A bird’s-eye view of the budget – Addendum

This post is in response to the first few comments received for the post A bird’s-eye view of the budget. If you haven’t read that post, this one here may not make any sense to you; you should read it first before coming here.

I’m rather pleased with the comments I’m getting, as they indicate that readers are looking at the numbers. I think this is to be encouraged. A habit of referring to facts and figures makes for more grounded discussion than just spewing criticism of the government (as some websites tend to encourage).

So let me now take the issue further by responding to a few of the more cogent comments.

Defennder said in his comment to the earlier post:

Note that GST revenue did not decline because of the recession either. So there must be more than meets the eye than just pointing out that personal tax revenue did not decline meant that the rich had insulated themselves from recession. Income tax revenue is projected to decline in 2010, although I have no idea why.

Actually, GST collection did decline. It is not obvious if one looks only at the gross amount of GST dollars collected, for this would show the quantum increasing every year from 2006 to 2011. However, as I mentioned in the earlier article, the GST rate changed significantly in 2007. Prior to 1 July that year, it was pegged at 5 percent. After that it went up to 7 percent.

Hence, it is necessary to pro-rate all the figures to the same GST rate in order to compare if consumption — which is what GST reflects — declined in any year.

For Fiscal Year 2006, we can do a simple adjustment from 5 to 7 percent. As you can see from the table below, if in 2006, the GST rate had been 7 percent, we would have collected S$5.57 billion instead of S$3.98 billion.

Adjusting FY 2007’s figure is a bit more complicated. The fiscal year starts from 1 April. The rate hike took place three months into that fiscal year, on 1 July 2007.  The average GST rate for FY 2007 is therefore 6.5 percent. Doing a similar pro-ration, we would have collected S$6.64 billion in GST if it had been 7 percent throughout that year instead of the S$6.17 billion actually collected.

In FY 2008, when the rate was 7 percent throughout, we collected on S$6.49 billion, which was 2.3 percent lower than what would have been the comparable figure for FY 2007. That’s your recession.

* * * * *

As I pointed out in the earlier article, one can see the recessionary dip in all the broad-based sources of revenue — Corporate Income Tax, Assets Tax, Customs and Excise Tax, Dividends and Interest from investments, and GST. But there is one exception: Personal Income Tax (inclusive of Withholding Tax). This combined line item kept rising year on year. It really begs explanation.

I had suggested that it indicates how insulated the richer segment of our society is from the vicissitudes of economic cycles. They are able to maintain their personal income despite the recession. Is this a measure of their ability to manipulate income and wealth distribution to their own advantage, I asked?

A comment by suggestion said we should look at population growth, a point also made by John Tan. Suggestion wrote:

That’s gross income tax and not per capita or household tax?

The population grew a lot from 2006 to 2010

A quick look at the Statistics Department website reveals that the population midyear 2006 was 4.40 million. The total population midyear 2010 was 5.08 million. That’s an increase of 15.5 percent.  Given the one year lag in income tax assessment, we should look at Personal Income Tax (+Withholding Tax) collected in 2007 and estimated for 2011. The figures are S$5.69 billion and S$8.16 billion respectively, an increase of 43 percent.

It thus seems that population growth alone (per capita income tax holding steady) cannot fully explain the increase in personal income tax collected; it would have to be population growth + significant increase in per capita income leading to higher per capita taxes payable  — and this while a recession ravaged Singapore in the interim. In any case, I think a huge part of the population increase was in the form of low-wage workers who do not pay tax.

But we know that a large segment of the Singaporean working population suffered wage restraint through the recession, so it suggests that a minority of our working population enjoyed really good years despite the recession, in order to create that rising average. This was what led me to speculate that the rich were able to insulate themselves from the economic cycle, maintaining their upward march without a hiccup.

Sprechen Sie Singlisch contributed an important perspective:

quite a bit of your analysis hinges on who exactly these middle to high income persons are with respects to the population in Singapore (30%, 50% or 70% of the population better yet a histogram). Any data with respects to the income distribution population would surely strengthen your argument.

Also, I suspect the brunt of the recession fell on transient workers who I believe make up the majority of low income workers here. This does not substantially change your argument “that pain is disproportionately borne by other sections of society” but it would change the moral calculus for many Singaporeans.

Ah! Histogram. If only it were so easy. The first problem is that data regarding incomes is hard to find. Our Statistics Department is very bad at providing comprehensive data consistently over the years. Although a census was conducted last year, I cannot find any report from there about earnings; maybe it’s coming.

All I could find was data from the 2000 census, i.e. ten years ago. Source.  The numbers are out of date, but since what we’re interested in is percentage distribution across different income bands, they are still usable in a way. Relative distribution would not have changed much over a decade even if absolute numbers might have changed.

However, while the curve might keep the same shape, it will have crept up the income bands over the past decade. On the other hand, since I am unable to make any adjustments for tax reliefs, they kind of cancel each other out; the chargeable incomes of 2010 is probably similar to the gross incomes of 2000. In the table (thumbnail at right) you will see the assumptions I made regarding average incomes and tax payable on them.

Based on those assumptions, the following graph shows how much of Personal Income Tax collected comes from the top end of our society:

I estimate that about 50 percent of the Total Personal Income Tax collected by the government comes from the top 3 or 4 percent of income earners. 80 percent of Total Personal Income Tax collected by the government comes from the top 14 percent of income earners.

Therefore, in response to Sprechen Sie Singlisch’s comment, the middle to high income group that largely determines how much Personal Income Tax flows into State coffers is probably about one-seventh of the working population. It is quite conceivable that salaries for two-thirds of the population can stagnate, while the top 15 – 20 percent see strong income growth even through a recession, thereby paying increasing income tax year on year.

The thumbnail on the right is the Personal Income Tax structure, just for the record.