BUDGET 2015's surprise hike in top personal income tax rates reflects the government's determination to strengthen future revenues, with the next iteration likely to come from higher Goods and Services Tax (GST) - though this may not happen anytime soon, observers have said.
Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam had caught economists unawares on Monday with his announcement of an increase in the top marginal rate of personal income tax to 22 per cent from 20 per cent, and smaller adjustments for others in the top five per cent of income earners.
"Our philosophy is to keep the burden on the middle-income low, and to target benefits at the most important needs of the poor and middle-income groups ... Hence, we have designed our system such that we have lower overall taxes than most countries, but nevertheless maintain a highly progressive regime," he said, adding that the lower-income group gets significantly more benefits than the taxes they pay.
Still, observers told The Business Times that there is room to strengthen Singapore's revenue base - whether by way of higher marginal tax rates for a broader swathe of income earners, or through a rise in the GST rate.
After all, they said, calls for greater social spending must come with a new social compact - where a stronger sense of collective responsibility augments the long-held foundation of personal effort. At present, the top 10 per cent of Singapore's taxpayers foot slightly over 80 per cent of personal income taxes.
Nanyang Technological University (NTU) associate professor of economics Walter Theseira said: "I think the main motivation for widening the tax base is, honestly, not the revenue. It's more about the principle of solidarity, which is that everybody contributes something, even if it's not a very large amount. To give the idea that we'll tax you only if you're very rich and the rest of you get redistribution from the rest of these guys - that's not the message to send."
Indeed, Mr Tharman had said on Monday that "it would be naive to think that we can keep raising tax rates without affecting our competitiveness", and noted that many Singaporean professionals are in fact working abroad, in places like Hong Kong.
Still, Laurence Lien, chairman and chief executive of Asia Philanthropy Circle, said there is still room for top marginal tax rates to increase further: "Whether it's 22, 24, or 25 per cent - it's still more than bearable for high income earners, who get a lot of value out of being here."
Even so, now that steps have been taken to make Singapore's income tax regime more progressive - especially with the introduction of various negative income taxes for lower-income groups in recent years, such as Workfare and the Silver Support Scheme - private-sector economists say a rise in consumption taxes, particularly GST, will be next.
Mizuho's Vishnu Varathan, noting that top-end tax rates cannot keep rising without adjustments to consumption tax, said: "It's like eating a fishball on a stick - you don't keep biting on one side because half your fishball is going to drop off on the other side."
He added: "There is a bona fide intent to have our tax system be very progressive, but at the same time, Mr Tharman has emphasised that we have to look at the entire suite of measures to see the progressivity of this.
"So at some point - maybe five or eight years down the road - our GST will have to rise to 10, or maybe even 12 per cent."
Even though the GST is a broad-based, regressive tax system, economists do not think that increasing it would undermine recent efforts to make the income tax regime more progressive.
UOB's Francis Tan said: "As long as the government is efficient and sufficient in identifying the bottom tier who need GST vouchers, they can increase intensity of subsidy to help those suffering from an additional three percentage point GST hike."
Still, several observers pointed out that this is unlikely to materialise anytime soon, citing the government's assurance in 2011 that the GST rate would not be increased for at least the next five years.
Mr Tharman had also said in his Budget speech that, based on current projections, the revenue measures introduced in Budget 2015 "will provide sufficiently" for the increased spending needs planned for until the end of this decade. Noting the inevitable increase in government spending in the future, driven largely by health-care and infrastructure needs, Mr Tharman had underscored the need to review Singapore's domestic taxes to bolster the country's fiscal position for the long term.
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