SELECTED SINGAPORE'S TAX POLICIES : A DYNAMIC PERSPECTIVE

Abstract

Early in 1986, the Economic Committee advanced a proposal for fundamental tax reform. The crux was to shift from direct taxes to indirect taxes as the main source of tax revenue for Singapore. In short, the recommendation was to reduce reliance on taxes on income and switch to taxes on spending. Since then, the government has busied itself with getting the system ready and letting people get accustomed to the idea of a consumption tax. The White Paper on the Goods and Services Tax was released only early this year. The proposed GST rate is fixed at 3 percent, to be introduced from 1 st April 1994 and will remain unchanged for the next five years. Singapore's rate is one of the lowest in the world (together with Japan), compared with the average rates of 17. 5 percent and 7. 5 percent for Europe and Asia respectively. The GST, a form of value added tax (VAT), is one of the most popular tax instruments in the world. Although frequently criticised as being regressive, the VAT is lauded for its efficiency, ease of administration and ability to generate a large amount of revenue using relatively low rates. In addition, because the GST falls on consumption and not on saving, it is often favoured to alternatives like the individual and corporate income taxes when there is a desire to encourage investment. The expectation is thus for saving and investment to increase when an economy switches from a predominantly income-based tax to an income plus consumption-based tax. This academic exercise takes a micro view of the two tax systems under study. It attempts to first equip readers with an understanding of the theoretical aspects of income and consumption taxation before proceeding to simulate the two tax structures. In particular, the aim is to examine how households, firms, and the government would respond to the two different tax regimes: today's system with only the personal income tax, and tomorrow's system with both the personal income tax and the GST implemented. Starting with the basics, the academic exercise differentiates between the many taxes in the real world and suggests how they can be classified. A distinction between static and dynamic perspectives of tax incidence is also outlined, whereby the strengths of a dynamic approach over a static one is noted. A description of the existing Singapore tax system is provided to serve as a benchmark for the evaluation of future tax changes. It traces recent changes in taxation and furnishes the reader with an expectation of the tax system in the near future, especially after the implementation of the GST. A description of a two-period life cycle model that is frequently applied to study the effects of taxes over time is reviewed in this academic exercise. The two-period life cycle model is adjusted to the Singapore context, and is used to evaluate the effects of GST on households, firms and government behaviour. The analysis suggests that there is a need for further and more comprehensive empirical research on how GST may affect economic behaviour, and its implications for the Singapore economy.