ESTIMATES OF EXPENDITURE FOR THE FINANCIAL YEAR - 1ST APRIL, 1992 TO 31ST MARCH, 1993
Sir, Singapore inherited the income tax system from Britain and for very good reasons. In the 19th century, Britain was the leading industrialised nation. She led the world with its taxation reforms. The three principles embodied by the British income tax system -- equity, simplicity and efficiency -- became the hallmark of all good income tax systems worldwide. Her system flashed across the Atlantic, the Washington people lapped it up and incorporated it into their income tax system, Europe incorporated much of the British system. But, Sir, the world today is very different from the world of the 19th century. It is far more complex. And the system that was good for the 19th century is now difficult to service the needs of the 20th century and increasingly the needs of the 21st century. All governments -- Britain, Sweden, America -- realise this problem. So they develop various techniques, basically a hybrid of the wealth, income and the consumption tax system. Sir, the present system has defects. But Chancellors, Finance Ministers and Treasurers in every country are trapped and are unable, sometimes unwilling, to institute fundamental tax reforms. So what do they do? They tinker here and there; a rebate here, a relief there, an increase here, and a removal there. No matter how they tinker, the pressure for tax cuts is ever present. There is a saying in America, "There is always a good time for tax cuts." Norman Lamont delivered his budget on 10th March 1992, two days ago. He was under great pressure to cut taxes. He did, but did not cut it enough to please enough people, even though cutting of taxes is against the grain of most economists in the city of London. The Economist magazine cuts a sharp remark. It says, "It is too late for Norman Lamont to use his budget to revive the economy before the election [which will be held on 9th April], but he still has time to bribe the voters." Bribing the voters, of course, is nothing new. And John Major must be inspired by the American President. In the 1988 election, President Bush turned the tide against Michael Dukakis largely perhaps, maybe, and I think definitely, because of his, "Read my lips, no new taxes" bribe. Views necessarily differ, Sir, but I concur with the school of economic thought which subscribes to the philosophy that for the long-term health of the nation, of the economy, fiscal tools like income tax rates must never be used as a counter-cyclical measure, unless the structure of public spending has changed, and that no increase in taxes will be needed when the economy recovers. In fact, indeed, in Singapore for the last 25 years the tax rates have come down because the structure of public spending has changed and I hope that, as we corporatise more, the tax rate can come down further. 1.30 pm But cutting tax rate is the most powerful political tool, especially in an election year, like Britain and America are facing now. It is also the cheapest legal political bribe available to politicians, perfectly legal. So long as the PAP is in power, I am convinced that this would not be a weapon here. But like the reasons for instituting the Elected President, we must also institute fundamental reforms in taxation so that we will dull this fiscal tool, make it less attractive. Why? I would explain later. Apart from this possible abuse of income tax rates, there are other defects to the present system. First, it sends money in the wrong direction, into spending instead of saving. Savings are penalised and expenditures are encouraged. Indeed, the malice now afflicting the developed countries comes from a spending culture which income tax explicitly and implicitly promotes and encourages. Over the last decade, savings have fallen in every country - in America, as a percentage of GNP, from 9% in the 60s to 3% in the 80s; in Japan, the thriftiest nation on earth, experienced similar decline from 26% in the 60s to 20% in the 80s, a sharp drop of 6% over a period of about 20 years. The appetite for more consumption in Singapore is also on the rise. It is quite clear and evident. The second reason why we should move against the present income tax system, Sir, is that income itself is hard to measure. Wages and salaries are easy to measure. But ask an accountant, an economist and a taxman to agree on fringe benefits and the task becomes a little more difficult; ask them and the consensus view on income from profits, from businesses and investment transactions becomes even more difficult to achieve. Sir, the Government's intention to introduce consumption tax is a move in the right direction. Consumption tax shifts the burden of taxation from direct to indirect taxes. Clearly, the receipts from sales tax or the value-added tax would better reflect aggregate demand than receipts of income tax which tend to lag behind according to changes in employment. But, Sir, to my mind, a better system is to shift the burden of income tax from the source of income to that of expenditure, in other words, from income that is saved to that which is spent. For companies, we should tax their "cash flows". If Britain were under an expenditure tax system, as it nearly did in 1986 under Margaret Thatcher and Nigel Lawson; John Major and Norman Lamont need never agonize so difficult over a tax cut, because in a recession, like they are facing now, the savings rate will rise with a corresponding fall in expenditure. Tax receipts will, therefore, fall correspondingly under this system. So there is no need to bribe the voters with a tax cut. You do not have to bribe them in any way because your expenditure is already coming down. But if the expenditure tax is so superior, the Minister may rightly ask: why is it that no developed country has tried it? To this question, I like to pose a model question: since when have we in Singapore waited for a good idea to be implemented overseas before we convert ourselves to it? Because if we did, there will be no Area Licensing Scheme, there will be no COEs. Indeed, our economic strategy of riding on the back of MNCs in the early 60s was largely untested. But then the Minister may say, "This is a big scheme, it affects everybody." As far as the taxpayer is concerned, he is concerned whether he is paying more or not. As far as the Government is concerned, it wants to reflect aggregate demand. Under an expenditure tax system, the majority of Singaporeans would still not pay more taxes than they are now. Today, 60% pay 6%. Under the expenditure tax system, maybe 60% would still pay more or less 5% or 6%. It depends on how you structure it. Coming back to the first question on why is it that most developed countries have toyed about it, talked about it, but did not implement it, like Britain, Sweden and America. The short answer is that they do not have the political system, the vision and the courage to go for it. With their confrontational and adversarial style of politics, it is very difficult, Sir. Who has tried it? In the 50s, Sri Lanka and India, following Kaldor's advice, tried it, but they failed. They failed for reasons that they were totally different from what Singapore is now; their economy was not sophisticated, not monetised and their tax office was not computerised. Whereas our system is quite different. Our tax office is as computerised as it can be. Can the expenditure tax be implemented? The British and the American economists of every political stripe and persuasion say they can, uniting both Keynesian and non-Keynesian. The Meade Committee thinks it can. The American Treasury in a report in 1977 thinks it can. The Minister may ask: will it be a massive invasion of privacy, the principal reason why it was not implemented in many countries? Not at all, Sir. Like it or not, we have embraced the credit card culture. Our expenditure pattern is already open to the credit card companies who document every cent we spend. In five to 10 years' time, when I suggest that we should implement the expenditure tax system, most Singaporeans would be spending every cent with their card. Those who do not qualify for the card would probably, I say "probably", not be taxed under the expenditure tax system anyway. When we expose ourselves to the American Express, to Visas, do we not trust the taxman even more? I do. Will it spawn a massive tax avoidance racket, the Minister might ask? I do not think so, Sir. In fact, it would be easier to avoid taxes under the present income tax system. We are all familiar with tales of seemingly poor people who pay no income taxes but who spend conspicuously. Under the expenditure tax system, these people have no escape. Money, Sir, is only good for spending. Few people are keen on making all the money and then locking them away. One day we will spend them, they will spend them and when they do, the Minister's taxmen will be able to catch them. Finally, discussion on expenditure tax usually excites iconoclasm, like Mr Heng Chiang Meng and myself, but send politicians to sleep. I notice that most Members are still awake and I think there is hope yet.