How Much Personal Income Tax Do We Really Pay?
It’s budget season once again, and very soon it will be personal income tax filing season too! While the Goods and Services Tax (GST) looks to be finally going up from 7% to 9%, we can be thankful that personal income taxes have always been low and easy to file. Or are the income taxes we pay really that low? How much personal income tax do we really pay?
With the top rate of personal income tax (for assessable incomes above $320,000 per annum) set at 22%, amongst developed countries, only Hong Kong has a lower top rate of tax at 15%. And if we assume the median salary of $5,000 a month in Singapore, the median average tax rate payable is around 7%! That is really low! Especially if we compare ourselves to European countries such as Finland and Denmark, which have top marginal personal income tax rates above 50%! But is this comparison a valid one? Or are we missing something out, since these countries have pensions, unemployment insurance, and free health care which we do not have. What is the true amount of personal income tax which we pay?
Personal income tax rates around the world
An easy way to compare tax rates across countries is by looking at the top rate of personal income tax, which this website shows, using data from KPMG in 2020. Summarising the familiar names and their ranks, we see that Singapore really only ranks higher than Hong Kong, and that there are at least 10 countries (ranked 130 to 140) which have no personal income taxes at all!
Top Personal Income Tax Rates Around the World
|Rank||Country||Top Income Tax Rate|
Of course, just looking at the top personal income tax rate is not a good way to do a comparison between countries, since the top rate of tax might only apply to a very small number of people with massive incomes, while everyone else pays far less tax. This really depends on how progressive the tax rates in a country are. For example, Singapore has a progressive personal income tax rate structure in theory:
Marginal Personal Income Tax Rates in Singapore
|Chargeable Income||Gross Income|
(Incl Employee & Employer CPF)
|Marginal Tax Rate|
|< $20,000||< $30,713||0%|
|Next $10K up to $30,000||< $45,338||2%|
|Next $10K up to $40,000||< $59,963||3.5%|
|Next $40K up to $80,000||< $118,463||7%|
|Next $40K up to $120,000||< $158,740||11.5%|
|Next $40K up to $160,000||< 198,740||15%|
|Next $40K up to $200,000||< $238,740||18%|
|Next $40K up to $240,000||< $278,740||19%|
|Next $40K up to $280,000||< $318,740||19.5%|
|Next $40K up to $320,000||< $358,740||20%|
|Above $320,000||> $358,740||22%|
Looks pretty progressive, doesn’t it? Especially when we gross up the income figures to include both the employee and employer Control Provident Fund (CPF) contributions (up to a maximum of $37,740, which are excluded from the chargeable income) and the Earned Income Relief of $1,000. Most other countries do not have such a complicated scheme like our CPF, nor in such large amounts. Even Hong Kong’s Mandatory Provident Fund (MPF) contributions amount to only 5% each from the employee and employer respectively. Speaking of which, Hong Kong’s personal income tax structure looks like this:
Personal Income Tax Rates in Hong Kong
|Net Chargeable Income||SGD Equivalent||Marginal Tax Rate|
|< HK$50,000||< S$8,620||2%|
|Next HK$50,000 up to HK$100,000||< S$17,241||6%|
|Next HK$50,000 up to HK$150,000||< S$25,862||10%|
|Next HK$50,000 up to HK$200,000||< S$34,482||14%|
|Above HK$200,000||> S$34,482||17%|
So this is where we can see that a comparison of the top rate of personal income tax across countries is quite useless. While Hong Kong has a lower top rate of tax, it is levied on a relatively low income, which means that most people in Hong Kong end up paying close to a 15% average tax rate. While in Singapore, the top rate is levied on a relatively high income, and so the median income earner in Singapore pays only about a 5% average tax rate. Hence, Singapore is quite the tax haven!
For comparison, here’s what personal income tax rates look like in the UK, and it is really simple!
Personal Income Tax Rates in the UK
|Taxable Income||SGD Equivalent||Tax Rate|
|< GBP37.500||< S$68,325||25%|
|GBP37,501 to GBP150,000||S$68,326 to S$273,300||40%|
|> GBP150,000||> S$273,300||45%|
And in Australia, where they levy the tax in worldwide income, so there is no escape for the expats living elsewhere!
Personal Income Tax Rates in Australia
|Taxable Income||SGD Equivalent||Tax Rate|
|< A$18,200||< S$17,500||0%|
|A$18,201 to A$45,000||S$17,501 to S$43,269||19%|
|A$45,001 to A$120,000||S$43,270 to S$115,385||32.5%|
|A$120,001 to A$180,000||S$115,386 to S$173,076||37%|
|> A$180,000||> S$173,076||45%|
How Should We Compare Personal Income Tax Across Countries?
As we can see, comparing top personal income tax rates across different countries does not tell us anything at all! Firstly, it is because the different marginal tax rates apply at different income thresholds, so a country with a low top personal income tax rate can have almost everyone paying tax at that rate (e.g. Hong Kong), while one with a higher top personal income tax rate may only apply at a very high income threshold and so everyone pays much less tax (e.g. Singapore). Secondly, taxes pay for different things in different countries. In the Denmark for example, taxes pay for everything including pensions and healthcare. In other countries, there may be additional payroll taxes levied for pensions. So to truly compare personal income taxes across countries, we need to harmonise for these aspects too.
This is done on this website, and an extract is shown below:
Tax Wedge and Decomposition By Country
Surprise, surprise! It turns out that the three countries with the highest top personal income tax rate might not be the most heavily taxed countries for personal income after all. In fact, the average tax rate levied is far lower. And instead, Belgium, which levies higher payroll taxes ends up being on top when the total personal tax burden is considered. Further down the list, we see the UK and Australia swopping places as well, even though Australia has the higher marginal personal income tax rate.
Unfortunately, the website does not include Singapore. Presumably, the CPF system we have is more than confusing to outsiders, and to do an apples-to-apples comparison, it is essential that the salient features of the CPF system be considered. Are the monies earned from work and put into the CPF tax-free really our money?
While Malaysia has their Employee Provident Fund (EPF) and Hong Kong has its Mandatory Provident Fund (MPF), all thanks to the British, they do not operate in the same way as the CPF in Singapore. Specifically, upon retirement, the members of EPF or MPF are free to withdraw everything they have in the EPF or MPF! Hence, whatever state-provided healthcare or pensions are clearly not funded from the EPF or MPF. Whereas in Singapore, there are restrictions on the withdrawal of the Retirement Account and the Medisave Account, which are presumably used to fund public pensions (CPF LIFE) and healthcare (MediShield Life).
Incorporating CPF into Personal Income Taxes in Singapore
Let’s give this a shot! As we have shown earlier, the tax-free CPF contributions from the employees and employers can (and should) be considered part of the overall income of anyone who is taxed in Singapore. After all, from the perspective of the employer, CPF contributions are simply part of the overall wage bill. Whether the government taxes it or not, or even whether it truly belongs to the employee, is none of the employers’ concern.
But which parts of out CPF contributions should we consider as being a “tax”? If we try to do an apple-to-apple comparison with other countries, it will be obvious that the two biggest parts of government spending (apart from defence) is healthcare and pensions. Healthcare is usually financed out of general government taxes, while pensions are sometimes financed out of payroll taxes, and in rarer cases, out of general taxation. In Singapore, we can make the following assumptions:
- The amounts going into the CPF Medisave Account is a tax, since it goes towards paying for our healthcare insurance and other medical fees and charges. The equivalent form in other countries is to have healthcare financed by taxes, so that it is free at the point of usage. While the forms differ, the substance is the same.
- The amounts going into the CPF Special Account (which is ultimately converted into the Retirement Account) is a tax, since it goes towards the state pension known as CPF LIFE. Again, in substance, it is similar to the payroll taxes we see elsewhere, only that in form, it is described as a form of savings.
Once we make these adjustments, what happens to our average tax rate? First, let’s refresh our memory and look at our marginal and average tax rates based on the personal income tax rates on chargeable income in Singapore (shown in earlier table):
Marginal and Average Personal Income Tax Rates in Singapore (Based on Chargeable Income only)
As noted previously, by this measure, the average personal income tax rate on the median Singaporean is lower than that for the average Hong Konger, despite having higher marginal tax rates here! But the picture changes if we include all our CPF as income in the denominator (and not just chargeable income), and also count the CPF contributions to the Medisave and Special Accounts as taxes. Because the CPF contribution amounts and the allocation to the MA and SA both vary by age, the marginal and average tax rates will also vary by age. Note that the line for those < 35 years old matches that for the ones between 55 to 60 years old exactly.
Marginal Personal Income Tax Rates in Singapore (Based on All Income including CPF)
Average Personal Income Tax Rates in Singapore (Based on All Income including CPF)
A couple of things jump out straightaway from these two charts:
- The marginal tax rates show a kink between the chargeable incomes of $80,000 and $120,000 (which correspond to roughly $120,000 to $160,000 inclusive of CPF). This means that while our tax rates are progressive, they are in fact progressive for two distinct sets of people – those below the average income level, and those above. The people earning an average income in Singapore essentially pay as high a marginal tax rate as their richer brethren. This is of course due to the fact that CPF contributions max out when someone earns $6,000 a month. Which means that there is no longer a “CPF tax” or a payroll tax above that level of income
- The average tax rates are quite flat across all income levels up to a chargeable income of $320,000 (or $360,000 including CPF) for those between the ages of 35 to 55. Again, this is the result of the “CPF tax”. Below the age of 35 and above the age of 55, the CPF contributions and allocation to the MA and SA are lower, and hence we see more progressively in taxes between the poor and the rich. But for the main bulk of the wage earners, everyone basically pays the same personal income tax rate!
So the personal income tax plus CPF system in Singapore actually ends up being less progressive than imagined, primarily because of the “CPF tax” which we pay for our healthcare and CPF LIFE. In fact, for most of us, it looks almost like a flat tax! Of course, it is not mainstream to think of our CPF MA and SA as “taxes”. Hey, after all, those accounts are in our own name! But so are tax accounts, and the difference between the CPF Ordinary Account and the MA and SA is that we cannot withdraw our MA and SA all at once, or use it for housing!
The difference between the CPF Ordinary Account and the Medisave and Special Accounts is that we cannot withdraw our MA and SA all at once, when we like it during retirement, or use it for housing!
Another quirk of the tax system which makes it even less progressive than the flat tax that we see now, is of course above the chargeable income of $240,000 (or $280,000 including CPF), a small business owner can then pay himself or herself through dividends ousted of wages or bonuses. Since the corporate tax rate is 17%, while the personal income tax rates go above that to 22%, by arranging their sources of income, they never need to pay a higher tax rate than 17% to the taxman! So again, it could be like the Warren Buffett syndrome all over again, where a tycoon actually pays a lower tax rate than the average Singapore salaryman!
What does this tell us about how much personal income tax we really pay?
Actually, not that much! At the very least, it tells us that we are not very different from many other countries when it comes to taxes. The truth is that, in line with many other tax systems, what starts off as a progressive form of taxation, where the poor pay a lower rate than the rich, inevitably ends up closer to a flat tax system, once all the bells and whistles to pay for everything else is put in!
Average Tax Rates in the World (Piketty and Saez)
For example, if our CPF system, which started off like the Hong Kong MPF our the Malaysian EPF had stayed on the same course, then there will be no “CPF tax”. But then again, how will we pay for healthcare and pensions? From general taxation? Which means personal income tax rates have to go up! Perhaps, at the end of the day, a 25% Goods and Services Tax (GST) can do all this work of raising revenue for the state from the individual taxpayer, instead of having so many different schemes.
Or maybe we can take comfort that we are not paying more taxes than say the Americans or the British. But we get what we pay for. They get free healthcare (in the US, Medicare kicks in at age 65) and a higher level of pensions, which could be worth up to a million dollars for high earners. We get CPF LIFE which maxes out at the Enhanced Retirement Sum of about $300,000. So a straightforward comparison of the average tax rates is not very useful either.