Saturday, April 9, 2016

Tax and the single man (The $80,000 tax relief cap)

Ignatius Low
Deputy Editor

April 3 2016

The latest Budget Statement goes back to the principle of tax equity

I have covered almost every Budget Statement by the Finance Minister for the past 16 years. So you would think that by now, nothing would really excite me when the annual exercise rolls around.

Sometimes the economy is in trouble and needs rescuing with schemes and incentives. Then, once in a while, there is a new man in charge, duly photographed leaving for Parliament House with a briefcase of a new style and colour.

So it was this year, with Mr Heng Swee Keat taking the helm as Singapore's new Finance Minister. And as the speech started, it became clear that it was going to be a cautious Budget.

This was the first year of the new term of government, so Mr Heng had to watch the expenditure and avoid going into deficit. The economy is slowing but is not in dire straits yet. So either way, there was no need to bring out the big guns in terms of financial help.

Somewhere at the end of his speech, however, the soft-spoken new Finance Minister suddenly made me sit up.

This will take some explaining.

You see, every year the Government looks at your taxable income to assess how much tax you pay.

To ease your tax burden, the Government offers various tax reliefs, for example, $3,000 for active NSmen. That means that if you had done any reservist duty in the past year, you get to deduct $3,000 from your taxable income. A tax rate is then applied on the smaller figure, which essentially means you pay less tax.

Up to now, there had been absolutely no limit on the total amount of tax reliefs that a taxpayer can claim. That means in theory, you can claim so many tax reliefs that your assessable income drops to zero, and you don't pay any tax at all. The question is: Can anyone really do that?

Apparently the answer is yes. There are many tax reliefs that you can apply for in Singapore, and one of the most powerful is something called the Working Mother's Child Relief (WMCF).

Working mothers get to claim reliefs of 15 per cent off their taxable income on their first child, another 20 per cent off for the second child and 25 per cent off for every subsequent child.

The limit is $50,000 per child, but that still means that a working mother with five children who earns $250,000 a year (making her obviously quite well-off) can theoretically claim 100 per cent in reliefs and pay zero tax.

That sort of mother maybe doesn't exist. Yet analysts have worked out that working mothers who roughly earn $150,000 a year or more do have their tax bills significantly reduced or even eliminated by the combination of the WMCF plus other reliefs such as CPF Relief and Foreign Maid Levy Relief.

So in his first-ever Budget, Mr Heng made a very bold move: to limit the amount of total tax reliefs a person can claim to $80,000 a year.

Now, I have nothing against working mothers. I have two dogs and it is expensive enough to raise them, so I can't imagine what it would be like to raise two children. I know it is also not nice to gloat at someone's misfortune.

There is also much to be said for having tax reliefs that encourage Singaporeans to form families. Our society is ageing and we need more babies, but we are up against the stresses of modern working life. Already, many have criticised Mr Heng for limiting tax reliefs, saying that it is counter-intuitive given all the work Singapore has done to promote childbirth.

But somehow the announcement made the irrational part of me want to stand up and very quietly pump my fist.

I guess I just have tax relief envy.

Ever since I started work and made enough money to pay income tax, I have been made to feel at nearly every Budget that I have clearly led the wrong sort of lifestyle in Singapore.

I am not married, I don't have kids, I don't have a maid and for now, at least, I don't live with my aged parents. In other words, I am as far removed as can be from that Singaporean ideal of having a multi-generational family living under one roof - the stuff of every shiny and smiley government campaign.

But does that mean I have to be taxed that much more?

The question brings me back to the debates we used to have in my first year of working life.

Having studied at a British university on a government scholarship, I returned to Singapore to serve my bond and found myself as a young assistant director in the Ministry of Finance (MOF).

Back in those days, there were "two MOFs" - the Revenue Division that collected money, and the Budget Division that spent it.

I was in the Revenue Division, not in one of the many tax departments but certainly privy to all the big decisions that my bosses had to make on tax policy.

It was here that I learnt that at the heart of a good tax system is a sense of equity and fairness.
Some of these high-income working mothers live in big landed houses. Together with their husbands, many lead a comfortable life with maids to take care of the family.

I even know some of them, having been their classmates in school. We've taken very different paths in life, but haven't necessarily landed too far off from each other in our careers.

Should they be getting such a big discount off their tax bill? Should they be paying the same in taxes as someone who earns far less and is more in need of government support?

I was taught in MOF that you can never really compare two individual taxpayers and ask who should rightfully pay more. Each life is led differently and imposes unique financial stresses.

But as tax policymakers, we should still strive to set the rules such that those who earn more and can afford to contribute more should pay more tax; and those who earn less should pay less.

That was not the only thing I learnt during my days at MOF as a young officer.

From my permanent secretary Ngiam Tong Dow, I learnt that you can buy a tin of Milo from two different shops and pay a very different price. In everything there is value-for-money to be sought, but you must want to seek it.

I learnt the value of saving up for a rainy day. I remember asking my director what was the point of the Government accumulating so much in surpluses and reserves, if the Ministry was (it seemed to be anyway) never going to use it.

Twenty years later, as I read that returns of almost $15 billion from investing those reserves were the only way Mr Heng could balance the Government's budget, the liberal in me finally understood the wisdom of fiscal conservatism.

It was just one small change in a long list of Budget initiatives that was rolled out.

But the Finance Minister's bold and principled move is one that goes back to basics, for me in more ways than one.

[Comment: I was like Mr Low, the author of this piece, for most of my life - until marriage and parenthood. Like him I understood that if I had to pay income tax, it meant that I was earning enough to pay taxes. 

If you pay income tax, you are better off than about 1/3 of employed Singaporeans. maybe as much as 40% of employed Singaporeans (once you take into account tax reliefs and deductions). If you pay more than $1000 in income tax, you are probably above the 65th percentile of income earners. That is you are better off than 65% of employed Singaporeans. If you take into account those not employed but earning too little to pay taxes, and the unemployed and unemployable (disabled and retired), you may be better off than 80% (or more) of all Singaporeans.

I understood this. In my early working days, I earned too little to pay taxes for a while. I was happy. And sad that I earn so little the taxman took pity on me. Which is not to say that I jumped for joy when I had to finally pay income tax. My first few tax assessment were quite modest - I believe it was $100 or less. I had been promoted, and the extra salary was welcomed. The tax, well, I would rather not pay taxes, but I was not upset about having to pay taxes. I took it as a sign that I was arriving, if not actually arrived. 

In the following years, my tax grew incrementally in line with my salary. It was fair. There were people who earned less than me and they paid no taxes. And people who earned more than me and paid way more taxes. 

Today I pay considerably more taxes because of my changed circumstances, and also have more tax relief and once even got to enjoy the Parental Tax Rebate.

But before then I did not have Tax Relief "Envy". It was not as strong as envy. Maybe wistfulness. Then gratefulness. Because if you have a child and you get tax relief for that child ($4000), you can be sure that what you spend on that child, will likely be more than that. 

But I understand Mr Low's visceral reaction. I did not respond as he did, because I am no longer in the same circumstances as him. But I do not begrudge him his little fist pump of... joy? validation? satisfaction? :-)

I don't know. Some visceral response cannot be amply explained. Simply understood.

In any case the tax relief cap of $80,000 is not one that most people will be able to enjoy. The related article below suggests that previously, only a woman earning $150k a year would fully benefit]

Why working mums should be happy to start paying tax
Chua Mui Hoong
Opinion Editor

Apr 3, 2016

Seen from a family perspective, taxes paid may give solace to a relative receiving Silver Support

Each year, the Budget rolls around and agitates or delights different segments of society, with its slew of new measures to cut or raise taxes.

This year, two measures in particular have drawn public attention.

The first is the move to cap the amount of personal income that working mothers can claim for tax relief, at $80,000. They will now have to pay tax on income above that amount.

Although the move is expected to hit just about 1 per cent of earners, the outrage from this group of high-earning, and presumably very well-educated and hence vocal, women has been palpable, going by comments from folks I know.

But the fact is that working mothers have enjoyed generous tax relief for years. I didn't realise how much, until I saw a March 28 article in The New Paper that tabulated just how much tax savings a high-earning mother can make.

A working mum below 55 years of age, earning $150,000 a year, can claim tax relief in excess of that amount, if she has three children; supports one set of parents including one who is handicapped; hires a maid, and tops up her retirement savings in the Central Provident Fund (CPF) with the Supplementary Retirement Scheme (SRS).

In other words, she pays no tax.

The lion's share of relief comes from her children: the working mother child relief for the three kids comes up to $90,000 alone. With the proposed cap of $80,000 in tax relief, she will have to pay tax amounting to about $2,650.

TNP then helpfully computed how much tax the same woman would pay, if she could not claim all those child reliefs and other reliefs, and if she can claim only the earned income relief of $1,000 that all taxpayers can claim.

The answer:$10,950.

In other words, the rest of us taxpayers are subsidising the tax bills of working mums who earn $150,000, to the tune of nearly $11,000 a year. And to think that when the rules change to tax them $2,650, they complain?

[I believe the TNP computations may have some slight errors, but the minor errors do not detract from the point -  without a cap on relief, some very rich people (mainly women) could end up having to pay NO taxes, and Ms Chua's point is, if you are earning $150k a year, you can afford to take up some of the tax burden. The cap of $80,000 of tax relief would mean that if one earns up to $100,000, one would pay no income tax with all the relief. At $100,000, one would be in the 77th percentile of tax-payers (and maybe over 90th percentile of all Singaporeans). In other words, it should not present a hardship for these high income women. There are women (and men) in a lot worse situations paying taxes. And and Ms Chua points out, these women are being subsidised by taxpayers.]

At the other end of the spectrum, there is concern in some quarters that Singapore risks becoming too generous to our elderly.

The Silver Support Scheme is a pension payment for lower-income elderly. It was first announced in 2014. Last week, Finance Minister Heng Swee Keat fleshed out the details. About140,000 seniors aged 65 and above will get quarterly payouts of $300 to $750. They fall in the bottom 30 per cent of seniors.

[I do not think this is excessive. Quarterly payouts of $300 to $750, is $100 to $250 a month. It would help (every little bit helps) but no one can live on that alone.]

This "major new feature" of Singapore's social safety net will be a permanent scheme. It will cost nearly $320 million in the first year - and will likely grow as Singapore's population ages.

Mr Heng made it clear that Silver Support is not meant to replace other sources of support - such as savings or allowances from children. It will also complement other government assistance programmes such as ComCare and Workfare.

Some concerned citizens have asked if too much social security benefits might erode filial piety.

The fiscal conservative in me understands such concerns. Indeed, few would want to live in a society whose government bankrupts this and future generations on over-generous welfare benefits.

But I also wondered why not more people have spoken up about the dangers of generous tax reliefs for parents eroding their sense of parental responsibility.

If we fear a pension payment for the bottom 30 per cent of our seniors might erode their children's sense of filial piety, should we not worry that giving too-generous tax relief to the top 1 per cent of our working mothers might erode their sense of maternal responsibility?

If we worry that a public pension may crowd out intergenerational private transfers (from children to their parents) shouldn't we also worry that a Baby Bonus and tax benefits for parents may crowd out similar intergenerational transfers (from parents to their babies)?

If one is viewed as a public good, so should the other.

Yet, if we compare the tax relief given to families, we will find that families with children get a lot more in relief than families with elderly folks to support.

[I don't disagree, but while there is a comparability, there isn't a symmetry. With your parents, there is an element of repayment, of gratitude, and so there is a visceral concern (if not fear) that the state providing more benefits may lessen one's perceived obligation. Children are a more or less active choice (you can't choose not to have parents, but you can choose not to have children. Hence the asymmetry). ]

This is not necessarily the most equitable of tax arrangements.

But rather than let this descend into a us-versus-them diatribe, I want to argue here that we should go beyond a world view of seeing taxes from an individual win-lose perspective.

Otherwise, the young family with three kids struggling with childcare fees will begrudge further Silver Support payments to the elderly; and the childless taxpayer will resent tax perks given to those with kids.

But such views are blinkered and divisive. Instead, we can choose to look at taxes from a collective family perspective, and over a lifetime.

Most of us are embedded in family relationships and can and should look at tax benefits accordingly. The working mum who pays $2,600 more in tax this year should consider how her own parents, or a distant uncle, will get some solace from the Silver Support allowance.

The so-called intergenerational conflict disappears if we consider that we are all part of families. Giving a retiree an extra $200 a month in Silver Support benefits not only him, but his family, if his grown-up son struggling to care for an ailing wife and kids, has more money to spend on milk powder or medication.

In any case, filial piety is not a function of how much money one gives to one's parents.

As for the fear that public transfers may crowd out private transfers, the jury is out on this.

A draft paper by Dr Bei Lu from the University of New South Wales, titled Rural Pension, Income Inequality And Family Transfer In China, looked at whether elderly men and women in Gansu and Zhejiang got less money from family members after China introduced a rural pension system in 2009. Her conclusion: There is little or no correlation between parents' retirement income and the allowance children gave.

Dr Lu's paper also gave a useful summary of the literature on the issue. The survey yields mixed results.

One study in China suggested that "public transfer would only crowd out private transfer at very low levels of income but becomes less responsive at or above poverty line". Other studies in Mexico and Peru showed some crowding-out effects.

But this "crowding out of private transfer" (from grown-up children to parents) could just mean more money within the family to be spent on the kids.

If we add a lifetime perspective to understanding tax benefits, we can be more comforted that the costs and benefits may equalise over time.

Financial Times columnist Martin Wolf cited a study by the London think-tank, the Institute of Fiscal Studies, which showed that "in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes, even though 36 per cent of people receive more in benefits than they pay in taxes in any given year".

The welfare state, in his parlance, is a "piggy bank for life" - into which you put deposits and from which you withdraw when needed.

Understanding taxes and benefits within the context of a family, and as a continuum over the course of a lifetime, has a salubrious effect on tax relief envy.

Rather than see tax and benefits as a win-lose proposition from a self-centred, individual perspective, it is better to adopt a more holistic outlook that takes into account a person's role in a family, our own needs over a lifetime, and ultimately, our shared responsibility as a society.

Working mums hot under the collar over $80,000 tax relief cap

Apr 5, 2016, 

Bitter pill to swallow, say some high-earning mums whose tax will jump when it kicks in
Lorna Tan

Invest Editor/Senior Correspondent

The move by the Government in this year's Budget to cap personal income tax relief at $80,000 has got many working mums hot under the collar. Some mothers have told The Straits Times that it is a bitter pill to swallow after having enjoyed generous tax savings in past years.

The change will take effect from the Year of Assessment (YA) 2018 and tax experts estimate that it could affect about 20,000 people, of which most are likely to be working mothers.

Tax experts say that it is those working mothers earning above $150,000 with at least two children who will end up paying more tax, particularly if their chargeable income jumps to a higher tax bracket because of the new cap.

Ms Elizabeth Chan (not her real name), 54, who earns about $250,000 a year and has two children, worked out that her personal income tax will jump 50 per cent to about $15,588 from her current $10,000.

This translates to an additional $500 a month in payable tax. Her total reliefs amounted to about $114,000 last year, of which the lion's share of about $83,000 came from the Working Mother Child Relief (WMCR).

Assuming her reliefs and income remain unchanged, an amount of about $34,000 will be added to her chargeable income when the new cap is imposed. It will push her chargeable income to the higher tax bracket, which attracts 17 per cent of tax, up from her current 15 per cent tax bracket.

With the cap, her overall effective tax would still be considered low at 6.2 per cent, up from the current 4.1 per cent.

But Ms Chan said: "Why target us, working mothers, who have worked hard both in our careers and at raising our children? I belong to the sandwiched generation, taking care of ageing parents and our children. Every cent counts." 

[No. you are not being targeted because you are a working mother. You are "targeted" because you are a high income earner. At $250,000 a year, you earn more than 95% of all employed persons in Singapore. And yes, we sympathise with you as the sandwiched generation, but you are a sandwiched generation with $250,000 income. Many other "sandwiches" earn a lot less.]

The Ministry of Finance (MOF) has said that the new cap is expected to raise an additional tax revenue of $100 million a year. The cap only affects 1 per cent of tax-resident individuals, which means many can still continue to claim reliefs.

According to MOF, there were about 2.2 million individuals assessed to tax in the 2014 year of assessment and that most of these would be tax-resident individuals. This translates to about 20,000 individuals who would be affected by the new tax relief cap.

And even with the new cap, nine in 10 women can continue to claim the WMCR fully.

There are 15 personal income tax reliefs in the current tax system for eligible individuals. They include reliefs for course fees, CPF cash top- ups, earned income and for those who care for parents, grandparents, disabled family members, and who save for their own retirement.

The most substantial relief is the WMCR, which aims to encourage married women to remain in the workforce after having children. To be eligible for WMCR, the working mother can be married, divorced or widowed. It is calculated on the child order and pegged to the working mother's earned income.

Under the WMCR, working mothers can claim up to $50,000 per child in total child reliefs. The WMCR is tiered: 15 per cent of earned income for the first child, 20 per cent for the second and 25 per cent for the third and up. The cumulative WMCR for all children is capped at 100 per cent of the mother's earned income.

Finance Minister Heng Swee Keat had said that while this cap would make Singapore's personal income tax system "more progressive", the personal income tax burden remains low.

Ms Wu Soo Mee, partner at Ernst & Young Solutions, believes that the new tax relief cap is a move in the right direction to make Singapore's tax system more progressive. After all, in a progressive tax system, higher tax is collected from taxpayers who earn more and lower tax from taxpayers earning less.

This is not the case currently, she said. "The current WMCR is inconsistent with the Government's aim to make the tax rate system a progressive one. WMCR increases with a working mother's earned income as it is based on a percentage of her earned income up to a cap of $50,000 per child."

She added that there are other child-related cash subsidies and grants for parents such as the Baby Bonus, First Step grant and reduced Foreign Domestic Worker Levy Concession, as well as other work-life support measures such as extended maternity leave, paternity leave and child and infant care leave.

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