The Budget's high-wire balancing act
SINGAPORE has long been regarded as a place where the annual tax bill is easy on the pocket - for firms and individuals.
But the winds of change are in the air, driven by an ageing population and a desire to inject a more progressive tone into the tax system.
This has led to rising taxes on the rich, seen in hikes in taxes on expensive properties and cars. At the same time, middle-income earners have been spared.
The 2014 Budget is expected to continue in this vein.
Analysts predict higher tax revenue from corporate tax and personal income tax, and stamp duty this year. The Government will likely end up with a healthy surplus for financial year 2013.
A strong fiscal position helps pay for programmes such as the $3.6-billion Wage Credit Scheme, under which the Government co-funds some wage increases by firms.
As Singapore moves towards building a more inclusive society, by restructuring its economy to rely less on foreign labour and to increase wages, there will be more calls on the public purse.
An ageing population will also put pressure on state coffers.
But there are limits to how much the state can tax the rich heavily, as talent and capital are both highly mobile.
The challenge for the Singapore Government lies in how to raise more money to fund programmes that benefit a large proportion, without frightening the rich away and over-taxing middle-income earners.
Changes in recent years have made the tax system more progressive, by making the better-off bear a larger burden. In personal income tax, more income bands were introduced to tax higher income tiers more.
Property taxes have risen for those living in high-end homes or those with investment properties.
There is also now a tiered registration-fee structure for cars with high open-market values.
LIMITS TO INCOME TAX HIKES
Looking at the estimated revenue and expenditure numbers given last year gives an idea of the tax picture.
Corporate income taxes are projected to bring in nearly $13 billion, nearly a quarter of the Government's projected $55-billion revenue.
The Government can't raise corporate taxes too much, as firms are already facing rising wage bills as the tap on inflow of cheap foreign workers tightens. Singapore also needs to remain business-friendly.
A large contributor to revenue is the goods and services tax (GST), which is forecast to bring in over $9 billion in FY2013.
However, as the GST is a regressive tax - meaning it hits the poor disproportionately harder - it is unlikely to be raised further.
Lower-income Singaporeans have traditionally been the biggest beneficiaries of the tax system. Those with an annual income of less than $22,000 a year need not file a tax return.
Lower-income earners also benefit from special transfers and redistribution of income. An estimate is that low-income families get $4 in transfers for every $1 they pay in taxes.
Workfare, where the Government tops up the wages of lower-income workers, gives older and lower-income employees the equivalent of an income-tax credit of about 20 per cent to 30 per cent.
Coupled with housing grants, low-income couples at the 10th percentile of the income ladder get benefits equal to about 30 per cent of their lifetime incomes.
But some middle-income earners grumble that they don't qualify for subsidies and special transfers and feel that they are being hit disproportionately harder.
Mr Tay Hong Beng, partner and the head of tax at KPMG in Singapore, believes that the coming Budget may see more moves to lower the taxes of the so-called sandwiched class of taxpayers.
Lowering taxes for middle-income taxpayers makes the system more progressive, but it will not, of course, help with the goal of raising more revenue.
More tax revenue could be generated by raising income taxes for the rich.
But bear in mind that Ernst & Young tax consultants have estimated that a marginal 1 percentage point rate increase - from, say, the current 20 per cent to 21 per cent - would add only between $110 million and $120 million to the coffers. That's a fraction of the estimated annual revenue.
To raise larger amounts of revenue would entail stiff tax hikes on higher-income earners - but that would make Singapore less attractive a place to do business in.
OTHER REVENUE SOURCES
How about raising taxes on wealth? Could property taxes be raised further?
But the recent property-tax hike drew complaints from the middle class, and the luxury property market is slowing to a trickle.
There is also a key source of income apart from taxes: The net investment returns (NIR) contribution.
This comprises up to half of the net investment returns on the net assets managed by GIC and the Monetary Authority of Singapore, and up to half of the investment income from the remaining assets (which includes Temasek).
In FY2013, the NIR is estimated to be $7.7 billion. Could there be more?
While Budget 2014 looks set to remain in a healthy position, the pressure to raise revenue to fund increased social spending, while keeping taxation progressive, will build up.
All this while keeping Singapore attractive to firms and investors.
That's a high-wire balancing act for Finance Minister Tharman Shanmugaratnam and the Government each year.