One-off rebate can’t make up for an income-tax cut, especially when inflation is expected to rise sharply
THE collective groan of disappointment that greeted the government’s announcement of no cuts in personal tax rates this year was just about matched by the cheers that went up when a one-off 20 per cent rebate was subsequently announced.
But make no mistake: the rebate, generous as it was, cannot make up for the much-needed tax cut.
And that’s because what’s at stake are not just lower individual tax bills – but how tax cuts can help Singaporeans cope with the rising costs of living and aid Singapore’s regional and international competitiveness.
But don’t get me wrong: the 20 per cent rebate is a very welcome measure. It would mean having a fifth of your tax bill knocked off this year, subject to a maximum reduction of $2,000.
Public accounting firm KPMG has done the math, and calculated substantial savings for the lower to middleincome earners. The benefits thin out for the big-income earners, expectedly, because of the $2,000 cap.
But are the savings enough to help Singaporeans cope with one of their most pressing concerns in recent times – the rising costs of living here?
Inflation in Singapore, as mentioned in the Budget speech yesterday, was about 2 per cent for 2007 as a whole – and was much higher towards the end of the year. And inflation is expected to hit between 4.5 per cent and 5.5 per cent this year.
As Finance Minister Tharman Shanmugaratnam himself said: ‘Inflation today is higher than what we have been used to in Singapore for many years.’
The unprecedented level of inflation will be a grave concern for Singaporeans, going forward – which makes the need for lower taxes all the more urgent.
And the 20 per cent rebate, while generous and targeted at the low to middle-income earners, is just a one-off measure – that is, it will only mean lower tax bills this year. What’s needed to help Singaporeans cope with rising costs over the longer term is a more permanent move, in the form of a reduction in the tax rates for all individuals.
To a lesser extent, a cut in personal income taxes would also have helped to boost Singapore’s competitiveness as a wealth management hub in the region.
The abolition of estate duty in Singapore will go far in luring wealthy individuals to park their money here – and that announcement in the Budget yesterday will, for now, help to increase Singapore’s attractiveness as a wealth management hub, even without a cut in personal taxes.
But, one needs to remember that neighbouring Hong Kong – Singapore’s fiercest rival for private banking and wealth management funds – is pulling ahead of Singapore, in terms of being able to offer a competitive tax environment for individuals.
Hong Kong slashed personal taxes in its 2007 Budget – it widened the marginal salaries tax band, cut the top two income tax rates, and announced a one-time waiver of 50 per cent of salaries tax and tax under personal assessment payable – when Singapore chose to keep its rates on hold. KPMG worked out that a person earning S$1 million would pay less tax in Hong Kong than in Singapore, as a result of these measures.
Assuming the individual is married with two children below the age of 16, he would pay an effective tax rate of 12.29 per cent in Hong Kong, as opposed to an effective tax of 17.42 per cent in Singapore, after deducting the respective reliefs applicable to him.
Experts agree that it’s not something Singapore can afford to ignore – and all eyes will be on whether Hong Kong decides to cut its tax rates again this year.
And it’s not just Hong Kong; with tax rates coming down across the globe, Singapore can ill-afford to lag behind.
The country has always prided itself on being one of the most competitive in the region, and it will need to seriously consider lowering personal taxes – along with the other generous incentives it’s offered to make itself the preferred hub for science and technology, businesses and individuals – to maintain that edge.
Expectations had been great that this would be the year for Singapore to bring its personal tax rates down to 18 per cent at the top level, but those expectations have been sorely dashed.
Source: Business Times 16 Feb 08