Can an increase in GST help the poor?
I am still trying to work out how that can be so.
Imagine a 'poor' family who does not pay any income tax now.
And it spends, say $1050 a month on all purchases of goods and services (for which it is currently paying $50 in GST).
When GST rises to 7%, it would be paying $1070 a month for these purchases.
So, that is $20 more.
Now how does an increase in GST help the 'poor'?
Contrast that with the 'not-so-poor', who currently pays some income tax.
The GST increase would be timed with cuts in corporate tax rates.
And to minimise any loopholes, similar cuts in personal income tax rates would also be implemented.
So, the 'not-so-poor' would enjoy a lower personal income tax rate when GST goes up.
If a 'not-so-poor' household has an annual income of $100,000, a 2% cut in personal income tax rate would make it $2,000 'richer' a year.
But, to work out if they are 'better/ worse off' than current, they will have to offset this against the increase in 2% GST.
The 'break-even' consumption for him to be 'worse off' under the new tax regime is if his annual consumption is $100,000 (ie $2,000/ 2%).
Since the household only earns $100,000 a year, it is not possible for them to spend more than $100,000 (housing mortgages aside).
So, it seems the 'not-so-poor' will benefit, at the expense of the 'poor'.
Unless, of course, the price levels fall by 2% or so, so that the total price after GST increase remains the same.
But, our CPI had been hovering at about 1% each year.
What scope is there that price levels would go down by 2%?
Since there are indications that the 7% figure is not the final one, it is time for the government to consider implementing different GST rates for different goods and services.
In the UK, eg, VAT has three rates - 17.5%, 5% and 0%.
The reduced rates apply to things like domestic fuel and children's car seats, etc.
Zero-rated items are what would be considered essential items like food, medicines. Full lists here and here.
Australia is another country that implements zero-rated GST for its 'essentials' like food.
And perhaps due to such measures, it has a lower cost of living than Singapore.
In a report by the UBS recently, Singapore's food and household appliances were surprisingly more costly than Sydney's.
Although people in Sydney pay more tax than people in Singapore, and price levels are generally higher, Sydney's purchasing power was found to be higher than Singapore's.
I'd extracted bits of the report and posted it here as I had some trouble posting the table here in blogspot.
In the table, I'd used Sydney's prices as 100 where appropriate to facilitate comparisons across Singapore, KL, HK and Mumbai.
To soften the impact of the increase in GST, the Government will be implementing some offset 'Packages' (eg Economic Re-structuring Package, etc).
However, these will disappear after a few years while the increased GST will continue.
A more 'poor-friendly' package would be to implement differential GST rates.
Continue to raise GST for non-essential items by all means.
But, unless we have different rates of GST, a GST increase cannot be helping the 'poor'.
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