, revenues will have to be obtained through consumption taxes, which hit the poor harder. Yet policymakers should include people from disadvantaged backgrounds in the labour market and to ensure they can grow their skills and incomes. This can make them feel included in society, he said.

He said one way to grow incomes for the less well-off is to implement negative income taxes for lower-paid workers, which Singapore has experience with implementing through its Workfare scheme. Another way was to provide tax credits and subsidies for training.

A dollar cap on total income tax deductions, which Singapore is implementing, is also a useful reform in personal tax income regimes as those who get the most benefit from tax allowances are the rich, he said.

Another priority for policymakers is around property taxes.

International evidence shows these taxes are the most efficient in that they are the least damaging to income growth, he said.

"There is in fact more scope in many of our economies to increase taxes on immovable property: land as well as developed real estate."

But property taxes have to be made progressive, and owner-occupied residences should be taxed less compared to investment properties. Land, even when not developed, must also be taxed, he noted.

Taxes on property transactions, like stamp duties, also have a place.

"Taxes on property transactions have been especially useful in the Asian context, where speculation in the property market is almost a habit," he said.

Mr Tharman also spoke about ensuring that subsidies for public services are targeted at those who need them most. Another priority is to ensure consumption taxes, like the goods and services tax (GST) or value-added tax (VAT), do not hit the poor disproportionately hard.

This article was first published on July 25, 2016.
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