Word in the New$: Tax

by Ryan Ong

TAXES create more criminals than a Batman writer on a daily basis. Entire religions have condemned “tax collector” as an evil profession. And maybe they have a point, given that organisations like ISIS are built on effective taxation. But the painful reality is that without taxes, we probably wouldn’t have governments. Here’s a rundown on the realities of tax:

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Why do we have to pay taxes anyway?

Taxes are used to fund the government. This is the primary use of taxation. Politicians have to be paid, roads have to be built, professional soldiers don’t work for free, etc. Taxes are the way governments raise revenue for both new policies and projects, as well as maintain existing ones.

Before we had coherent systems of taxation, the civil service was a very unfunny joke; the punchline to which was often your house being burned down. For example, take fire departments:

If you go back to Europe in the 1800s, fire departments were private companies. They weren’t paid by the government (i.e. not funded by taxpayers), and they only put out fires when paid. If that sounds like a good idea to you, then maybe you haven’t thought hard enough about how fires work.

Why would you pay for a fire to be put out, when your neighbours would do it for you? Fire spreads: if they don’t pay to have your fire put out, their stuff will be destroyed too.

Of course, your neighbour could think the same thing about you, and often did. This resulted in lots of people standing around, and watching each other’s houses burn down because no one wanted to get stuck with the bill.

That’s just one example of a civil service that everyone needs, but that no one wants (or can afford) to pay for individually. Hence, the first primary use of taxation: everyone pays a share to the government, which then divvies up the money to pay for things like a police force, fire department, education, etc.

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But taxes are also used to encourage / discourage certain types of behaviour

Governments also use taxation to try and nudge societies into behaving in certain ways. For example, out of a $12 pack of cigarettes, $8.50 goes to the government – that’s a 71 per cent tax. Cigarettes, like alcohol, is one of the things that fall under a vice tax – the government tries to discourage these indulgences by making them cost more.

A vice tax is a careful balancing act. Taken too far, it often becomes a source of black market (read: criminal) activity. Because of the high tobacco tax, for example, unlicensed cigarettes are lucrative to smugglers.

The government also encourages certain business practices this way. The Additional Buyer’s Stamp Duty (ABSD) for property developers, for example, imposes a tax of 15 per cent on the land purchase price, if a developer doesn’t complete and sell out the property in five years. This prevents developers from speculating and holding back launches, which would restrict supply and drive up home prices.

On the flip side, we have tax deductions from schemes like the Productivity and Innovation Credit (PIC), which grants 400 per cent tax deductions for approved upgrades. Or a 250 per cent tax deduction for donating to recognised charities.

Taxes thus become one of the main tools through which governments try to control demand and supply, and influence the behaviour of the country’s residents.

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Taxes can also serve the redistribution of wealth

Income inequality (a situation where the rich get richer and the poor get poorer) is often addressed via taxation.

Taxes can serve as a way to redistribute wealth, by taxing the rich more and the poor less. The revenue raised from taxing the rich is also used for services which can empower poorer citizens, such as University grants, adult education subsidies (e.g. SkillsFuture programme), housing subsidies (someone has to pay for those HDB housing grants), and more.

In Singapore, income tax varies based on your earnings. Singaporeans with an annual income of $20,000 or less do not get taxed, while taxes top out at 20 per cent of earnings for those who earn above $320,000 per annum.

Bringing up this topic is a good way to start fights and lose friends.

One argument is that the rich cannot be over-taxed, lest they leave the country and bring their money elsewhere (remember: the G needs their tax dollars to fund its initiatives.) In fact, if the tax on the rich is low, wealthy people from other countries might be encouraged to move over, thus bringing their wealth with them.

A lot of the tax avoidance in the Panama Papers happens for these reasons – rich people try to hide their assets abroad, so they won’t be taxed as much. But governments may be compelled to close an eye, because they don’t want to drive their cash cows to another country.

Poorer citizens, of course, tend to demand even more taxes on the rich. In Singapore, this often goes along the lines of “Why should I serve NS / vote for the current government if they are only going to protect the rich, and make people like me bear most of the costs?”

If you want a counterargument from the wealthy, you can look up writers like Ayn Rand. When not busy ruling the demon legions of hell, she wrote halfway readable books like Atlas Shrugged, which explains that the rich should be allowed to keep their wealth because they earned it, damn it.

As a practical example though: say you’re wealthy enough to drive, and never need public transport. Is it fair that you are taxed to support bus and train subsidies? You don’t gain anything from these services, so why should you pay to upgrade them or keep fares low?

This is, of course, a political hot potato. In 2015, then Minister for Finance, Tharman Shanmugaratnam, warned that low taxes could be hard to maintain if we want to narrow income gaps. This is not a problem unique to Singapore – every country struggles to balance social benefits against high taxes.

As a loose rule of thumb: liberal governments are often expected to raise taxes, because they want to fund more benefits like cheaper housing, unemployment support, child support benefits, minimum wage, etc.

Conservative governments are often expected to lower or maintain taxes – they are often pro-business (low corporate taxes), and unsupportive of “welfarist” policies like unemployment support, disability payouts, or luxury taxes on the rich.

In practice, this is a theory that is hard to substantiate. In 2013, for example, it was pointed out that the United States under the Obama administration (a liberal government) had the second lowest spending of any American government since around World War II.

In Singapore, Budget 2016 capped tax relief for the top one per cent of income earners at $80,000 – this does mean higher taxes on the rich, which is not considered a common move by a conservative government.

So don’t take the “liberal = high taxes, conservative = low taxes” argument too literally.

Common types of taxes

Here are some common types of taxes and how they work:

– Income tax: This is a tax on your earnings. In Singapore we have a tiered system so the more you earn the higher your taxes, to a cap of 20 per cent. This is considered low, as in countries like Belgium it can cap at over 40 per cent.

– Corporate tax: A tax that businesses have to pay. This is a flat 17 per cent in Singapore, which is one of the lowest in the world.

– Property tax: A tax on property that you own. There are two different tax rates, one for owner-occupiers (you live in the house), and another for landlords who rent out. For owner-occupiers, property tax is capped at 16 per cent. You can see more details on the IRAS website.

– Goods and Services Tax (GST): This is a 7 per cent tax on all goods and services in Singapore. Most countries have their own version of this. In some places it is called a Value Added Tax (VAT).

– Vice tax: This is taxation for tobacco, alcohol, pornography (where it’s legal), and gambling. All of these are taxable in Singapore except for poronography (which is illegal).

– Carbon emissions tax: A tax based on carbon produced by vehicles you own. In Singapore, you get rebates for having a less polluting vehicle, under the Carbon Emissions-Based Vehicle Scheme (CEVS.)

– Inheritance tax: Also called an estate tax. Some governments will take a portion of what parents, relatives, etc. leave you in their will. Not applicable in Singapore.

– Capital gains tax: A tax on returns you make from investments. For example, a percentage of profits you make from the stock market. Not applicable in Singapore.

– Luxury goods tax: A variation of the GST or VATS, which is common in Europe. This is when luxury goods, such as sports cars and jewellery, are taxed higher than other items. Not applicable in Singapore.

– Petrol tax: In Singapore, this ranges from 56 to 64 cents per litre. Ask taxi drivers about this and you’ll develop a solid vocabulary of swear words.

– Junk food tax: Singapore may have one soon, in the form of the sugar tax. Junk food taxes are often imposed when obesity, diabetes, heart disease, etc. drive up healthcare costs in a country.

– Plastic bag tax: Practiced in many western European countries like the UK. Imposes a tax on shoppers asking for plastic bags, for environmental reasons.

– Airline / airport taxes: See here for the list of taxes / charges in Singapore. Some travellers will depart from a nearby location (e.g. taking off from Kuala Lumpur instead of Singapore) to minimise these charges.

More articles from Ryan related to taxes:

• What’s the difference between tax evasion and tax avoidance?
• Income tax deductibles you may not know about.
• The Panama Papers leak could hurt S’pore banks. Here’s how.
• What is the Gini coefficient, and how bad is our income inequality?
• Word in the New$: Budget

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Featured image Scrabble Series Taxes by Flickr user Chris Potter. CC BY 2.0. 

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The post Word in the New$: Tax appeared first on The Middle Ground.

- Ryan Ong