Tax policies should take aim at specific behaviours

Finance Minister Heng Swee Keat has done a commendable job managing the budget, especially under current challenging conditions. However, with tax rates at a current low, the Singapore Budget has in recent years become an exercise in funding as opposed to the use of tax policies to drive economic and social behaviour. Traditionally, tax policies have been used as tools to influence and reward desirable outcomes and/or to penalise and discourage undesirable outcomes.

The overriding criterion in designing effective policies is to ensure that the incidence of reward or burden is ultimately borne by the correct party exhibiting the targeted behaviour. In addition, for any measure to be effective, the stick or carrot must be pegged at a level that is meaningful enough to actually change behaviour.

In recent years, however, the use of tax policies to achieve goals has become more challenging because of a combination of low tax rates and unintended outcomes from tax policies.

I will discuss some of the measures announced in the Budget 2017.

Special Employment Credit (SEC) for older workers: While companies have indicated that this is a welcome measure (no one will reject a bonus), it is doubtful as to whether a 3 per cent SEC is sufficient to influence a company’s hiring policies, and it might be useful to investigate further, otherwise, we could be looking at S$600 million that could have been better deployed elsewhere.

20 per cent income tax rebate (capped at S$500): As with the above, only taxpayers with chargeable incomes in excess of approximately S$67,000 per annum (gross employment incomes in excess of S$80,000) will receive a S$500 tax rebate.

Considering that approximately half of registered taxpayers do not have any tax liabilities, this small gesture appears to serve no real economic purpose apart from tokenism as it does not appear to be a significant amount vis-a-vis the individual’s total income. The total cost of these rebates is expected to be in the region of S$385 million.

Increase in price of water: While there may be a need to adjust water prices to reflect the increasing costs, we need to bear in mind that there is, for every household, a basic level of usage, and we should ideally only be increasing the tariff for levels beyond this basic minimum. An example would be when telephone lines were repriced to reflect usage instead of the then-prevailing fee structure. The final outcome of the adjustment actually resulted in households paying less for home lines with the burden of price increases shifted to the high-usage corporate users.

In addition, for a water-saving policy to work well, the price increase should be pegged to a level that reflects frivolous water usage so that prudent usage is rewarded.

Also, as mentioned earlier, it is important that the burden is not shifted back to the low-usage consumers while taxing the high-usage consumers. An example of this could be water supplies to hawker centres (high-usage consumers), which should be outside of the scope of this increase as the end consumers (the heartland diners) are the end recipients of this tariff increase.

Traditionally, our system has always favoured one-size-fits-all policies that are easier to administer, but we should refine our policies to ensure that the final burden is where it should be.

Diesel tax/carbon tax: The diesel tax is spot on and a good example of taxing specific areas. The carbon tax, however, is in its early days, and we need to be mindful that any regime conceptualised does not end up in the carbon emitters passing on the costs to the end consumers.

Various business schemes: This is an area where we should applaud the government for taking a genuinely proactive approach in helping local businesses. However, implementation of these schemes should be targeted at those that need help, hence the importance of providing sufficient information and education to the small- and medium-sized enterprises.

Also, in view of the already-low corporate tax rates, any further rebates and incentives might be insufficient to influence economic behaviour, with the exception of the larger corporate taxpayers.

Small- and medium-sized enterprises: The focus on SMEs in Budget 2017 is to be lauded. Instead of viewing businesses as either large corporates or SMEs, it may be timely to look at “micro-SMEs” on a standalone basis as they have different needs from the larger SMEs. These are typically family businesses that can consist of one to five employees, and helping them with targeted measures could inject resilience into the economy and persuade more entrepreneurs to start micro businesses. The micro-SMEs of today could be the SMEs of tomorrow, and we should nurture them before they fizzle out prematurely.

Budget caps on ministries and organs of state: While this is an admirable initiative, I am yet to be convinced that this is the way forward. With greater complexities to deal with and blind spots in a free market, I believe that the public sector will play an even more important role in addressing these shortcomings. While all budgets should most definitely be relooked and reevaluated, I believe that the imposition of a downward cap might not be the correct way forward.

Conclusions and a peek into the future: As Mr Heng has hinted, expenditures are expected to rise in the future and these expenditures need to be funded. As such, we must embark on policies that are effective in changing behaviours and review spending policies that have no effect on outcome.

To recap, taxes are already low and further reductions may not have the desired effect. Future funding is likely to take the form of additional tariffs instead of incentives. As such, we need to be mindful that any additional tariffs do indeed have the effect of targeting specific behaviours and not have the unintended outcome of being passed on.

ABOUT THE AUTHOR: Goh Bun Hiong is director of taxes at PKF-CAP Advisory Partners.