15 January 2011

Top Income Tax Rates Should Not Be Reduced

Some people have suggested that the top income tax rates be lowered in light of the expected strong budget revenues.

The government should reject them.

Firstly, with GST, the tax differential across the income spectrum has narrowed.

A person whose chargeable income is below $20,000 pays no income tax, yet has an effective tax rate of 7.0 per cent by virtue of GST if he spends all he earns.

Retirees find their savings increasingly shrunk by increasingly higher GST rates, but derive no benefit from the lower income tax rates that often accompany GST increases, nor lasting benefit from occasional offsets.

A person with a chargeable income of $0.5 million has an effective tax rate of 19.2 per cent after GST if he spends half his chargeable income domestically.

Secondly, the affluent benefit from the removal of estate duty and tax on most interest income and income distribution from REITs and business trusts.

Thirdly, those who did well in 2010 have already been rewarded with salary increases and bonuses. They are also better positioned to deal with inflation.

Fourthly, the current income tax structure will not deter talented people from coming or staying.  They will come or stay, provided there are suitable jobs, and living conditions are conducive.  Furthermore, lowering income tax here simply transfers tax revenues from Singapore to those countries which tax worldwide income of its people.

Fifthly, a budget surplus in any year is not sufficient reason to lower income tax rates.  Reversing course (that is, increasing income tax rates) in the future is unpopular and requires exceptional political will.  If the budget surplus is projected to persist far into the forseeable future, the government should review its revenues and expenses.  Perhaps, the budget surplus is the result of its not spending enough, especially on the disadvantaged.

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The title of this post, previously "Top Income Tax Rates Should Remain", was changed in order that it does not give the impression that it contradicts a later post entitled "Top Income Tax Rates Should Be Raised".  The arguments herein were not changed.

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