Mind... the (income) gap

Thanks for the debate.

Some folks tend to think that the rich always mean "other people". Even the brain dead editor of the Straits Times refer to it as if he is not part of the rich gang too!

Let's take a look a closer look at SingStats to define rich. In 2011, the median household income should be between 5794 and 7032, 5794 being the median for 41st and 50th decile while 7032 being the median for the 51st and 60th decile. Assuming that each household has, on average, 2 working members, the average income of the these folks in the 51st to 60th decile would be around 3,500 (approx 3,000 if you exclude employers' CPF). Please remember by definition, anybody higher than the average is potentially contributing to the income gap! Therefore to "reduce" the income gap, we should increase the tax of anybody with monthly income of 3,000 or more?

The nation is up in flames over the overly broad definition of "rich". The govt went back to the drawing board and decided to just hit the truly rich, defined as income > SGD1,000,000 per year. With the assistance of the ISD, IRAS, etc. all the rich folks are rounded up in a school field. (My rough estimates are that there should be 1,000 or so of them, nice and easy to fit into a school field). After some tough negotiations, the rich folks decided to give up another 20% of their income, meaning that the top income tax bracket has just hit 40%, very similar to developed countries (Yay! We are now truly developed). Despite some of these @#$%^& rich guys diverting some income overseas, the tax collectors still managed to collect SGD240 million in additional tax, amounting to 240k per rich guy. We can now distribute the largesse to all the poor folks. But wait a minute, SGD240 million distributed to 120,000 poor households in the lowest decile is a mere SGD2,000 per year, less than 200 bucks per month. What a miserly govt?!

If you were the government, in order to raise sufficient funds to fund your social welfare programme, where would you draw the line?

if Mr. A works hard and thrift to be rich vs Mr.B who is lazy and only dream of striking toto/4D .
Tax A more to help B ?

^^ Things are never so simple, that's why policies must be structured properly to help those in need. A simple way that we are currently using is to look at the primary residence as gauge of wealth. I think it works relatively well as people won't list their cheapest home as primary residence and pay higher property tax on the other property. Though I'm sure there are rebates to undeserving people but that doesn't render the policy ineffective ON AGGREGATE.

Poverty trap and poverty spiral is real which the movie "pursuit of happyness" sums up very well. Key is to help those who wants to help themselves rather than the freeriders. A parliament debate on welfare state also shows how academic the speakers were warning against a welfare state like the west. As usual the devil is in the detail. Subsidising for glasses is different from subsidising for cancer. I challenge any ministers to get cancer just to be subsidised by welfare. Irrational academic thinking rules.

In the minimum the effective tax rate on rich and poor should be similar after taking into account their needs. Basic necessity comprise around 70% of low income group while maybe 15% of higher income group. There is a big difference between saving for luxury and spending hand to mouth.

That's why progressive tax structure makes sense. In a memorable interview, Buffett posed this challenge to the republicans on taxes: why don't we discuss this on the shores of Normandy? I think that sums up pretty nicely about what is fairness.

(08-04-2013, 09:05 AM)cfa Wrote: if Mr. A works hard and thrift to be rich vs Mr.B who is lazy and only dream of striking toto/4D .
Tax A more to help B ?

Under the preogrssive tax system, A who works hard and earns more will pay more tax.
B who is lazy will earn less, and hence pay a lower tax rate.

It is a logical fallacy to suggest this means taxing A more to help B.

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(08-04-2013, 08:07 AM)WolfT Wrote: Rich people are not sitting ducks, if you rise their taxes,they just move on, in the end only the middle class income incur the wrath. This is the same everywhere and Singapore is not unique. If u think Singapore is safe and stable?Think again.

Only the truly super rich is that mobile. And their numbers are far and few compared to the majority of taxpayers. They will be okay anywhere in the world. It is not equitable that any examination of the tax system should overly pander to this small group at the expense of the vast majority who forms the base of the system.

I think Spore is very safe and stable enough, compared to other equally attractive if not more attractive places of abode. You do not think so?

Specuvestor and Kichialo

Assuming you earn more than the monthly median wage 3,249 (including CPF) {source - MOM}, or 2,925 excluding CPF, will you be willing to pay more taxes?

If not, at what income level would you be willing to pay higher taxes?

Alternatively, what other kind of additional taxes (GST, estate duty, vehicle related, capital gains, etc.) would you be willing to pay to support this grand ideal of being progressive?

Last but not least, what is your ideal target in terms of income distribution? Gini coefficient of 40? 30? 20?

A few points to add to the debate on taxes:

a. In an open economy like Singapore, only property, car and GST on necessities cannot be avoided. Increases in other taxes like income, estate duty, company tax and taxes on interest, capital gains and dividends will result in reaction to some extent or other to the changes.

b. Company tax is currently already lower than the highest income tax bracket and hence will be used to offset the latter if it is increased further (like what happens in some other countries).

c. The previous estate duty exemptions favored property over other forms of wealth and hence further skewed investment towards the former for wealth preservation.

d. I wonder why increases to company tax and reinstatement of taxes on dividends have not thus far been suggested. But I do note that company tax and taxes on capital gains and dividends will reduce the return to investors like us.

I also make a distinction between those who have amassed assets in their own lifetime through entrepreneurial or investment activities versus those who inherited it and those who have a very high earned income.

I subscribe to Buffet's views on the "ovarian lottery" for the former.

On the latter, I feel that our Anglo Saxon based capitalistic system where the "Winner Takes All" is broken. Human ability is Gaussian distributed whereas CEO's rewards is distributed by Power Law. The reason why I no longer believe in Singapore's brand of meritocracy is because I see people who are of similar ability as others get paid obscenely more just because of luck or because of the circle of friends they made by say going to elite schools. The latter is most toxic in my view and I would classify it NOT as Meritocracy but as Elitism.

However, I do not advocate increases in the personal tax rate as I do not believe that it will be effective. The salary paid would simply increase to compensate for the higher tax and the shareholders will lose out.

I would instead advocate for a cap on salary paid with the Government, Statutory Boards and GLCs leading the way. I hope that this will be the outcome of the Admin Service Salary Review that is long in coming but I am not holding my breath.

(08-04-2013, 12:13 PM)HitandRun Wrote: Specuvestor and Kichialo

Assuming you earn more than the monthly median wage 3,249 (including CPF) {source - MOM}, or 2,925 excluding CPF, will you be willing to pay more taxes?

If not, at what income level would you be willing to pay higher taxes?

Alternatively, what other kind of additional taxes (GST, estate duty, vehicle related, capital gains, etc.) would you be willing to pay to support this grand ideal of being progressive?

Last but not least, what is your ideal target in terms of income distribution? Gini coefficient of 40? 30? 20?

Hi HitandRun

If this question can be answered precisely, I would be able to run a business on this You are looking at specifics but let me share with you the general idea.

The most important thing about income taxes (as opposed to consumption taxes) is that it is a cost based on PROFITS. What that means is that if one doesn't make income, low tax is irrelevant. Conversely it is also why oil majors don't mind being taxed 90% in some jurisdiction.

But generally I think the psychological barrier for income taxes is around 50%. Anything above and people's propensity to accumulate wealth or income reduces drastically (ie getting a smaller part of the fruit of their labour) so obviously I think the rich man tax of 75% in France is excessive.

Consumption taxes are direct taxes that reduces tax evasion on an income level, but also meant to influence decision making, for eg luxury tax, excise duties or even ARF. That is most likely why people confuse the arguments between these 2 type of taxes. Income taxes are seldom the number one consideration for investments or employment, as Buffett had explained many times. If I got a sure win stock idea or a high pay job for you, is your first consideration going to be: how much am I taxed?

Income tax is an after thought when the environment for profit generation, and other issues like security is considered.

Singapore should also never try to match HK tax rates as they don't have defence spending. But investors will flee HK at the first sign that China is exerting control. That is our comparative advantage, together with stability and efficiency. Competing on taxes is crazy IMHO, though that is not to say that we should have 32% tax rate vs HK 16%. People will adjust based on the value proposition. Having low tax rate in a crime infested neighbourhood is not exactly enticing either.

Those who understand the concept of self-enlightenment will realise that rich people come here for many purposes. Keeping the general populace happy or contented serves selfish purpose as well. It is unlikely that increasing the top tier tax rate will drive many away, as the City of London showed, despite all those threats from the bankers.

Hence back to your question: Will median income workers pay more tax? Obviously nobody wants to pay more tax but if it can be shown that their percentage on take home pay after necessities vs the rich people are about the same, or effective tax rate is similar, then it will go down easier. That is the main crux of Buffett's argument: How can I be taxed at a lower effective tax rate than my cleaner?

Therefore firstly you have to separate taxes that directly affects decision making and those that are afterthought. For the latter you would have to decide what is the optimal income distribution based on your ethos and ideology. That is the main problem of million $ ministers pegging their salary to top 5 occupations: their incentives and ethos will be skewed towards the elite or the rich

PS I hope I also answered some of nsengkia's points indirectly. One of the reasons why we don't want capital gains tax or abolish dividend tax is to simplify the tax code. As a tax payer I am proud that our taxation system is one of the simplest in the world. I haven't prepared my tax return to be filed in 8 days time and if you are in the US you would be stressed up by now. Nonetheless eliminating those taxes cause other skewness and problems that should be adjusted in other form of taxes, which includes income tax. And please bring back the estate tax. We need to level the social playing field as well as bring back asset declaration.

Excellent stuff from Specuvestor!

(08-04-2013, 08:40 AM)HitandRun Wrote: But wait a minute, SGD240 million distributed to 120,000 poor households in the lowest decile is a mere SGD2,000 per year, less than 200 bucks per month. What a miserly govt?!

What you are saying is essentially what the republicans say about the Buffett tax. But they forget that everything is a drop in the ocean but the ocean is made up of many drops. This is just one aspects. $2k is probably more than their monthly salary for the lowest decile To put in perspective this may also mean no GST increase.

We would look at consumption based property tax, luxury tax, etc as a whole. And I'm pretty sure there should be more than 1000 of these million$ earners

Progressive tax means we will also look at those earning below $1m for a more equitable distribution of the burden. End of the day like I said, the effective tax rate should be similar across the board, remembering that even the poor pay 7% tax since they consume almost all their income. That is not the case for the richer.

(08-04-2013, 09:05 AM)cfa Wrote: if Mr. A works hard and thrift to be rich vs Mr.B who is lazy and only dream of striking toto/4D .
Tax A more to help B ?

Dude... Its a fallacy to think in such a way.

Imagine you telling that to the poor auntie toilet cleaner or to the average joe who works in the assembly line at a plane.

Saying that a CEO deserves his $5 million of pay per year because he worked really hard for that year does not do justice to the toilet cleaner.

Is it true that the toilet auntie should be paid $12k per year only because she is not working hard enough? Because she skive very often? I do not think so.

Then we talk about social mobility. How many social mobility stories have you heard in Singapore these days? There are not many because it is not easy to move up the social ladder in Singapore. If you happen to be born into a poor family. Good luck to you. The richer folks will get the best tuition from expensive private schools, while you only can rely on yourself to study hard. That is even before you enter into Primary school. This severly hampers your chance of doing well in PSLE, which happens to be the main fork in the education system in Singapore. If you to badly and go to Normal (T), you can forget about entering into a proper Uni in Singapore.

Sometimes, how much you have all depends on whose womb God chose to put you in.