2econdsight

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Tharman The Genie & His (Magical) GINI Numbers

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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.

Conclusion
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.

Chris Kuan

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11 thoughts on “Tharman The Genie & His (Magical) GINI Numbers

  1. If you include cost of living, where Singapore is the most expensive city in the world, the picture will look much worse.

    Another way to look at it is the poverty line. What are the percentages of poor Finns and Danes compared to Singaporeans? I am sure the comparison will be very revealing.

    Mr Tharman, you can’t whitewash facts!

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  2. Dear Chris

    I’ve always wondered if Singapore is really a low-tax regime. While the headline tax rate is low, there’s GST, COE, etc. Above all, we are taxed by paying for inflated property prices (even HDB prices), which can ultimately be traced to the Government’s land sale revenue. I think a more meaningful comparison would be disposable income across countries rather than headline tax rates, which the PAP proudly claims to be very low by international standard.

    I also wonder if the “grant” (transfers) is a true reflection of what’s really transferred to Singaporeans. I understand HDB gives grants to flat buyers, but I understand this is actually subsidy against “market price”, rather than actual cost. The other day I went to the polyclinic. I remember I paid only $8, I think. The statement claimed that a grant of $30-plus was given, which means that the consultation fee is more than $40. Isn’t this amount ridiculous, given that private GPs don’t even charge this kind of consultation fee? What I’m saying is that the grant is an inflated number, measured against some fictitious out-of-the-world rates. Is this a normal practice when countries refer to government “transfer”?

    Could you comment? Should we not enlighten Singaporeans about this mirage?

    Thanks & regards
    John

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  3. G’morning, Xmen & John (TK).

    Both yr observations are an expansion of how Tharman is less than honest and rather liberal with the ground reality and the numbers. I share the same view as you do that, perhaps, Chris can further clarify his comparative analysis of the Dan/Finn vs SGn ‘Low Tax Mirage’ segment.

    I suggested to him as follows and am awaiting his response.

    “I feel tt a layman will better understand if the CPF rate is shown as a tax returned as self-paid social pension (e.g.; total wage=80% take home + 20% employee’s + 16% employer’s effectively means a tax of 36 divided by 116 = 31% of income). Of course, it must be stated that part of CPF can be used for mortgage. But with the PAP demanding tt we sell off our roofs to finance retirement inadequacy, it’s as good as cashing in the pension cheque, no?
    – Perhaps, if we compare the 2 major taxes paid by the average Dan/Finn + SGn (personal income tax + VAT/GST) using the median income respectively, then throw in the CPF for SGn, the picture will be much clearer for us layman.”

    Thanks, both, for taking time to engage and comment.

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  4. I think the difference between Singapore and Scandinavian countries boils down to this, “Would you rather have more of your own money to spend on yourself, or do you prefer to spend other people’s money on yourself but have them also spend your money on them?”

    Clearly, if you are right wing in your thinking, you would love Singapore. You are forced to save for your own retirement and your own healthcare. This allows you to exercise full personal responsibility, which right wingers like. That is capitalism, which gives you personal liberty but also leaves you to face the consequences of having that liberty.

    Of course, if you are more left wing, which I realized quite a number of Singaporeans are, you would rather live in a country where everyone spends “somebody else’s money” on themselves. That is basically socialism.

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  5. @Kelvin,

    This is not about right or left wing ideology. The wealthy has responsibility to the society where they gain their wealth. Take infrastructure spending (airport/road/transport/communication) as an example. Without the infrastructure, most businesses will not exist. How much should they be responsible for infrastructure spending? Based on your argument, the ‘right’ wing wants everyone to pay equally for infrastructure spending (=business costs?) even though businesses are the main beneficiary. (I am sure you have read about privatizing profits and socializing losses in banking too.) In the other extreme, the ‘left’ wing demands businesses pay for all infrastructure spending because they are the main beneficiary. Every society has to wrestle with this ‘fairness’ issue in public spending (education/healthcare/transport/etc). In Singapore, the propaganda has you believe that this is a left wing agenda. No, demanding a fairer distribution of wealth is not socialism. This is something for you to think about.

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  6. The output of a country is produced by 4 factors of production, land labor capital and entrepreneurship. It is tempting to think that “capitalists” gained the most from infrastructure and hence they should be paying more for it, but the complementary in those 4 factors is far more delicate than you think. If there are not capitalists and entrepreneurs, there would also be no jobs for labor. Thus, to say that the main beneficiary of govt provided infrastructure are “businesses” or the “wealthy” is way too strong a point.

    As for your point about fairer distribution of wealth, to a economist, wealth is simply the present value of all future consumption. At a given level of income, some of us who are YOLO, prefer to consume more now, so we do not save for our future. Others are not YOLO, they save more now so that they can consume more in the future.

    Different people have different tastes and preferences towards present and future consumption but both are equally wealthy over their entire lifetime, they just choose to consume their wealth at different points in their life cycle.

    Thus, to have the govt forcefully redistribute the wealth thru taxation, penalizes those people who prefer future consumption, and indirectly rewards people who spend most of their income on present consumption. Is that necessarily “fair”?

    You may still think so of course since the concept of fairness is basically very subjective, but I hope more Singaporeans will begin to question this concept for themselves.

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    • @Kelvin,

      I did not recommend the left-wing approach. Taxation generally falls between the two extremes. I believe Singapore is closer to one extreme than most developed countries. The Silicon Valley high tech millionaire workers pay SIGNIFICANTLY MORE TAXES than Singapore millionaires. And their poor will soon be making US$15 per hour compared to US$3(?!) per hour in Singapore.

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  7. Hi, Kelvin & Xmen!

    I acknowledge tt Kelvin’s Right or Left ideology is one way of looking at the issue. It is even a basic way to simplify complex issues which, in and of itself, is not inherently a bad thing. It’s what we humans have in order to make sense of the world given our, among other factors, acquired value system and limited time. One cannot be always getting back to start from empirical factors with everything and issue tt crops up our way.

    However, I think that if we analyze further back Right & Left, we’ll come face-to-face with what’s even more basic – fundamental, actually – before we can even discuss Right or/and Left ideologies (and Kelvin’s e.g. of the freedom to use one’s own wealth or possession acquisition, there is the question, ‘So, how did it end up with some of us being born with what we have and what we do not have – at the base, start line at birth?’ I often remind my children, ‘You didn’t choose to be born, a male/female, Chinese/another race, tall/short, pleasant looking/not so pretty, with all limbs intact/without, high/low IQ etc etc.

    If the answer to the question of determination at birth is, as what the Right normally would reply is, ‘Well, it’s the luck or the draw or fate or whatever name is given’, I can still accept that. But then the next question would have to be, ‘Ok, we cannot change the luck of the draw, so then, is it possible to exist in isolation as individuals and not as a group or a society?’ Except for a few hermits amongst us, the answer is obvious that we need different capabilities, functions, talents to co-exist both to just get by and, indeed, enjoy the finer things in life (whether you are Right or Left-leaning).

    With that settled, the next question then would have to be, “Not a question of ‘can’ but ‘do we want to’ be enjoying ourselves to the exclusion or neglect of helping those who are less ‘fairly endowed’ to enjoy at least a fairly decent life for them and theirs even as they go about their less meritorious roles/work with their less material rewards while we, the ‘better endowed at birth’ get to enjoy the fruits of our labour?” This is not to say that society should not put pressure on the former to put in their fair effort instead of waiting to get their share from the better endowed.

    Singapore, I fear, has over-emphasized the good of ‘meritocracy is fair’ without balancing it with the nobility of looking after our fellow, less-endowed human beings, without which, the existence of our air-conditioned nation is only possible if we banish our lesser ones and our more meritorious ones can produce wealth enough to employ minions and mercenaries to serve those of us to enjoy our ‘just?’ rewards.

    If that is not an option, the earlier we elect leaders to change our current ideology, the sooner we redeem ourselves from a certain dead end in nation-building.

    Law Kim Hwee

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    • Appreciate your perspective. From a libertarian perspective, as long as society is restricted to persuasion, they do their best to encourage people to voluntarily help those who are unfortunate, we will be fine. This has already been done in many different ways, thru religious organizations, thru ST pocket money fund and so on and so forth. This is also what I like about the tax relief for charitable donations, which is 300% this year and 200% in the past.

      What libertarians are not fine is coercion by the state, in the form of taxes, to force the above transfer thru threat.

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      • G’evening, Kelvin.

        I understand and agree the part tt voluntary help plays.
        – Can you point out to me which country anywhere in the world where this specific aspect of Libertarianism has actually proven to have worked?
        – Likewise, I can accept tt this aspect of Libertarianism is also only a work-in-progress here in Singapore, can you also discuss how you think and show with supporting info tt it appears to be working out fine and we are on the right track?
        – And, while you are at it, why do you think the PAP “Cabinet has shifted to the left in how it views social policy and helping the lower income,” Deputy Prime Minister Tharman Shanmugaratnam said (19 Apr 2013)?
        And does tt mean tt the PGP, GST vouchers, CPF top-ups etc should not exist in the first place?

        Thanks & rgds, Law.

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    • It is clear that Singapore rich-poor divide has worsened since the civil servants and politicians who are supposed to serve the people pay themselves millions. Forget about labeling left or right. Singapore’s fat cat ministers and the scrawny old men and women who picked cardboard for their daily exercises can be likened to 2 siblings – one obese and the other rail thin. The fat one says “I eat what is right” and the thin one says “I eat what is left”. So, Leftist or Rightist, does the common people have enough to eat at the hawker centre, food court or restaurant? Or XO chye tow kuey?

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