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Embark on tax policies that change behaviour

This article is more than 12 months old

As the finance ministers have before him, Mr Heng Swee Keat has done an amazing job managing the Budget.

However, with tax rates at their current low, the Budget has in recent years become an exercise of funding as opposed to the use of tax policies to drive economic and social behaviour.

Tax policies have been traditionally used as a tool to achieve one or more of the following:

  • Influence and reward desirable outcomes;
  • Penalise and discourage undesirable outcomes, and the use of such penalties to fund desirable causes.

The overriding criterion in designing effective policies is to ensure that the incidence of reward/burden is borne by the correct party exhibiting the desirable/undesirable behaviour.

In addition, for any measure to be effective, the carrot must be pegged at a level meaningful enough to change behaviour.

My observation is that it is getting very challenging to use tax policies to achieve our goals. This is largely a combination of low tax rates and unintended outcomes from tax policies.

Special Employment Credit (SEC) for older workers

While companies have indicated this is a welcome measure (no one will reject a bonus), it is doubtful as to whether it will be enough to influence a company's hiring policies.

It might be useful to investigate further; otherwise, we could be looking at money that could have been better deployed elsewhere.

Twenty per cent income tax rebate (capped at $500):

Taxpayers with chargeable incomes in excess of about $67,000 per annum will reach the cap of $500 tax rebate.

Considering that half of registered taxpayers do not have any tax liabilities, this gesture appears to serve no real economic purpose apart from tokenism as it does not seem to be a significant amount vis-a-vis the individual's total income. Total cost of these rebates is expected to be about $385 million.

Increase in price of water

While I do not dispute the need to adjust the prices, we need to bear in mind that there is a basic level of usage that is unlikely to go away, and we should ideally only be increasing the tariff for levels beyond this minimum.

A good example of a similar implementation would be when telephone lines were repriced to reflect usage instead of the then prevailing fee structure.

The final outcome of the adjustment resulted in households paying less for home lines with the burden of price increases shifted to the high usage corporate users.

For a water-saving policy to work well, the price increase should be pegged to a level that reflects frivolous water usage so prudent usage is rewarded.

It is important that the burden is not shifted back to low usage consumers while taxing the high usage consumers. An example of this could be water supply to hawker centres (high usage consumers), which should be outside the scope of the increase as the end consumers (heartland diners) are the end recipients of this tariff increase.

Traditionally, our system has favoured simple one-size-fits-all policies that are easy to administer, but I believe the time has come to refine our policies to ensure that the final burden is where it should be.

Diesel tax/carbon tax

The diesel tax is spot on and a good example of taxing specific areas. The carbon tax, however, is in its early days and we need to be mindful that any regime conceptualised does not end up in the carbon emitters passing on the costs to the end consumers (which could be the case if water price increases are not implemented correctly).

Various business schemes

We should applaud the Government for taking a proactive approach in helping businesses.

However, one cannot help but suspect there is not enough information out there, resulting in the better organised (and perhaps bigger businesses) availing themselves of the schemes.

Also, in view of the already low corporate tax rates, any further rebates/incentives might be insufficient to influence economic behaviour (with the exception of the larger corporate taxpayers).

Categorisation of businesses

At the expense of oversimplification, we have traditionally viewed businesses as either large businesses or small- and medium-sized enterprises (SMEs) and tried our best to tailor policies to their specific needs.

However, I believe the time may have come to further relook at micro-SMEs on a standalone basis as they have different needs from larger SMEs.

These are typically family businesses.

Helping them with specific measures could inject resilience into the economy as more could be persuaded to start micro businesses and be less reliant on the job creation mechanism.

In addition, the micro-SMEs of today may be the SMEs of tomorrow, and it is imperative we try to nurture them before they fizzle out prematurely.

Budget caps on ministries and organs of state

I remain to be convinced that this is the way forward.

With greater complexities to deal with and blind spots in a free market, I believe the public sector will play an even more important role in addressing these shortcomings.

While all budgets should be relooked and reevaluated, I believe the imposition of a downward cap might not be the correct way forward.

Conclusions and a peek into the future

As Mr Heng has hinted, expenditures are expected to rise and these need to be funded.

As such, it is even more imperative that we embark on policies that are effective in changing behaviours and re-look spending policies that have no effect on outcome.

The writer is director of taxes at PKF-CAP Advisory Partners. This is an abridged version of an article that appeared in The Business Times yesterday.

Businesstaxheng swee keat