26 January 2011

The Lowest Income Tax Brackets Should Remain

PricewaterhouseCoopers Singapore hopes that the Singapore government will remove its bottom two income tax brackets of 3.5 per cent and 5.5 per cent, according to a Business Times report entitled "Hopes Rise For Budget To Bring Down Tax, Costs" (25 January 2011).

The marginal tax rate for residents of 3.5 per cent applies to chargeable income between $20,001 and $30,000, and 5.5 per cent applies to chargeable income between $30,001 and $40,000.

This suggestion, if adopted, is said to benefit lower-income earners while reducing the government's tax administration costs.  However, in light of Singapore's very simple and straightforward tax code, especially for those who don't earn much, the tax administration costs are minuscule.

What happens if the government removes the bottom two tax brackets?

Firstly, the number of taxpayers will shrink further.  If the suggestion had been implemented in Year of Assessment 2009 (the latest data available), the number of resident taxpayers would have shrunk from 1.0 million to 0.7 million..

Secondly, it will not benefit the approximately two-thirds of employed residents who already don't earn enough to pay any income tax.

Thirdly, all taxpayers benefit, not just those whose chargeable income is $40,000 and below, because the first $40,000 of chargeable income will not be taxable.  Anyone whose chargeable income is more than $40,000 will see his income tax reduced by $900.

Fourthly, the new scale of personal tax rates will start at 8.5 per cent and end at 20.0 per cent.  It is likely that these rates will be adjusted downwards, if not immediately, then in subsequent years.

Fifthly, if this suggestion had been implemented in Year of Assessment 2009, income tax collected from tax residents would have been reduced by $0.7 billion, from $5.9 billion to $5.2 billion.

What if more tax revenue is needed in the future?  It is unlikely that the income tax rates that have been cut or removed will be restored.  What is more likely is that the GST rate will be increased.  With GST, everyone, including those who have little or no income, pays part of the tax collected.

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