This just in the news; the Goods and Services Tax (GST) in Singapore is set to climb to 7% in the year 2007, barely 2 years after it increased by 2% to the current 5%.

The government is making a bad habit out of pushing the GST rates up.

As all self-respecting students of economics should know, the GST (or VAT in countries like the UK) is a regressive tax. Now what do I mean by regressive tax?

It simply means that it cuts into the income of the poor more so than the rich. In absolute numbers, the rich may pay more than the poor, but after taking into consideration the impact an increase in a regressive tax may have on the proportion of income of the poor, it is easy to see that the poor are more adversely affected than the rich.

For example,

1. there is a family of 4 surviving on a sole income of $1000 a month. Based on their expenditure alone, they spend $100 on GST. Proportion of their monthly income that goes into feeding the GST? 10%

2. we now look at a family of 4, albeit being to the upper middle class, surviving on $8000 a month. Because they are rich and we all know that demand increases as income increases, they spend $400 of their income on GST. Proportion that goes to GST? 5%

3. for a more extreme scenario, a family of 4, with a combined income of $25000. Considering they are annoyingly rich , they spend more as well, which in turn means more money going to GST, let's take it to be $800. Proportion of income to GST? 3.2%

Note that the figures used for income are assumed to be the net take home pay of the household. The amount of amount paid to GST is taken to be an estimate as well. And while it holds true that generally as income increases, so does demand, this direct relationship may not be a proportionate one, ie someone who earns twice the amount you do may not necessarily waste twice the amount you do on GST.

The above example merely gives a rough illustration how regressive taxes like the GST affects the poor more than the rich. Living in a society that keeps harping on how it wants to help the poor, I find it unbelievable that the government would neglect to consider that this measure is likely to affect the poor the most. Or maybe the government couldn't really be bothered. In the end, some poor businessmen will end up absorbing the full 2% increase, resulting in a drop of their revenue and hence profit, or some will pass the full 2% onto consumers (affecting the poor), and some will absorb some and pass the others on (affecting both parties).

I have no idea which one is better but I sure hate the idea of an increase in GST. And when all these money goes into the government's pockets and eventually sits in our foreign reserves, ie money we cannot touch, even during an economic recession, we distort the multiplier process because not all the money that is spent goes through the multiplier process to boost the aggregate demand of the economy, which eventually affects the economy's performance.

Now with the HUGE amount of reserves the Singapore government has, does it need this additional revenue? Not to mention that it is still drawing revenue from other sources like income tax, corporate tax, property tax, Certificates Of Entitlement etc etc etc. Yes, I know corporate tax is on a slow climb downwards and I agree that this is needed to maintain international competitiveness, but must we do it at the expense of citizens?

All in all, the greatest tragedy in the whole rising of the GST rate is that this has to be coupled with a fall in corporate tax, so in essence, our government is sacrificing us to attract MNCs to coming and staying here. More jobs for us? We still don't know. Plus, that brings into issue another point, structural unemployment. All day long the government yabbles about solving structural unemployment, yet I don't see any real, long lasting solution. We even have people who put their savings into getting retrained, only to find themselves unable to find a job as that industry has gone into a slump of its own, or that employers find them too old. Yes, who is going to address the problem of age discrimination within the workforce?

We have a whole host of problems and the government can only think about raising regressive tax rates. A REGRESSIVE tax, of all taxes?????

By the way, I'm so flawed that I wouldn't like the idea of any tax raised that directly affects me. Yes, I'm selfish. The thought of having my purchasing power reduced by this 7% thing irks me. I wouldn't want to be paying higher income taxes in the future though. >.<

Oh, by the way, I am NOT a student of Economics. I'm a student of Science. The last time I touched my Economics material was last year. Plus, I prefer Microeconomics over Macroeconomics, anytime.