Sunday, March 17, 2013

A taxing question of luxury v necessity

Mar 16, 2013
The answer will mean difference between taxing one and keeping the other cheap


THE recent announcements on loan curbs and higher taxes for cars and investment property seemed to share one common element, apart from the larger purpose of cooling their respective markets. That is, they make it increasingly harder for people to lay their hands on what appear to be luxury goods.

At the same time, pledges were made to keep the prices of new Housing Board flats and public transport fares down.

Going by Economics 101, that seems right. Luxury goods bought by the well-heeled should be taxed more, while basic necessities should be kept affordable, and subsidised if necessary.

Yet the measures evoked quite different responses.

Fewer complained about the higher property taxes, even though a fair number would have been affected. Perhaps it's hard to rail (too much) against taxes on profit-making investments.

The knockback on the measures for cars, however, was quite a different thing. Many felt the Government was killing their dreams of getting their own set of wheels. Others believed they were being deprived of a necessity - something the authorities acknowledged when they made some concessions for disabled drivers.

Taxing luxury goods was obviously acceptable - or at least tolerated. But not a necessity.

But... wait a minute. Isn't a car a luxury? Isn't personalised transport a privilege you should pay for? Isn't public transport for the masses, and a personal set of wheels for the well-heeled?

Many a poor family would probably see a car that way: Great to have, but something one can live without. Clearly, however, there were even more who don't.

So why was the Government clamping down on a widely held aspiration, or worse, restricting access to a necessity?

The same questions have been asked for property. Why are five-room HDB flats and executive condominiums (ECs) so expensive? But to what extent should the Government subsidise larger flats to meet aspirations?

This issue could be turned into a philosophical debate about the role of government in meeting citizens' needs and helping them achieve their aspirations. One that revisits the social contract between the state and its citizenry, and also over whether a government should stop people from overreaching to achieve their dreams - lest they land themselves in trouble.

But that's a debate that will take too long, and will probably be near impossible to resolve anyway.

What if we bring down the matter a notch or two, and ask a simpler question: What is a luxury and what is a necessity?

That may make it easier to agree on what kind of measures the Government should take to control the cost of living here.

In transport and property, the distinction between luxuries and necessities seems less clear than in, say, health care and education.

We demand low-priced medicine and treatment at government hospitals and polyclinics, but not at private ones.

We all expect primary school and secondary school fees to be affordable and subsidised for the poor, but no one expects a free PhD course. (Even so, pre-school is a little more tricky, with demand for basic but quality pre-schools rising while private providers charge high premiums for the latest in pedagogy.)

But the controversy is much bigger in transport. No question about buses and trains, of course. But what about taxis and cars?

In many countries, cabs are seen as a luxury. Passengers pay a lot for what is after all a premium chauffeured service, and taxi operators are left to price their rides in a completely free market.

Cars, on the other hand, are almost a necessity in some nations. In parts of the United States, they're virtually a human right.

In Singapore, strangely, it's the other way round. Because cars are so expensive, taxis have replaced them as the only viable alternative to mass public transport for many. Hence the perennial - and understandable - pressure from the public to keep cab fares down.

[Interesting perspective. Cabs are a "necessity" that we should keep affordable?]

As for housing, National Development Minister Khaw Boon Wan got to the nub of the issue when he asked recently: Should HDB flats be seen as a basic roof over our heads, or an investment asset?

Again, there's a big grey area. Sure, keep the two-room and three-room flats small and cheap. And tax the condos and bungalows. But what about the five-room units and the ECs? Should Singaporeans be given help to buy these "aspirations"? Shouldn't buyers who can't afford them accept that they should start smaller and upgrade if they can?

Of course, you could always bring in the kopi-o versus Starbucks debate. You know, the one that argues that rising expectations have turned what used to be luxuries into necessities. So should the state have to keep trying to catch up?

But then again, one could easily counter - isn't that how a nation makes progress? Aren't dreams of a better life the very things that drive people to enrich themselves - and their country?

Admittedly, it's going to be near impossible to divide everything into luxuries and necessities. Many consumables and services will obviously not fall neatly into either category.

Perhaps, then, we can place them in a third, in-between category. If luxury goods are to be taxed and basic necessities to be subsidised, then for this neither-here-nor-there category of goods and services, the Government should do... well, nothing.

If we agree to put cars, for example, into this category, then the state must not try to curb their purchase. (Curbing their use is another thing, of course, since that has to do with congestion and pollution.)

And if ECs go into this category too, then Singaporeans should also not expect them to be subsidised. Or taxed.

The hard part, of course, is for Singaporeans and their Government to come to an agreement on what should be considered a luxury, what is a necessity, and what goes in the in-between category.

It may take a lot of debate before a consensus can be reached. And in this current climate, consensus is probably the biggest luxury of them all.

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