My eyebrows rose thrice, part 2: Low-income tax-payers hit jackpot

Within a space of slightly over two hours Friday night, two friends of mine mentioned Tharman Shanmugaratnam’s ‘pay one dollar, get four dollars’ sales pitch. “What do you think of that?” asked the latter of the two.

I knew Singapore had become one of the gambling capitals of Asia, but it was still depressing to see our politics adopt the same mindset: If you pay taxes, you win!

Clearly, that was not the point the finance minister was trying to make. I believe he was trying to show that the help lower- and middle-income Singaporeans were getting from the government exceeded what they paid in taxes, over a lifetime. But from the twinkle in my friends’ eyes as they repeated Tharman’s soundbite to me, I had the awful feeling it was received quite the wrong way. My eyebrows rose.

I had seen that comment from Tharman in the morning’s edition of the newspaper, but the math didn’t strike me as noteworthy — of course, the low income would get more back from the state than they put in, I told myself — and I did not pay it any further attention until my two friends mentioned it.

For every dollar that low-income Singaporeans paid in taxes in their lifetimes, they now get back $4 in the form of government aid.

Middle-income earners have also gained, the Finance Minister said, as he wrapped up Parliament’s three-day debate on the Budget. They receive about $1.50 in benefits for every tax dollar they pay. If they own a car, that falls to around $0.80.

— Straits Times, 2 Mar 2012, Grow economy to forge inclusive society: DPM; Strategies to tackle inequality are in place, Tharman assures MPs, by Lydia Lim

(The graphic alongside this story in the Straits Times, indicated the following ratios to two places of decimal: Low-income 4.25; middle-income without car 1.55; middle-income with car 0.81)

Straight away, a critical-minded person would take issue with the vague terms he used. What do ‘low-income’ and ‘middle-income’ mean? What does the term ‘benefits’ include?

You should also note the qualifier ‘over a lifetime’. This means the multiples the minister mentioned do not apply when we only consider a person’s working years. The payback only reaches these multiples when the amounts spent by the government during a person’s childhood, adolescence and senior years are included. Thus my guess that ‘benefits’ includes education and healthcare spending, in addition to to the more tangible help from housing grants, rebates, workfare payments, baby bonus, etc.

Anyone who wants to check those numbers would either have to wait till Tharman (right) clarifies, or make some heroic assumptions.

Even so, I hope to show readers why I didn’t think those numbers were anything out of the ordinary. To do so requires me to make a few assumptions — not too many; I don’t want to play hero more than necessary.

Let’s start with a bird’s eye view. Individuals who don’t own cars pay, in the main, two kinds of taxes: personal income tax and the Goods and Services Tax (GST), which is currently rated at 7 percent. As you can see from the pie chart I found from the Finance Ministry’s website (above), each of these two types of taxes contribute about 15 percent to the total budget revenue. (Personal income tax is the pale lime slice; GST is the strawberry cream slice). Together, they make up about 30 percent. In other words, the government has more than than three times as much money as they collect from individuals for the various kinds of governmental spending.

Some of that spending cannot be considered ‘benefits’ except by a great stretch, e.g. defence or certain infrastructure projects. But still, there’s more money available for ‘benefits’ than the 30 percent collected from personal income taxes and GST. Hence, to have an overall Benefits-to-Personal Taxes ratio of 1.5 or more is therefore not remark-worthy at all.

Looking at the same question from a micro perspective is harder, because it requires several assumptions.

Let’s assume that by ‘low-income’, we mean someone whose income from work is at the 10th percentile. By ‘middle-income’, it is someone at the 50th percentile, i.e. the median income from work. The Ministry of Manpower has on its website the 2011 median gross monthly income from work of full-time employed residents, excluding employer’s  CPF contribution, of $2,925.

Getting the figure for the 10th percentile proved much harder. The closest I could find were these figures from Table 32 (page T47) of the Manpower Ministry’s Labour Force Report 2011. It gives the number of employed residents in each wage band:

(By the way, don’t you just love the title the Report gave to the table: “. . . monthly income from work and sex. . .”?)

The table indicates that the 10th percentile income earner would have a salary around $1,200 a month.

Next is an outline computation of the personal income tax and GST that these two persons would have to pay:

I assumed the typical person would get a 13th month bonus and I also put in the main tax reliefs that a male citizen might enjoy. The personal income tax is then computed based on the current rates.

For GST, I assume the low-income guy would spend just about all the disposable income he has, perhaps managing to save only his 13th month bonus. As for the expenditure likely incurred by the middle-income guy, I made an estimate by referring to the Report on the Household Expenditure Survey 2007/2008. Page iv has a table that shows average monthly expenditure by households in the third quintile (41st to 60th percentile) to be $3,571. Page 2 has a table that shows average household expenditure per household member, for households in the third quintile to be $974. Together they suggest a household size of nearly four persons.

I’ll assume that in such a middle-income household, there are roughly two income earners, and that each income earner supports two persons. Thus, the expenditure per income earner is about twice $974, or $1,948.

The second block of the green tables above shows how much in GST the low-income and middle-income workers would have handed over to the government based on their assumed expenditure. The bottom line is that the low-income worker would be paying a total of $756 a year in GST, while the middle-income worker would be paying a total of $1,652 a year in income tax and GST.

The table at right shows my estimate of how much the ‘low-income’ and ‘middle-income’ guys would be paying in taxes over their working lives, and how much ‘benefits’ they get in return per year on average over a lifespan of 75 years.

Considering that Workfare for the low-income, GST rebates, baby bonus already run into hundreds and thousands of dollars per head, and housing grants into the tens of thousands, the bottom figures (averaged per year over a lifetime) aren’t that much. They certainly look less than any initial impression one might get from Tharman’s multiples of 4.0 and 1.5, which to some sounded like “pay one dollar, win four dollars.”

As a soundbite, it was a good one. But as with all soundbites, it is worthwhile looking beyond it.

17 Responses to “My eyebrows rose thrice, part 2: Low-income tax-payers hit jackpot”

  1. 1 Robox 4 March 2012 at 23:50

    I understand that you were only trying to cover as much ground as possible with this article. However, in my opinion, you might have de-emphasized what I feel is the singular most important aspect in discussions of a fiscal nature, which Tharman wilfully attempted to obliterate.

    Taxes aren’t the only revenue citizens pay; there are a variety of other sources of government revenue and as you pointed out, and we – the lowest income earners included – pay them too.

    I hope that other readers can provide the verification, but I have read repeatedly that the total amount Singaporeans pay in revenue is actually comparable to a high-tax, first world country. (In those countries, citizens don’t pay much of the revenue that Singaporeans do precisely because their taxes alread pay for them.)

    The math would have turned out drastically different if Tharman had been more honest. We would have come to the same conclusion that I did long ago: we pay first world revenue in Singapore in return for third rate public services.

    • 2 ape 5 March 2012 at 11:28

      I may be stretching this a bit. Part of what consumers pay goes into lan lease or property tax via rental cost?

  2. 3 Sgcynic 5 March 2012 at 00:57

    I suppose the ‘benefits’ one receives would be drastically reduced of he does not qualify for the housing grants by HDB for one reason or another.

  3. 4 Anonymous 5 March 2012 at 01:24

    Sophistry is their game. I pity those who don’t read beyond the Straits Times.

  4. 5 colintywee 5 March 2012 at 05:43

    Thank you for the post!
    A well needed scrunity!

  5. 6 Charles 5 March 2012 at 07:43

    Impressive analysis on this sound bite, Alex.

    Tharman will probably counter with interests paid on CPF as “government benefit paid”, as well as HDB “rebates”.

  6. 7 Anon 5 March 2012 at 07:53

    For me, the problem with all these nice sounding sound-bites “A family earning $1,000 can afford a HDB flat” and “Low/Middle income people get back several times in benefits than they pay in taxes” is that the average person will check such statements against his “gut” reality. If his gut reality does not jive with the sound-bite, he will dismiss the sound-bite as propaganda and creative accounting.

    As for the first statement – “a family earning $1,000 can afford a HDB flat”, it is so out of whack with gut reality that many will probably just dismiss this out of hand. Essentially, it all goes back to the main point the govt is saying — if only you suckers will buy a one-room flat (instead of a two-room) and take whatever location we provide you, you would have afforded a flat. In other words, lower your expectations and everything would be fine.

    On the second statement, the statistic has no meaning to the average citizen. Yes, thanks for telling me I’m getting several times more benefits than I’m paying. But in the first place, what the average citizen is probably most concerned with is increase or decrease in spending power over the years. I’ve no problem getting less in benefits vs taxes, if my spending power has gone up. On the other hand, if my spending power has gone way down because of costs increases, its no use telling me how much benefits I’m getting vs taxes paid.

    Who causes the significant rise in costs over the last few years, and hence reduction in spending power? Its the govt. All the fee increases are excluded from the calculations because they are not “taxes” but it still goes into the govt coffers, one way or another. So you take more away with your left hand, and tell me to be grateful that your right hand is giving something back to me ?

  7. 8 Worst Singaporean 5 March 2012 at 08:43

    Have you factored in the GST that will continue to be taxed during the 35 non-working years?

  8. 10 Unbranded BreadnButter 5 March 2012 at 09:51

    Yup, until Tharman explains how he gets his figures, we can only guess.If I rem the speech correctly, he was using the family unit as an example, so HDB housing grants, baby bonus, edusave, these are the stuff that you would get if you choose to participate in ‘nation-building’ efforts. Not so friendly for non-pro-family choices. The non-discriminatory ones are rebates on income tax, water and electricity, singapore shares, gst vouchers etc. But yes, feel good PR on the whole.

    Question we need to answer would be, is govt responsible for your welfare or your poverty? Can someone who is on welfare aid but continually poor? What is the level that society is willing to accept?

    Thanks Alex, great research and articles (as usual).

  9. 11 Smoke 5 March 2012 at 10:23

    A major component of the benefits would, I believe, be HDB housing grants.

    Unless we know the actual building cost of a HDB flat, giving a discount to a market-based price can greatly inflate the value of the benefit offered.

    So when access to such relevant information is denied, there is no way for citizens to verify their claims.

  10. 12 yuen 5 March 2012 at 13:38

    tharman again made a poor sound bite; since SG government owns a large part of the economy, a bit like Qatar/Brunei that own the oil reserves which are almost the whole of their economy, people would like it to distribute the earnings to citizens in the same way, and salary earners envy those income tax free mid east states; also, some of these countries hire foreigners to do almost all the work (e.g., I recall in Kuwait, before Saddam invaded, Egyptians, Palestinians, Yemenese outnumber natives, who live on government handouts)

    with examples like these, how can Tharman expect people to be impressed by “pay 1 get 4”?

  11. 13 Hsq 5 March 2012 at 13:47

    Thanks for your great analysis.

    To me DPM sounds very much like a” koyork” man. A genuine and good product will sell itself all sound bite and marketing are deem redundant.

    I hope our leaders will do just that, be honest and genuine !

  12. 14 Poker Player 5 March 2012 at 16:21

    “Straight away, a critical-minded person would take issue with the vague terms he used. What do ‘low-income’ and ‘middle-income’ mean? What does the term ‘benefits’ include?”

    I suggest going even further than that.

    Notice that we get our goods and services from other people like us. The very rich play almost no role in this except in social organization.

    Money to us, is like pheromones for social insects.

    It is not wealth.

    It is a tool to organize and distribute wealth.

    Once we start describing things this was, we see what this discourse is for – crediting the rich and powerful more than they deserve for the general well being.

  13. 15 Lala 6 March 2012 at 12:55

    the government owns land as well, and collects leases / rental. Mapletree, CapitalLand, HDB are example of government organizations owns the land and charges people for using the land (serfdom). They’re free to increase the rental as they please to control profits. They can also bring in as many people as they wish to control demand and supply of labor / wages.

    “Serfdom included the labor of serfs occupying a plot of land owned by a Lord of the Manor in return for protection and justice and the right to exploit certain fields within the manor to maintain their own subsistence. Serfdom involved not only work in the lord’s fields, but his mines, forests and roads. The manor formed the basic unit of society and the Lord of the Manor and his serfs were bound legally, economically, and socially. Serfs were laborers who were bound to the land; they formed the lowest social class of the feudal society. Serfs were also defined as people in whose labor landowners held property rights.”

  14. 16 jentrifiedcitizen 6 March 2012 at 13:31

    again and again our Ministers and DPM have been throwing such glossy soundbites that are not fully honest nor transparent. Tharman’s claim of high benefits gained versus tax paid is not true at all especially for the singles. Working Singles in singapore have been discriminated against as they pay a lot of taxes but get very little subsidies nor benefits back from the state. Worse still if u r a single with no kids and r not in low income bracket, u r basically on your own. This government doesn’t take care of all its citizens, only selective groups.

  15. 17 Picker 6 March 2012 at 13:40

    Low and middle income Singaporeans that have purchased a HDB flat would have paid much more than the cost of building the flat. The difference should be seen as a tax.

    Profits earned by SLA through HDB flat sales go into the Reserves. Hence, the government profits considerably from the lower and middle income Singaporeans who have purchased HDB flats.

    Calculations of any net benefits to residents should take into account the selling price of HDB flats over the cost of building them. And please add in the interest charges.

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