Personal Income Tax
B.27. Several Members including Er Lee Bee Wah and SMS Zainul Abidin Rasheed have also asked for a larger Personal Income Tax (PIT) rebate, through an increase in the cap from the current $2,000. They argue that it would help boost demand.
B.28. There are two reasons why we capped the 20% PIT rebate at $2,000.
a. First, increasing the cap would only benefit a small proportion of the population, but at a high cost to revenue:
i. Only the top 5% of our resident labour force are affected by the cap of $2,000. The middle class, including the upper-middle class, are not affected by this cap.
ii. Removing the cap would be costly to revenues. Even raising it to just $3,000 would have cost us an additional $100m.
iii. If we had no cap, as Mr Inderjit Singh proposed, it would have more than doubled the cost from about $500m to $1.1b.
iv. We would either have had to significantly reduce the size of some of the other measures in the Budget; or
v. Reduce the PIT rebate percentage from 20% to 8% for all taxpayers, in order to stay within the same cost of $500m. This would have meant less for the middle and upper income groups in order to give more to the top most brackets.
b. Second, a larger rebate would not give us as much bang for the buck as a measure to boost demand.
i. Unlike the lower and middle income groups, the top income groups tend to save most of the benefits that they receive.
ii. This is one of the least contested facts of economics anywhere in the world. The marginal propensity to consume among the rich is low. Conversely, it is very high amongst the lower income groups – they tend to be cash constrained and spend most of the additional benefits that are handed out.
iii. In fact in the US, they found after last year’s personal income tax rebates, that only 15% of the rebates were spent by consumers. Amongst the higher income groups, this figure was even lower.
B.29. Some MPs such as Er Lee Bee Wah also felt that we should have cut PIT rates this year.
B.30. With our current PIT rate, our personal income tax regime is already very competitive and is highly progressive.
a. Compared to Hong Kong, the vast majority of Singaporeans pay lower taxes.
b. As a PWC study that was published in the Business Times on 23 Jan showed, the individual tax liability for a typical upper-middle income family – married man, non-working wife and 2 children – is lower than in any other country in the Asia Pacific region. [Chart]
B.31. It is only at the very top end that the effective tax rates in Hong Kong are still lower than Singapore’s.
a. MOF will continue to assess the competitive landscape for talent and see whether we need to make changes down the road, while ensuring our overall fiscal position remains sustainable.
