Mar 03, 2014

    The virtues of sin taxes

    IF REACTIONS on Facebook are anything to go by, what caught the attention of many in last week's Budget was not the $8 billion Pioneer Generation Package.

    Instead, it was an announcement at the tail end of the speech: higher taxes on alcohol, cigarettes and betting.

    Taking the hardest hit was booze, with the liquor tax up by 25 per cent to $88 per litre of alcohol content for wine and spirits, and $60 per litre of alcohol content for beer, with immediate effect.

    Some of those who drink, smoke or gamble - and I count myself in the first group, at least - are understandably upset.

    Yet, raising these so-called sin taxes is arguably one of the better revenue-raising options as Singapore seeks to fund increasing expenditures, especially in the social sector.

    First, although the move may be unpopular with those it targets, it is hard to argue against it for non-selfish reasons.

    A common objection to higher income or wealth taxes, for instance, is the fear that they might reduce incentives to work and hurt competitiveness if high-earners take their money elsewhere.

    We can question how realistic these fears are, but they are at least understandable.

    Meanwhile, one objection to raising the goods and services tax is that such a move is unquestionably regressive. The goods and services tax is a tax on general consumption, and low-income earners spend a larger proportion of their income on consumption, so they are hit harder.

    But what arguments are there against higher sin taxes? Some have said that the Government should not interfere with people's consumption decisions.

    If a drinker or smoker wants to harm his health, or a gambler his finances, that is his prerogative, goes the argument.

    Besides, who is to say that such behaviours are necessarily always harmful? An occasional flutter does not mean financial ruin, while a glass or two of red wine may even have health benefits.

    Such objections, however, apply only if we see higher sin taxes as a purely paternalistic move.

    Yet, the aim of discouraging such behaviours should not overshadow another important aim: raising more revenue.

    The higher cigarette taxes are expected to net an extra $70 million a year. This is more than enough to cover, say, the annual $30 million bill for this year's initiatives to support people with disabilities.

    The alcohol duties will bring in another $120 million more a year - almost enough to meet the $123 million cost of improved subsidies for specialist outpatient clinics.

    And the gambling taxes will bring in $255 million more, an amount which could cover both the $147 million in increased bursaries for institutes of higher learning and the $27 million cost of enhanced tax relief for those supporting parents and grandparents.

    In short, sin taxes deserve to be recognised for their role as revenue sources, not just decried for their paternalistic overtones. And this role is one that may only get more important as Singapore strengthens its safety nets.

    Before the Budget, some speculated about more progressive tax changes. The threshold for the top income tax bracket, for instance, could be lowered so that it applies to a larger pool of high-earners.

    Taxes on wealth, including assets such as property and cars, could also go up. These moves would hit the rich harder and thus have a redistributive effect, in line with efforts to tackle inequality.

    Such tax changes did not come to pass. But they might well feature in future Budgets. Last year, Deputy Prime Minister Tharman Shanmugaratnam said Singapore would "preserve and build on (its) progressive system of taxes and subsidies in the future".

    Some might object, pointing to another option: raising the ceiling on the net investment returns contribution. This is the amount of investment returns on the reserves that the Government can tap for its Budget.

    The Government is allowed to take up to half the net investment returns on net assets managed by the Government of Singapore Investment Corp and Monetary Authority of Singapore, and up to half the investment income from remaining assets, including Temasek Holdings'.

    Why not just raise this limit and fund more public spending that way, some might ask. Well, that is a possible option. But just because this option exists doesn't mean that we should dismiss the possibility of raising taxes.

    After all, a more progressive tax system makes for a more equitable society.

    On a purely self-interested level, I won't be cheering the higher prices of booze if retailers pass on the higher taxes.

    But if income and wealth taxes go up, thus helping to address inequality, I'd happily drink to that.