A Short History of Personal Taxes in Singapore
It’s Income Tax filing season once again! As we all strive to file our taxes before the April deadline, and inwardly groan at how much of our earnings have to be turned over to the taxman, we should appreciate how low the personal income taxes are in Singapore. Of course, that is also the reason why additional revenue for the taxman has to be obtained through other taxes like the Goods and Services Taxes (GST), which are a lot less visible to the taxpayer. But have personal income taxes in Singapore been so low for all time (see here)? And must we have higher and higher GST to make up for this (see here)? Let’s take a look at a history of personal taxes in Singapore!
Time to File Personal Income Taxes!
Has Personal Income Tax in Singapore always been so low?
While Singapore is not known to be a tax haven, it is known to be a good and safe place not just to earn an income, but also to park assets. This is thanks to the relatively high wages for professionals, low income tax rates, and also because there are no taxes on capital gains or dividends! And the argument goes that this is key to attracting and retaining talent. But has personal income tax in Singapore always been so low? Especially as we have been trying to attract global talent and investments for the longest time?
To shed light on this, we need to go back in time to look at the historical personal income tax rates over time. Right from the time the Singapore Tax Department was set up in 1947, and started collecting income tax from 1948. Oddly, the Internal Revenue Authority of Singapore (IRAS), doesn’t provide the historical personal income tax rates on its website! However, this information can still be obtained from the Income Tax Act of 1947 and its subsequent versions.
Now, as you can imagine, wages and salaries have risen by a tremendous amount over the years. And the income tax brackets have also changed accordingly. To make personal income tax rates comparable, we group them by the periods when they had the same income bands. The first chart is from 1948 to 1964:
Singapore Personal Income Tax Rates 1948 to 1964
Here, we can see that the history of personal income taxes in Singapore starts at a relatively low level. The top rate of income tax was 30% back in 1948. While this top rate was levied on chargeable incomes above $100,000, remember that back in those days, such a princely sum would buy the rich-lister a couple of houses in Katong! Over time however, the Singapore Tax Department raised personal income tax rates across all levels of incomes. Up to a level with a top tax rate of 55% imposed on chargeable incomes above $100,000 in 1964!
In 1965, the newly independent Singapore changed the tax brackets for personal income tax, and this series of income tax brackets remained in use until 1997:
Singapore Personal Income Tax Rates 1965 to 1997
During this period, personal income tax rates remained strongly progressive (i.e. soaking the rich while taxing the less well off lightly), with the top tax rates remaining at the 55% level until 1982. It is interesting to note that these were also the formative years of many of the city state’s political leaders and captains of industry, enabling them to rise from humble backgrounds. Many of them allude to the fact that they got their head start in life thanks to the generous government scholarships and bursaries, allowing them to attend the best universities in the world. Indeed, the high marginal tax rates, along with the high corporate income tax rate of 40%, is possibly a key factor paying for social mobility in society back then.
This period also saw the start of a persistent lowering of personal income tax rates across all income brackets, starting from the 1980s. Not only did the top rate of personal income tax fall (from 55% to 28%), the overall tax structure become less progressive. This coincides with the rise of conservative political and economic ideology in the West, as exemplified by Ronald Reagan in the USA and Margaret Thatcher in the UK. And it is remarkably similar to the changes in the personal income taxes in those two countries as well. For example, Singapore tax rates reached 55% in the 1960s, when the US and UK had rates at around 90%.
Historical Personal Income Tax Rates in the US, UK, Germany and France 1900 to 2013
The current set of income tax brackets which the IRAS uses was adopted in 2003, which we show below:
Singapore Personal Income Tax Rates 2003 to 2024
In this period, we see a persistent fall in the personal income tax rates until 2017, when they were raised slightly for these top income earners. Also in this period, for the first time in Singapore tax history, the marginal income tax rate for those earning less than $20,000 in chargeable income fell to zero, leading to a significant proportion of wage earners being exempt from income tax, and hence narrowing the tax base.
Despite this, the median full-time monthly income in Singapore in 2021 has risen to $4,680, and the 20th percentile to $2,500. This means that some 75% to 80% of the full time work force is subject to some income tax. Hence the tax base for income tax is not as narrow as it appears!
Comparing Personal Income Tax Rates across Time
One of the difficulties of looking at personal income taxes and rates over history in Singapore, like what we have done above, is that they are not really comparable. Thanks to wage growth, inflation and asset price gains, the $100,000 income tax bracket of 1948 – 1964 is not quite what is is in 2022! How do we make this comparable? One way is to look at inflation over time, or more usefully, the price level over time, shown below:
Singapore Inflation and Consumer Price Index 1961 to 2020
Of course looking at inflation alone is not a perfect indicator. For example, the price level today is more than 4 times that in 1961. But if we go by asset prices, $100,000 back in 1961 could buy 2 houses in Katong, something which will cost $5 or $6 million today! Asset prices are 60 times what they were back then! Wage inflation is probably somewhere in-between these two extremes. But we can look at the tax rates in the earlier periods when the consumer price levels were a quarter (1948 and 1966), half (1978) and three-quarters (1994) of what they are today (for YA2024). We show this below:
Singapore Personal Income Tax Rates Adjusted for Inflation
Adjusting for inflation, the history of personal income taxes in Singapore tell the same story:
- Starts off at moderate levels in 1948
- Becomes strongly progressive with high tax rates for top earners in the 1950s, 60s, and 70s
- Falling persistently and becoming less progressive since the 1980s to the present day
Moreover, the current state of personal income taxation in Singapore, supposedly with a relatively narrow base, and raising insufficient revenue to fund social programs, can be quite clearly seen to have resulted from the design choice made over the years, namely:
- Exempting 25% of the full time workforce from personal income taxation, hence narrowing the tax base
- Persistently lowering the rates of personal income tax since the 1980s, resulting in proportionately less revenue being collected compared to growth in incomes
Which are precisely the reasons for the introduction of the GST in Singapore in 1994. And this is what we turn to next, as GST is another form of personal taxes.
A history of GST in Singapore
Compared to personal income taxes, GST is far simpler and has a shorter history in Singapore. This is summarised below:
GST Rates in Singapore
| Year | GST Rate |
|---|---|
| 1994 | 3% |
| 2003 | 4% |
| 2004 | 5% |
| 2007 | 7% |
| 2023 | 8% |
| 2024 | 9% |
The introduction of GST in 1994 also coincided with cuts to the personal income tax rates as well as corporate income tax. However, these were not the most major cuts, as the larger reductions in personal income ax and corporate tax already took place in 1987. However, this represented a shift of the burden of taxation away from corporates and top income earners towards the middle classes. Note that GST is a personal tax, since all GST is paid by consumers. Corporates pay no GST because they either claim back the GST paid from the IRAS (if they are GST registered), or simply add the GST to their cost of goods sold, which they then mark up to pass the cost onto their customers.
Let’s revisit a question from the previous blogpost: Who bears the burden of GST? Since that post, some new data has come from the Government, in terms of the burden of GST:
Share of GST paid by Households
Looking at the right-hand graphic, it appears that he top 20% of households will bear 42.2% of GST in the future, while the middle 20% of households bear 18.6% and the lowest 20% of households bear 2%. Does this sound fair to the poor? But to make sense of this, we need to look at how much these households earn, and this can be found here, in Table 14A which we show below:
Average Monthly Household Income by Deciles 2010 to 2020
Distilling those numbers down, we can work out the share of income of the top 20%, middle 20% and bottom 20% of households:
Share of Total Income and GST by Households 2010 to 2020
| Household Tier | Share of Income | Share of GST Paid |
|---|---|---|
| Bottom 20% | 5.1% | 2% |
| Next 20% | 11.2% | |
| Middle 20% | 17.4% | 18.6% |
| Next 20% | 24.6% | |
| Top 20% | 41.7% | 42.2% |
It appears that every tier of households by income pays roughly the same share of GST as their share of income, except for the bottom 20% of households. Now, the spending patterns of the top 60% of households are similar (see here where we show household spending as a percentage of household income). This probably means that a slightly greater burden of GST actually falls on the 20% to 40% percentile of households, which are the ones which pay just a little in personal income taxes.
Overall, this means that Singapore has a largely flat tax structure across all personal taxes:
- Income taxes, once we include the “CPF Tax” are by and large a flat or slightly regressive tax structure, except for the very top end
- GST again is a largely flat or slightly regressive tax structure
- The lack of capital gains taxes again makes the personal tax structure regressive
Conclusions
This concludes our sojourn around the history of personal taxes in Singapore – Personal Income Tax and Goods and Services Tax. And once again, it helps to reinforce the view that Singapore is indeed a haven for high income earners, both for those whose income is from work, and especially for those whose incomes are from assets!
I don’t understand the last table, if the bottom 20% earns 5.1% of the income, but only pays 2% of GST, doesn’t that mean that they pay less overall in proportion of their income than compared to other groups?
Yes, but it could also be that a larger portion of their expenditure is made at non-GST registered stores e.g. hawker food. It doesn’t mean they don’t bear as much GST though, because the hawker will have paid GST for at least some of their ingredients and rent, and this is passed on to the consumer through their pricing markup over costs, even if they do not explicitly include GST in their pricing.