The man can appear and disappear in a puff of smoke like a genie. Especially to those who are lapping up his words as the fount of all economic and financial wisdom. The key points of his speech at the SG50
Lecture Series at the Economic Society was that Singapore’s inequality is not specially high and that the low income inequality achieved by the likes of Denmark and Finland was due to tax and social transfer
and hence imposed a “very heavy burden of taxation on their populations”.
Denmark / Finland / Singapore
Gini before Tax and Social Transfer 0.44 / 0.50 / 0.43
Gini after Tax and Social Transfer 0.25 / 0.26 / 0.37
Tax burden (% of GDP) 49% / 44% / 16%
Essentially, Mr. Tharman is saying that the large reduction in income inequality in Denmark and Finland, i.e. the difference between the Gini coefficients before and after Tax and Social Transfer (i.e. benefits and
entitlements) was the result of a heavy tax burden. He said that the PAP government’s approach is to keep the overall tax burden low but ensure that tax revenue is used “in a fair and progressive way by targeting support for the low- and middle-income groups where it helps them most”.
Gini drop, why did the dog not bark?
As far as the writer knows, the latest Gini after tax and social transfer for Singapore was 0.416 in 2014, much higher than the 0.37.
YEAR / Gini before / after Tax and Social Transfer
2011: 0.473 / 0.423
2012: 0.478 / 0.432
2013: 0.463 / 0.409
2014: 0.464 / 0.412
If the latest household survey has been released to show a drop to 0.37, why did the Straits Times not blare this across its headlines or as Sherlock Holmes famously asked “why did the dog not bark?” It is
inconceivable that the marginal increase in social transfers, in particular the $8b Pioneer Generation Package which actually amounts to just $500m disbursement a year could have cause such a large drop
in the Gini coefficient after tax and social transfer. Nevertheless 0.37 is still a much higher number.
But, Channel News Asia reported Singapore Gini at 0.43. comparing it favourably to the developed countries average at 0.47 completely failing to mention that this is before tax and social transfer and
conveniently omitting Singapore’s 0.37 Gini after tax and social transfer, the more important Gini, compares poorly to the developed countries average of 0.29.
Low Tax Mirage
In the comparison of Singapore’s low tax burden to Denmark and Finland high tax burdens, this is what Mr. Tharman did not say
●Danish and Finnish high tax burdens were mostly the result of taxes going into social security systems.
●Singaporean’s low tax burden in comparison is due to cashflows going into social security (CPF) taken place outside of tax.
●Danish and Finnish high taxes went on to provide a comprehensive set of social entitlements such as state pension, free or nearly free healthcare, old age subsidies for utilities, childcare subsidies, survivor benefit, disability benefit, free schooling, out of work benefits.
●Singapore CPF contributions provided only a basic retirement allowance and medical coverage which still require large out of pocket expenses.
Therefore to compare the cost and benefit of Denmark and Finland to Singapore, the flow of monies out of households to the government must take into account not only taxes but non-tax payments. That is to
say total financial transfer must be the basis for comparison, not just taxes. In Singapore’s case, this must include CPF contributions and out of pocket medical expenses. This is the cost side.
On the benefit side, the ability to bequeath upon death can be seen as an “advantage” to Singapore. However this “advantage” has to take two things into considerations. One is the large out of pocket medical expenses which reduces the “advantage” of the bequests. Next is the narrow range of benefit extraction from CPF compared to the comprehensive range of social entitlements given to Danish and Finns. It is then a matter of comparing bequests to comprehensive entitlements but do remember bequests have no value to Singaporeans during their lifetimes.
Taking all of the above into consideration, Singapore’s tax burdens may be a lot lower than Denmark and Finland but in terms of total transfers from household to government, Singapore pays as much or even more than Danish and Finns once CPF contributions and out of pocket medical expenses are factored.
Yet each Singaporean in his/her own lifetime receives far less benefit extraction than the Danes and the Finns.
Denmark and Finland achieved low income inequality with heavy tax burdens. But Mr Tharman’s smoke and mirror is that while Singapore’s tax burdens may be much lower, total financial transfers to the government is equal and higher than Denmark and Finland and yet income inequality remained much higher. That is to say despite high financial transfers to government, Singaporeans received very little in return. Do not get fooled by Mr. Tharman’s low tax fairy tale.