Sunday, March 10, 2013

Why it's good to tax purchase of luxury cars

Mar 09, 2013

People who go for conspicuous consumption impose a social cost
By Jessica Cheam Political Correspondent

IN THE recent Budget, the Government introduced, for the first time, tiered taxes on investment properties and high-end cars to tax the wealthy, while increasing handouts to the needy, and introduced a Wage Credit Scheme to co-fund wage increases for those earning up to $4,000 for the next three years.

Assistant Professor Giovanni Ko, 31, from Nanyang Technological University's economics division, speaks to The Straits Times on the recent moves and whether Singapore is heading towards what is called a progressive tax structure, and how it stacks up against other countries.

Prof Ko is a public economics expert with a PhD in economics from the London School of Economics and Political Science, and a BA (Hons) in mathematics from the University of Cambridge.

What do you think of the recent tax measures introduced in the Budget?

The Government has tried hard to help lower-income households with measures such as GST voucher increases and the Wage Credit Scheme. This is positive and, on the whole, it is quite progressive.

What does progressive mean? Referring to taxes, it means how much you pay in tax as a proportion of your income increases as your income goes up. So, the richer pay a bigger proportion.

The recent moves signal that the tax structure is headed in that direction, especially with the Additional Registration Fee on expensive cars and the tiered property tax for investment properties.

Do you think the measures signal a shift in the Government's approach to fiscal policy?

Overall, I think not. In order to achieve the more progressive tax systems seen in Europe or the United States, they would have to increase personal income tax rates for high incomes, but that is difficult to implement without introducing taxes on capital gains, dividends and interest.

A central tenet of the Singapore Government's approach to taxes is not to tax capital gains so Singapore can be competitive and achieve financial hub status, and I do not see this changing any time soon.

But without introducing these taxes, taxing income more heavily at the top will not be possible.

At the top end, people also have the flexibility to arrange the way they get paid. For example, if tax rates increase, they could shift their compensation into stock options which would not be taxed.

Such increases in taxes will also have to be done in tandem with increasing corporate tax, but this will have a big impact on Singapore's competitiveness.

Do you think the tiered taxes and increase in handouts to boost the social safety net will adequately address the rising income inequality?

Not quite. On the one hand, it does address some concerns because it works to reduce what we call in economics "conspicuous consumption", or the consuming of luxury goods like cars.

When people buy expensive cars, they impose a social cost and contribute to this "Keep up with the Joneses" mentality in society which makes individuals feel they should buy one too.

This results in stress and adds to the pressure of running the rat race. It does not add much value to society, so this tax discourages that kind of consumption, which is a good thing.

On the other hand, giving more handouts to (those in) the lower-income bracket is not the best way to address income inequality.

Many people ignore an important psychological aspect, which is that even if a worker earns $1,000 and gets $1,000 in handouts, he will prefer to be paid $1,800 in wages with no handouts, even if his take-home amount is less. The wage reflects society's value on the work you do, and receiving benefits tells the worker that he is dependent on the benevolence of society.

Rather than increasing handouts, it is better to increase wages at the lower end. So the Wage Credit Scheme is a step in the right direction, even if it is only for three years.

If this kind of wage subsidy doesn't work, a minimum wage can be considered, but that's another proposal altogether.

What are the trade-offs of such a targeted approach to raising wages?

Well, it does contribute to higher business costs and that can have knock-on effects and contribute to a higher cost of living and inflation.

Higher wages might also cause some increase in unemployment, but the effect on Singaporeans would be mitigated by the fact that employers would hire more locals to meet tighter restrictions on foreign labour.

Rising costs is a trade-off that Singaporeans have to make. Do we want to pay more? Is it worth it? This is the price of a fairer, more inclusive society. Singaporeans have to come to terms with this.

How does Singapore's tax structure now compare to those of other developed countries?

Its tax structure is quite similar to Hong Kong's, its direct competitor. It has low tax rates on the whole, to attract talent and big companies and keep its status as Asia's financial hub.

Its recent moves to tax investment and expensive cars can be considered progressive as very few countries do that. They usually adopt a flat tax.

But it is still a long way from say, European tax systems, which are far more progressive in that income tax rates are a lot higher. For example, top marginal tax rates in many developed Western countries are at 40 per cent, whereas in Singapore it is half that.

Capital gains are also taxed in Europe. Some people say Singapore is going towards "Robin Hood" taxes; I would disagree. It is very far from the situation where the rich are heavily taxed. The wealthy here still enjoy low tax rates compared to those in other countries.

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