e pur si muove

The latest news from Singapore is neatly summarized in the first two paragraphs of this MSM article:

Prime Minister Lee Hsien Loong yesterday served notice of a two-point hike in the Goods and Services Tax (GST) to 7 per cent, saying Singapore may need to cut its corporate tax rate to compete for investments.

Government spending will continue to rise every year while the state seeks to do more for lower-income people and the elderly and to invest for the future, Mr Lee told Parliament.

Source: Anna Teo, “PM Lee signals GST increase to 7%”, Business Times, 14 Nov 2006; as archived here.

What little I can recall of macroeconomics tells me that this smells like a very bad idea, because:

1. A sales tax such as GST is almost always regressive, i.e. the poor carry a larger tax burden than the rich. While the rich can hide behind tax shelter corporations and business expense accounts, the poor almost never have these recourses, and so must pay the tax upfront.
2. A sales tax affects the bottom line for poor people more than it does for rich people. If a person earning $1,000 a month spends $200 on food, and has to pay 7% GST on top of that, his tax burden for this purchase is $14, so that means that 1.4% of his salary goes toward taxes on food. Redo the calculation for someone earning $10,000 a month, and for this person $200 on food means only 0.14% of a tax burden for this purchase.¹
3. The reason given for increasing GST is because the government wants to help the poor. But since GST is regressive, it by definition affects the poor more strongly, which means that in trying to help the poor, you make things worse for them. This sounds like an exercise in futility.

Here’s what I’ve come up with so far that would make the higher tax rate more acceptable:

1. Exempt essential goods and services from GST, such as public transport and groceries such as rice, vegetables, fresh meat and fish. This would make GST function more like the VAT system in the European Union, and greatly lessen the burden on the people you are oestensibly trying to help out, if they confine their spending to these essential categories. However this could set a precedent for multiple tax rates for multiple food categories, making it a logistical nightmare for shops to comply with.
2. Offer tax rebates for needy families, e.g. as a direct tax refund on income tax. This would essentially work as a way to recompensate citizens for upfront taxation. However this would limit spending upfront since the tax money would still be locked up somewhere in the tax collection pipeline.

So either I’ve seriously misunderstood how taxation works, or the government has serious misconceptions on how taxation works, or the government is using proposed welfare programs as a flimsy excuse for the real reason for the GST rate hike, which is so that it can afford to lower corporate taxes.

Important as the tax burden on the poor is, there is a very disturbing message in all this that has far greater repercussions. The reason given for increasing GST is because the government expects a loss of tax revenue from lowering corporate taxes. The reason given for lowering corporate taxes is to remain competitive. So it’s a continuation of “business as usual”, which in this context is whoring Singapore out to corporations by offering tax carrots for MNCs to come in and set up shop. It doesn’t make sense anymore: We are a pretty well established economy, definitely a regional powerhouse; that should be enough for all sorts of other corporations to want to come here, but they’re not. Long ago the concerns were how to create pull factors; now the concern is that despite our current pull factors, we must have some push factors that are forcing corporations to shy away, or even pack up and leave altogether. High labor costs is one of the big ones, but the answer isn’t to cut costs elsewhere or freeze wages, it’s to train a workforce that had better be worth the money. That’s what we should be focussing on what we need to do, not try to sell ourselves out collectively as a country at the expense of ourselves.

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Sometimes things break all at once, and you realize that for the last two months or so you have accomplished essentially nothing except learn new ways to swear at the computer from your labmates. (So far I have learnt, at one point or another, Cuban Spanish, Thai, Shanghainese, Korean and Texan.)

And then you go to a talk on campus and hear, much to your amusement and horror, of how young zebrafish have been spun in centrifuges to see the effet of hypergravity (high-g) growth environments on the developments of their inner ears. It doesn’t take much to see the humor in studying spinning zebrafish in a large jar. Add that to the speaker nonchalantly answering a post-talk question by “Oh, the experiments run only for up to 8 days because after that the zebrafish starve to death”. Apparently the continuous high-g environment is more important than actually feeding the fish and keeping the experiment going longer.

Then from a certain person, you get something like this forwarded “just for you”:

And then you realize that even zebrafish and lab rats have their sucky days.

Maybe it’s schadenfreude, but it makes me feel a little better.