Does GST Help the Poor?

Does GST Help the Poor?

After much teasing and trial balloons, the shoe has finally dropped. Goods and Services Tax (GST) in Singapore will be raised to 9% on everything by 2024. GST has certainly come a long way from its introduction at a rate of 3% back in 1994, then to 5% in 2004 and finally to 7% in 2007. But in our own unique way, GST is supposed to help the lower income. How? By helping to fund more social services and healthcare, as well as through GST vouchers which offset the impact of the increase in the GST rate to 9% for them. In short, GST is to help the poor! Can that be true? Let’s delve deeper to figure out whether GST will really help the poor.

Time to pay 9% GST!
How much GST tax do we really pay?

Why Should We Have GST and How Does it Work?

Up until 1994, Singapore was doing fine with just personal income tax and corporate income tax. So, why introduce GST? The problem is that personal income tax is only paid by a small proportion of the entire population (half of all working adults pay no personal income tax), and hence the tax base is very narrow, and very dependent on the few top earners who pay the majority of personal income tax. These top earners could leave Singapore at any time, and this made the tax base less stable. GST, on the other hand, is levied on the final consumption of everyone, and so has a broader and more stable tax base.

GST is also an “efficient” tax. No, this does not mean that it is cost efficient to collect GST. In fact, the opposite is true! It is very cost inefficient to raise GST, since every company which is GST registered will need to hire additional accounting manpower to keep track of all the GST invoices received and issued, and keep the records for 7 years! But from the perspective of the tax authority, the cost is no worse than collecting personal or corporate income taxes, since the vast majority of the costs of GST are borne by businesses, and ultimately the consumer!

“Efficient” in this case is just an economics definition to mean that the tax does not distort consumption choices. This is especially so when it is levied on necessities. Hey, even if GST is 25%, you’ll still need to buy groceries right? In fact, GST is most effective when it is levied on necessities rather than luxuries. The demand for luxuries, being more elastic, will fall with GST, while necessities will still need to be consumed. So GST is specifically a tax that targets the man-in-the-street, especially those who earn less!

Which is why we keep hearing that GST is a regressive tax, because the lower income group will usually spend more of their total income (and save less, since they need to eat) compared to the higher income group. Therefore, the GST collected from the lower income group as a percentage of their income will be higher than it is for the higher income group. This is the opposite of personal income tax, where those earning more will pay a higher rate of tax than those earning less, or a progressive system. Some may argue that this is a fair way to tax, which is true, as long as you ignore social justice, equality and all that! The rich and poor live in different worlds, after all, despite sharing the same country!

Some have argued that to make GST fairer on the lower income group, it should not be levied on necessities. But this goes against introducing GST, since GST works best if it is levied on necessities which people, no matter how rich or poor, have to buy and consume! And it creates a huge issue in trying to define what is a necessity and what is a luxury. For example, high end cakes look like a luxury, but it is still food, which is a necessity. And of course the flour and eggs which go into the baking of such cakes are necessities. So where do we draw the line?

Yet others have argued that GST is okay, because the lower income group spends more at businesses which do not charge GST. This is a fallacy, because GST is levied at every point in the supply chain. For example, we may eat at a hawker stall which does not charge GST. But that $3 plate of chicken rice may be the end result of the hawker paying:

  • $1.50 for the ingredients (chicken and rice and oil) bought from suppliers who charge him or her GST
  • $0.75 for the rental and utilities and dish washing fees at the hawker centre. The NEA and other suppliers charge GST
  • $0.75 for the labour cost for which there is no GST

Hence even if the hawker does not charge you any GST directly for the $3 plate of chicken rice, you are already paying GST on the $2.25 cost of the input costs on which the hawker has already paid GST on, and is seeking to recover from you! So, no. You cannot escape from GST!

How does GST hurt the poor?

Now, let’s look at the claim that GST is regressive, and see how GST hurts the poor. To do so, we need to know about how much people spend or consume from their income. And the answer is in Table 1 of the Household Expenditure Survey 2017/18 by the Department of Statistics.

Resident Households by Monthly Household Expenditure and Income Group 2017/18

Let’s ignore the first two income groups, those earning less than $2,000 a month. Because, on average, they spend more than they earn, which means that they are getting all sorts of social services and support. So, if we only consider the households which earn more than $2,000 a month, we see that they spend anywhere from 82% of their income (and pay GST on this spending) for the lower income group, to just 33% for the higher income group.

Percentage of Income Spent by Income Group 2017/18
Spending as percent of income

Why do the higher income groups spend so little of their income? Well, the Household Expenditure Survey 2017/18 does not cover income spent on savings and investments (on which no GST is chargeable except for the fees), mortgage payments (no GST payable) or taxes (no taxes on taxes!). These are usually the largest items of “uses for income” for the higher income groups. But at the end of the day, the higher income groups, while spending less of their income, still have higher consumption expenditure than the lower income groups. It just does not go up as fast as income does.

Now, with 9% GST biting in 2024, how much do the different income groups pay in GST as a percentage of their incomes? It turns out that the lowest income groups will pay about 6% of their income on GST, while the higher income groups pay 3% (and even less as we get to the rich!). So GST is truly regressive!

GST Rate as a Percentage of Income by Income Group 2017/18 (9% GST)
Average GST Rates

In our previous blogpost How Much Personal Income Tax Do We Really Pay? we show that, if we include the “CPF Tax” which is used to pay for our healthcare and pensions, the lowest income groups pay some of the highest average personal income tax rates, of between 12% to 19%, depending on age.

Average Personal Income Tax Rates in Singapore (Based on All Income including CPF)
Average Personal Income Tax Rates with CPF

If we now add the GST tax burden on top of the average personal income tax rate inclusive of the “CPF Tax”, the tax burden of the lowest income group now goes to between 18% and 25%! Hence, GST can really hurt the poor!

So how can we claim that GST is to help the poor? Let’s look at that next!

How does GST help the Poor?

Is it true, as it is claimed, that GST is to help the lower income? As noted, this can be true:

  • Firstly, by helping to fund more social services and healthcare
  • And secondly, through GST vouchers which offset the impact of the increase in the GST rate to 9% for them

But higher spending on social services and healthcare can be done from other types of taxes too. After all, there is no earmark of GST revenues for any particular sort of government spending. Social services and healthcare can be just as effectively funded through higher wealth taxes, estate duties or personal and corporate income tax.

Using the GST vouchers to offset the impact of GST is an interesting approach. As we see earlier, GST is “efficient” in an economic sense because it does not distort consumer choice. So the way for GST to help the poor is not to have zero or reduced GST on necessities. Instead, let people spend the way they choose, and then reimburse them for the tax paid. If everyone got a GST voucher for $20,000 of spending, then the lower income groups will pay very little GST while the burden will fall on the higher income groups (since they spend more than $20,000 a year). Does this work in practice?

In Budget 2022, under the Enhanced Permanent GST Voucher Scheme, up to $500 of GST vouchers will be paid out every year to the lower income groups permanently. Does this work such that GST will help the poor?

Let’s assume that the full $500 GST voucher is paid out to households where the gross income (including employer CPF contributions) are $4,000 per month or less. This corresponds roughly to the $34,000 assessable income (no CPF included!) ceiling for the vouchers. Of course, the higher income families are not going to get the full $500, but let’s just use this assumption and see what changes.

GST Rate as a Percentage of Income by Income Group 2017/18 after GST vouchers of $500 for qualifying households
Effect of GST Vouchers

So, does GST help the poor? It appears that the answer is no. While the $500 GST voucher does reduce the GST paid by the 2 lowest income groups, it still does not make GST progressive. The 2 lowest income groups still have a 5% burden of GST (as a percentage of income) compared to 3% for the top earners. And the middle income groups who do not get the vouchers still face a regressive tax. Hence, the amount of the GST vouchers is neither enough, nor the coverage of the vouchers broad enough to overcome the regressive nature of the GST, and to help the poor.

So, what might work? Using the same data, if every one of the 1.35 million households in Singapore got a GST voucher for $2,500, GST, less vouchers, will become a progressive one! Of course the cost of this is huge, around $3.375 billion. But that will be about 15% of the GST tax revenues at the 9% level. And roughly equal to the additional revenue that raising the GST from 7% to 9% will bring in. Hence, it is not impossible, or too expensive, although this level of redistribution is far more costly than the roughly $1 billion which is spent every year now.

Does GST help the Poor?

Whoever came up with the catch phrase “GST is to help the poor” is a marketing genius! Because it is really hard to see how it can be true. As we have seen:

  1. GST is a regressive tax that is most effective when levied on necessities
  2. At a GST rate of 9%, the lower income groups pay about 6% of their income in GST, while the highest income groups pay about 3% or less
  3. Even with a $500 GST voucher, the regressive nature of GTS does not change. All that happens is that the lowest income groups will pay around 5% of their income in GST
  4. To truly work to help the poor and act as a progressive tax, taxing the rich more and poor less, a universal GST voucher of $2,500 might do the trick!
  5. Finally, we share more thoughts on who really bears the burden of GST here!

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