UNIT OF PERSONAL INCOME TAXATION : A COMPARATIVE ANALYSIS OF HONG KONG, MALAYSIA AND SINGAPORE

Abstract

This study examines the issues which are pertinent to the choice of personal income tax unit. It first reviews the changes in tax unit over the last two decades in the member countries of the Organisation for Economic Cooperation and Development (henceforth OECD). Since the 1970s, there has been a discernible shift from the traditional definition of tax unit (which was the family) to individual taxation in most OECD member countries. The factors which have been catalytic in prompting the shift to individual taxation were largely associated with socioeconomic changes such as increased participation of women in the labour force, rising divorce and cohabitation rates. These socioeconomic changes have far-reaching implications for the status of women and family as a social institution. Within the context of these socioeconomic changes, the criticisms directed at family as the choice of tax unit are reviewed with the United States serving as a point of reference. This study reviews the income tax practices in three selected East Asian countries, namely Hong Kong, Malaysia and Singapore and finds some characteristics in their tax practices to be similar to the OECD countries. In all three countries, there has been a significant lowering of marginal tax rates so that the economic decisions of firms and individuals arc not distorted and work incentives are not stifled. In all three countries, the shift from family to individual taxation has taken place, though the scope and timing have varied. The rationale for the shift to individual taxation in the three countries is evaluated. One of the relevant issues is whether the shift was likewise prompted by the pressures of evolving socioeconomic trends as experienced in most western industrial countries. In Hong Kong and Malaysia, the shift was advocated by political pressures from influential groups in view of the changing status of women and family. In Singapore, the shift to individual taxation was taken as a pro-active step by the Government to encourage female participation in the labour force and as a fiscal instrument to boost the pro-natalist population policy. This study also examines the implications of individual taxation for equity, efficiency and the tax structures in the three countries. In all three countries, the shift to individual taxation penalises one-earner far1ilies, whose proportion is anyway diminishing. Hence, this is unlikely to lead to much controversy. The shift to individual taxation which results in lower marginal tax rates for secondary earners helps in improving work incentives for married women who are socially classified as secondary earners. This is a desired outcome in labour-scarce economies of Hong Kong, Malaysia and Singapore. In terms of efficiency considerations, intuitively, lower marginal tax rates for married women arising from individual taxation should have a positive impact on their labour supply decisions. However, unlike the western countries where micro-data on the size of the compensated elasticities of labour supply of married women are available, there is a lack of such data for Hong Kong. Malaysia and Singapore. It is therefore difficult to quantitatively assess the impact of individual taxation on married women in these three countries although the impact can generally be regarded as positive. This leads to the recommendation that further research on the responsiveness of labour supply of married women to tax changes be undertaken. This would require development of micro-data sets by the relevant authorities in the three economies. Only then could more precise quantitative impact of the labour-supply and other responses to tax changes be ascertained.