Singapore's aghast at GST increase, Should they be?

Singapore has been slowly moving from a direct tax system to a more indirect tax system since 1994, when GST was first introduced. Then throughout the 1990s, income tax and corporate taxes were progressively cut.

In 2003, GST went up to 4% and in 2004 5%. And now next year it will be likely to be 7%.

Although no clear indications have been given, PM Lee has hinted corporate tax is likely also to fall. Income tax, already at 20%, may fall if other countries are dropping their rates too.

All these points to an acceleration of the moving from the direct to the indirect tax system. It will not be a surprise if by 2010, GST is up to 10% or higher. Crazy? Not really.

As I said in the previous post, there are several pros to having an indirect tax system. The one big worry is that indirect taxes are highly regressive and they impact the poor more than the rich.

Many Singaporeans have rightly taken up their cudgels against what they percieve to be a government placing a heavier and heavier burden on the poor, even as they claim to be helping them.

I disagree. I think the fundemental philosophy underlying the movement from direct to indirect taxes is still there. But it is not the kind of argument one would accept in the face of the prospect of having one's pocket burnt. I think the PM tried to sell the policy by stating how the Government can help the poor with the increase in revenue from GST.

The economic argument also holds a lot less water given that Singapore seems to have taken a classical economic approach to managing their economy and yet Singaporeans are still struggling.

Jobs are up but people are still unemployed. Jobs in the bottom fifth are also paying less, and incomes have dropped for them while the top fifth have seen their incomes soar.

Economics, alas, like any theory works in theory because it assumes many many things. In the case of Singapore, there were several many variables that upset the balance of Singapore's economy.

1) Competition from India and China. The flood of 1 billion workers into the world economy is like a heavy metal ball slamming into a

In any case, the movement towards