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Embark on tax policies that change behaviour
AS WITH finance ministers before him, Heng Swee Keat has done an amazing job managing the Budget, especially under such challenging conditions. However, with tax rates at their current low, the Singapore Budget has in recent years become an exercise of funding as opposed to the use of tax policies to drive economic and social behaviour.
Traditionally, tax policies have been used as a tool to achieve one or more of the following:
- influence and reward desirable outcomes;
- penalise and discourage undesirable outcomes, and the use of such penalties to fund desirable causes.
The overriding criterion in designing effective policies, of course, is to ensure that the incidence of reward/burden is ultimately borne by the correct party exhibiting the desirable/
undesirable behaviour. In addition, for any measure to be effective, the stick or carrot must be pegged at a level that is meaningful enough to actually change behaviour.
However, my observation in recent years is that it is getting extremely challenging to use tax policies to achieve our goals. This is primarily a combination of low tax rates and unintended outcomes from tax policies.
Special Employment Credit (SEC) for older workers: While companies have indicated that this is a welcome measure (no one will reject a bonus), it is doubtful as to whether a 3 per cent SEC is sufficient to influence a company's hiring policies. It might be useful to investigate further; otherwise, we could be looking at S$600 million that could have been better deployed elsewhere.
Twenty per cent income tax rebate (capped at S$500): Only taxpayers with chargeable incomes in excess of about S$67,000 per annum (gross employment incomes in excess of S$80,000) will receive a S$500 tax rebate. Considering that around half of registered taxpayers do not have any tax liabilities, this small gesture appears to serve no real economic purpose apart from tokenism as it does not appear to be a significant amount vis-à-vis the individual's total income. Total cost of these rebates is expected to be in the region of S$385 million.
Increase in price of water: While I do not dispute the need to adjust the prices, we do need to bear in mind that there is, for every household, a basic level of usage that is unlikely to go away and we should ideally only be increasing the tariff for levels beyond this basic minimum. A good example of a similar implementation would be when telephone lines were repriced to reflect usage instead of the then prevailing fee structure. The final outcome of the adjustment actually resulted in households paying less for home lines with the burden of price increases shifted to the high usage corporate users.
In addition, for a water-saving policy to work well, the price increase should be pegged to a level that reflects frivolous water usage so that prudent usage is rewarded.
Also, as mentioned earlier, it is important that the burden is not shifted back to low usage consumers while taxing the high usage consumers. An example of this could be water supply to hawker centres (high usage consumers), which should be outside the scope of this increase as the end consumers (heartland diners) are the end recipients of this tariff increase.
Traditionally, our system has always favoured simple one-size-fits-all policies that are easy to administer but I believe that the time has come to refine our policies to ensure that the final burden is where it should be.
Diesel tax/carbon tax: The diesel tax is spot on and a good example of taxing specific areas. The carbon tax, however, is in its early days and we need to be mindful that any regime conceptualised does not end up in the carbon emitters passing on the costs to the end consumers (which could be the case if water price increases are not implemented correctly).
Various business schemes: This is an area where we should applaud the government for taking a genuinely proactive approach in helping the businesses. However, one cannot help but suspect that there is insufficient information and education out there, resulting in only the better organised (and perhaps bigger businesses) availing themselves of these schemes.
Also, in view of the already low corporate tax rates, any further rebates/incentives might be insufficient to influence economic behaviour (with the exception of the larger corporate taxpayers).
Categorisation of businesses: At the expense of oversimplification, we have traditionally viewed businesses as either large businesses or SMEs (small and medium enterprises) and tried our best to tailor policies to their specific needs.
However, I believe that perhaps the time has come to further relook at micro-SMEs on a standalone basis as they have different needs from the larger SMEs. These are typically family businesses that can be as small as having one to five employees, and helping them with specific measures could inject a certain resilience into the economy as more could be persuaded to start micro businesses and be less reliant on the job creation mechanism, which could be cyclical and fickle. In addition, the micro-SMEs of today could eventually be the SMEs of tomorrow and it is imperative that we try to nurture them before they fizzle out prematurely.
Budget caps on ministries and organs of state: While this is an admirable initiative, I remain to be convinced that this is the way forward. With greater complexities to deal with and blind spots in a free market, I believe that the public sector will play an even more important role in addressing these shortcomings. While all budgets should most definitely be relooked and reevaluated, I believe that the imposition of a downward cap might not be the correct way forward.
Conclusions and a peek into the future: The above is just a quick reaction to some of the Budget initiatives and is in no way exhaustive nor conclusive. As Mr Heng has hinted, expenditures are expected to rise in the future and these expenditures need to be funded. As such, it is even more imperative that we embark on policies that are effective in changing behaviours and relook spending policies that have no effect on outcome.
Taxes are already low and I believe that further reductions may not have the desired effect. Future funding is, in my opinion, likely to take the form of additional tariffs instead of incentives. As such, we need to be mindful that any additional tariffs do indeed have the effect of targeting specific behaviours and not have the unintended outcome of being passed on.
- The writer is director of taxes at PKF-CAP Advisory Partners Pte Ltd