The Progressive Nature of GST and Its Suitability for Singapore

 

The Progressive Nature of GST and Its Suitability for Singapore

Introduction

The Goods and Services Tax (GST) is a consumption-based tax levied on the sale of goods and services. It is widely regarded as a progressive tax system, meaning that the burden falls more heavily on higher-income individuals. This essay will explain why GST is considered a progressive tax and why it is an appropriate measure for Singapore.

i. The Progressivity of GST

GST is often labeled as a regressive tax due to its flat rate structure. In Singapore, the GST rate stands at 7% and is set to increase to 9% in 2024. However, examining the progressivity of a tax system requires considering the overall impact on income distribution.

Ability to Pay Principle: GST adheres to the principle of ability to pay, which asserts that those with higher incomes should contribute a larger proportion of their earnings towards taxes. Although everyone pays the same GST rate, higher-income individuals tend to spend a larger portion of their income on goods and services subject to GST. As a result, they contribute more in absolute terms compared to lower-income individuals.

Exemptions and Rebates: To mitigate the impact on lower-income households, Singapore’s GST system includes exemptions and rebates. Basic necessities such as food, healthcare, and public transportation are either exempted or subject to lower rates. Additionally, the GST Voucher Scheme provides cash rebates to lower-income individuals and families to offset their GST expenses.

Considering these factors, it becomes evident that GST is a progressive tax as it effectively distributes the tax burden based on one’s ability to pay.

ii. Impact of GST Increase on Real GDP

The increase in GST from 7% to 9% will have both short-term and long-term implications for Singapore’s real GDP.

Short-Term Impact: In the short term, the higher GST rate may lead to a decrease in consumer spending as individuals adjust their consumption patterns to manage the increased cost of goods and services. This decline in consumption can cause a decrease in aggregate demand, leading to a contraction in real GDP growth.

Long-Term Impact: Over the long term, the increase in GST revenue will provide the government with additional funds to invest in public infrastructure, social programs, and healthcare. These investments can enhance productivity, improve human capital, and promote economic growth. As a result, the increased government expenditure can stimulate aggregate demand and positively impact real GDP.

To illustrate this impact, refer to the aggregate expenditure diagram below:

Aggregate Expenditure Diagram

In the diagram, an increase in GST leads to a decrease in consumption expenditure (C). As a result, the aggregate expenditure line shifts downward from AE1 to AE2. This shift reduces real GDP from Y1 to Y2.

iii. Alternatives to Raise Government Revenue

Apart from increasing GST, there are alternative measures that Singapore can consider to raise government revenue:

Personal Income Tax: Singapore could choose to increase personal income tax rates for high-income individuals. This approach would directly target those with higher earnings and redistribute the tax burden more progressively. However, it is important to consider potential disincentives for work and investment that higher income taxes may create.

Corporate Tax: Another alternative is raising corporate tax rates. By increasing taxes on corporate profits, the government can generate additional revenue from businesses operating in Singapore. However, this approach must be balanced with maintaining Singapore’s competitiveness as an attractive business hub.

Both alternatives have their advantages and disadvantages, but they provide viable options for diversifying Singapore’s revenue sources and ensuring a fair distribution of tax burdens.

Conclusion

In conclusion, GST is a progressive tax that distributes the tax burden based on one’s ability to pay. With exemptions and rebates in place, it effectively ensures that lower-income individuals are not disproportionately affected. The increase in GST will have short-term impacts on consumption and real GDP growth but can lead to long-term benefits through increased government expenditure. Furthermore, alternative measures such as adjusting personal income tax rates or corporate tax rates provide Singapore with options to raise government revenue while maintaining fairness and competitiveness.