Singaporeans question who PAP MPs are trying to help

Cutting GST to ease financial strain of inflation would benefit poor more than rich, they say.

The Singapore parliament debated today on the topic of the recently announced 2011 budget. As reported in the Straits Times, the main point of contention was around the impact of inflation on the less well off. Workers' Party chief Low Thia Khiang suggested reducing GST from 7% to 5%, as well as eliminating GST entirely on essential items.

"The GST is at the centre of everything we consume. I urge the Government to seriously consider reducing the GST to help all sectors of the society cope with projected slower growth and high inflation"

His suggestion is a wise and constructive one, as it would no doubt benefit the less well off hugely by reducing their weekly shopping bill for food, clothes and other essential items. A few extra dollars in the pockets of the poor makes a significant difference to their quality of life and a cut in GST should be seen in that light. These facts however, did not stop a gang of at least seven PAP MPs standing up to take turns trying to undermine his suggestion. The two main protagonists were PAP MP for Tanjong Pagar Koo Tsai Kee and PAP MP for Holland - Bukit Timah Christopher de Souza

Koo Tsai Kee said

"Our policies are designed to protect the lower income group. If we lower GST, those who benefit are the rich Singaporeans"

The Straits Times put it another way, whilst cleverly managing to put the words in the mouth of the Government and not their own, presumably for fear of basic economic illiteracy tarnishing their reputation.

"the Government's stand has been that cutting [GST] across the board would not necessarily help the poor."

The problem with this logic is that it flies in the face of common sense and basic economic literacy. The common sense argument is as outlined above, making basic necessities cheaper puts money directly back into the pockets of those who need it most, the poor. The fact that it also puts money back into the pockets of the rich is not really relevant. Mr Low's suggestion to abolish GST entirely on essential items goes to the heart of the matter and is in fact a policy that many modern first world nations have adopted. Distinguishing what is and is not essential might well be beyond the intellectual capacity of SM Goh but it is something that many countries around the world, including Switzerland, have solved many years ago.

The point about basic economic literacy is slightly more subtle but nevertheless an important one. You might forgive the average man on the street for not understanding the difference between progressive and regressive taxation but Messrs de Souza and Koo can not be forgiven, since they hold a total of seven degrees between the two of them. So what is the difference between progressive and regressive taxation, and why does it matter?

Those of you with a keen sense for the English language can guess that progressive taxation is a positive concept (as far as taxation can ever be positive!) whereas regressive taxation is a negative concept. Regressive taxation means that the poor are hit harder, relative to their income, than the rich. Progressive taxation is the opposite, where the rich are hit harder relative to their income, than the poor. When it comes to funding for government services such as health care, education, defense, infrastructure etc, it makes perfect sense for the rich to pay their way a bit more than the poor, hence in most sensible academic circles, progressive taxation is considered fairer. So, with this in mind, it is important to note that GST can only be considered regressive taxation. It hits the poor harder for those reasons touched on in the common sense argument above. Every time the price of a bowl of rice goes up, the poor, who are already struggling just to get by, have to struggle that little bit harder. And the rich barely notice. Conversely, if the price of a bowl of rice went down by 7%, the poor would benefit immediately and the rich would hardly notice, not least because they are most likely to be eating Australian steaks and no rice.

This is not a controversial argument, in fact it is widely accepted economic theory. Wikipedia for example says

"In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay"

"Sales taxes are often criticized because low income households must pay a greater share of their disposable income to a sales tax than wealthier households"

and

"It has been suggested that any regressive effect of a sales tax could be prevented, e.g., by excluding rent, or by exempting 'necessary' items"

The last quote is particularly interesting since it refers again to making necessary items exempt from GST, a simple idea which is supposedly beyond the understanding of our million dollar ministers.

So where does all this leave us? Regressive taxation is less fair and causes the poor more financial difficulties than the alternatives. Mr Low of the Workers' Party would like to reduce regressive taxation. The conclusion can only be that Mr Low is trying to help the less well off, and we should commend him for that. In spite of this, PAP MPs were queuing up to discredit his opinion, even though they surely know the economic theory. I certainly do, and I first heard of it at high school. What is the agenda of the PAP, and why do they try to prevent a reduction in GST?

The unspoken consequence of reducing GST is that government revenues would obviously go down, and thus something else, most likely income tax, would have to go up. And guess what, income tax is the perfect example of progressive taxation. Remember, that's the more fair one, the one that impacts the rich harder than the poor. Presumably it is this group of high earners & high income tax payers that the PAP is trying to protect by maintaining high GST rates and low income tax rates. And don't forget the PAP MPs are themselves included in that group, with their super high self awarded salaries.

So my take on it is that those PAP MPs are speaking economic nonsense in parliament, to discredit the ideas of the Workers' Party, so that they can maintain their own low income tax bills, whilst keeping the burden of taxation (and recently, inflation) disproportionately on the shoulders of the poor in Singapore.