We are told that Singapore’s “top marginal individual income tax rate is 20%“. However, what exactly is our “real overall tax rate”, and how much are Singaporeans really paying?
By “real overall tax rate”, I am referring to what we pay through our personal income tax and CPF, or social security. In some other countries, the taxes that people pay would include what they pay for their healthcare and retirement as well, which in Singapore’s case, has been split into taxes and CPF. In the KPMG’s Individual Income Tax and Social Security Rate Survey 2012, they had thus “compiled personal income tax and social security rates from 114 countries for each of the past 10 years,” to give a better comparison of tax rates around the world. We will come back to this survey later.
First, let’s look at how much tax Singaporeans are actually paying.
In Chart 1, you can see the personal income tax rate that Singaporeans of different income brackets have to pay. I had used the tax calculator (which you can find here) to calculate the tax rate. I had not included the reliefs and bonuses in this calculation.
Even though it is said that Singapore’s top income tax rate is 20% on chargeable income of above $320,000, do you know that this does not mean that if a person earns more than $320,000 in a year (or around $27,000 in a month, without including bonus) that he/she will be charged the full 20% tax rate on the whole income?
The tax rate for the person’s income is staggered according to the income brackets, as outlined in Chart 2 below.
Which thus explains why in Chart 1, for a person who earns $27,000, his/her tax rate is still only 14%. Whereas, the “top rate” of 20% is only finally achieved by a person who earns $13 million in a month. Even then, the tax rate is 19.99% and does not go any further beyond that higher up the income ladder. But then, who earns $13 million in a month?
In Chart 3, you can see the CPF contribution rate for the employee. I had used the CPF Contribution Calculator to compute this. You can find the calculator here.
Do you know that for the CPF, “the Ordinary Wage Ceiling is $5,000“. This means that the “maximum amount of CPF payable” for anyone is based on a wage ceiling of $5,000. So, if you earn above $5,000, you still pay a 20% CPF based on a $5,000 monthly wage, or $1,000 every month. You don’t have to pay CPF for the rest of your income. The ordinary wage refers to “wages due or granted wholly and exclusively in respect of an employee’s employment in that month and payable before the due date for payment of CPF contributions for that month.”
CPF also needs to be paid for additional wages, which are “wages which are not granted wholly and exclusively for the month,” such as bonuses.
For the purpose of this illustration, I had only looked at the CPF for ordinary wages, and not other bonuses.
Chart 3 (above) is what you get.
Which means that even though the CPF contribution rate is 20%, after the wage level of $5,000, the contribution rate actually becomes increasingly much lower. So, for someone earning $30,000 every month, his/her CPF contribution rate is only 3% (based on the ordinary wage), and not 20%.
So, all in, what is the real overall tax rate (personal income tax rate + CPF contribution rate)? You can see this in Chart 4. The blue bars are the additions of the yellow (personal income tax) and pink (CPF) bars.
For a clearer picture, you can look at Chart 5.
Did anything struck you?
Perhaps I could explain this further in Chart 6.
If you look at Chart 6, you can see that for low- to middle-income earners earning below $5,000, their real overall tax rate is actually higher than the high-income earners.
What this means is that for someone who earns $3,000, he/she is actually paying a tax of 21%, whereas for someone who earns $15,000, he/she would pay a much lower tax of 15%.
What this also means is that Singaporeans who earn below $5,000, or the lower-income earners, seem to be shouldering the financial burden in Singapore, and the rich would have it much easier in Singapore.
When I first found out about this, I was taken aback. This is because first, we are told that the highest income tax rate is 20%. We are also told that the CPF contribution rate is 20%. So, I’ve always worked on the assumption that this means that for the top earners in Singapore, they would effectively pay 40% (20% tax + 20% CPF) in real overall taxes. But, it comes as a huge surprise that in fact, they pay much lower overall taxes. Someone who earns $15,000 monthly only pays 15%, and this is much lower than what the lower-income earners pay.
Take a look at Chart 5 again – do our “taxes” look progressive to you?
I decided to look at the actual number of Singaporeans earning the different wage levels – Chart 7.
Chart 7: CPF Board Annual Report 2011
(In case you are wondering why I am using statistics from the 2011 annual report, it is because this set of statistics on the distribution of CPF members by monthly wage levels had mysteriously disappeared in 2012’s annual report.)
Chart 8 gives you a better perspective to this – nearly 1.4 million Singaporeans earn less than $5,000, according to the CPF Board, or 79% of the CPF members.
Chart 8: CPF Board Annual Report 2011
Are the 1.4 million low- to middle-income earners shouldering the financial burden for one another then?
I had roughly estimated how much Singaporeans would actually be paying through their CPF and tax, which you can see in Chart 9.
Those earning below $5,000 would pay around $665 million to tax in total, while those who earn above $5,000 would pay around $516 million to tax in total (note that this is a low estimate as I do not have the exact distribution of the workers who earn higher incomes).
Now, back to the KPMG’s Individual Income Tax and Social Security Rate Survey 2012.
Do you know compared to other countries, high-income earners in Singapore actually pay a very low overall tax? According to the KPMG, even after accounting for CPF, those earning $10,655 monthly pay about 20.6% of their wages to tax and social security (CPF) (Chart 10).
And for those earning $32,000 this actually goes down to 18.5%, and this is including the CPF, which is rightfully 20% (Chart 11)!
Does this make sense to you that for a higher income earner who earns $32,000, he/she actually pays a lower tax than someone who earns a lower income of $10,655?
And of course, the income earner of $10,655 would in turn pay a much lower tax than someone who earns $5,000 or $2,000.
And why do the high-income earners in Singapore pay such low taxes?
Because in Singapore, the highest income tax rate only takes effect at a very high income level, of $320,000 annually, when compared to other countries (Chart 12)! Which explains why, if you are a high-income earner, it’s much better to escape to Singapore because first, you don’t get charged the top 20% tax rate on all your income and second, the top tax rate kicks in only at a very high income level. Not only that, according to the survey, “capital gains are not subject to tax in Singapore.” And as can be seen from above, the richer you are, the more you can benefit from Singapore’s system.
But do you find the tax structure in Singapore skewed? Why are the lower-income earners made to pay an overall higher tax rate and why is it the lower-income earners have to shoulder a heavier financial burden than the rich in Singapore?
The Singapore government has created a system that has allowed the rich to benefit a lot more in Singapore. But worryingly, who is left to pick up the pieces? 80% of Singaporeans are left to shoulder the burden in Singapore, even though we can rely on the rich can do more to alleviate the plight of those, especially of the poor and elderly in Singapore.
Actually, should everyone be paying a 20% contribution into their CPF, regardless of their wage level, as in Chart 13?
And when that happens, won’t the overall real tax rate be more evenly distributed, where the higher-income earners would then pay a higher tax rate (Chart 14)?
You can see a clearer picture in Chart 15. Even then, someone who earns $15,000 a month would still only pay 29% in tax.
Do you think that this (Chart 15) is a fairer tax distribution, as compared to Chart 5, where the lower-income earners were paying higher taxes than the high-income earners?
I did another rough estimation of what Singaporeans would pay through their CPF and tax, based on this more “progressive tax structure” (Chart 16).
Those earning below $5,000 would pay around $665 million, while those earning above $5,000 would pay around $787 million (note again that this is a very low estimate).
What this means is that as compared to the existing tax structure, a more progressive (and fairer) “tax” structure where the lower-income earners pay a lower proportionate tax, we would be able to yield another $300 million or so in “taxes” (note that because this is a low estimate, the actual amount would be higher) (Chart 17).
Why is a progressive tax structure important, you ask? Or actually, and honestly, we are not even talking about making it more progressive – just equal. Should everyone, regardless of their wage level, pay the same proportionate contribution of 20% to their CPF? Right now, the higher-income earners get to pay a lower proportion of their wages into CPF, but why do the lower-income earners have to pay more, and eat into their already constrained disposable wages?
Already, for the low-income earners, their wages have been depressed and for the lowest-income earners, their real wages have dropped. Yet, they are made to fork out an even higher proportion than the rich into taxes and CPF. What’s more, the higher-income earners have seen their incomes grow the fastest, yet they are allowed to pay the lowest overall taxes. We talk about being worried that the poor will leech on the system, but then, who could actually have an easier way to skid their way out of the system?
We are not talking about the higher-income earners paying a higher proportion, but paying the same, and fair, proportion, as the lower-income earners. Do you think this is fair and equal?
This is important because, can you imagine that with more CPF monies, if the government pegs the Medishield premium, and CPF contribution rates, according to income level, this would mean that there would be a bigger pool of Medishield which would allow for higher payout for Singaporeans from their Medishield (if the government is fair in their distribution and doesn’t siphoned the money off for other uses). Thus if the CPF contribution rates are equally contributed by all Singaporeans regardless of wage level, we would have a bigger pool to draw from, and be able to benefit a wider group of Singaporeans, especially those in the lower-income families and older Singaporeans.
Also, the government uses our CPF for investment in GIC and Temasek Holdings. If the government gets the higher-income earners to pay the same CPF contribution rate of 20%, this would give more to the government for investment, and more could then be done to alleviate the burden on the poor and elderly. But why didn’t the government do this? Do you think we could ask if high-income earners could contribute more, so that the poor’s plight can be alleviated?
But more importantly, research has also shown that higher taxes result in lower income and social inequality (Chart 18).
A more progressive tax structure would also result in better social equality (Chart 19), because there can be more resources that can be redistributed more fairly to the poor.
It has also been found that for countries with more progressive taxation and higher equality, their citizens also have “higher levels of subjective well-being, (as) mediated by citizens’ satisfaction with public goods, such as education and public transportation.” (Chart 20) People will be happier. And there are theories which link a higher state of happiness to higher productivity.
Finally, the issue of trust has kept cropping up in the sociopolitical discussion in Singapore, most often spoken by the PAP, which continuously ask Singaporeans to trust them.
But according to numerous research, it has also been shown that in countries where there are higher income inequalities, there are lower levels of interpersonal trust (Chart 21).
Also, not only does “improving the distribution of income … also contribute to economic growth in the long run via enhanced social trust“, “greater progressiveness allows countries to engage in countercyclical fiscal policy and thus creates the policy space to stabilize economic fluctuations, both in the short-run and long-run.” So, there are clear economic benefits to reducing the rich-poor gap and implementing a progressive tax structure.
For Singaporeans who are concerned about maintaining the stability of the Singapore economy, they would be comforted to know that it has been said that, “industrializing economies can raise economic stability through progressive income taxation“. If the PAP believes in ensuring stability in Singapore, it is clear what needs to be done, isn’t it so?
So, if the government wants Singaporeans to trust them, it’s very clear what they need to do, right? At this point, Singaporeans do not trust the government because they do not trust that they know fully how their monies are being used and what they are being used for.
Already, you can see that our real overall tax structure isn’t that fair and actually penalises the lower-income groups more so than necessary. The Ministry of Finance might claim that “Singapore’s individual income tax schedule is progressive, with higher income earners paying proportionately more income tax,” but the evidence in these charts clearly show that it is not, as can be also seen when in comparison with other countries in Chart 20. In fact, Singapore most probably have the most regressive taxes in the world. Whereas in other countries, the richer you get, the higher the tax you pay, in Singapore, it’s the other way round instead – if you are poor, you pay higher taxes than the rich!
But with this information in mind, the rest is really up to you now. Do you think that all Singaporeans, regardless of their income levels, should pay the same, and equal, proportion of their incomes into CPF? This CPF eventually goes into the Medishield, which is the “national health insurance scheme”. Do you think that we would be able to accumulate more wealth in the Medishield, by having the higher-income earners pay the same 20% rate as other Singaporeans into the CPF? Do you think that, in doing so, we would be better able to provide for the poorer and older Singaporeans, who have seen their incomes diminish, while their purchasing power have also dropped in the face of prices that have rose faster than their wages?
Medishield Pays for Only 2% Of All Health Spending
This is to note too that in 2011, Medishield accounts for only 2% of the total health spending in Singapore – just 2%. Perhaps with a fairer contribution system from the higher-income Singaporeans, we might be able to allow the Medishield to pay for 3% or 4% of the total health spending? This would still be a very small proportion, but would it be able to benefit more Singaporeans, especially the poorer and older Singaporeans?
Then again, do you also not find it suspicious that the Medishield is supposed Singapore’s national health insurance scheme, but accounts for only 2% of all health spending? Do you think that this is universal healthcare? And now that it’s compulsory, how useful will it be? What’s behind the mechanics or computation that is making this scheme?
But Who Will Take Care Of The Poor And Elderly?
Finally, are we taking the protection of the rich too far, while the poor are left to fend for themselves? The Singapore government has created the Singapore system for the rich, so that the rich can flourish in the system. This is not to say it’s wrong, but this system is at the expense of allowing the rich to benefit but where the poor has become left in the lurch. My question is, are the poor undeserving? Does it make sense that for higher-income earners who are earning significantly higher wages, that they need only pay a lower proportion of their wages on taxes and CPF, while for the lower-income earners, where every cent counts, that they have to take out a higher proportion of their wages into taxes and CPF?
While the government had announced in Budget 2013 that the low-income earners would in 2014 pay the full CPF contributions of 20%, why was it not announced that high-income earners would have to do the same as well? I am worried that the government seems to be squeezing the poor, when their livelihoods are already so desperate? The government could have implemented minimum wage, so that even as the poor is squeezed, they would have some breathing space in the form of higher wages – do you think this can be done? If the poor are being disadvantaged by depressed wages and higher CPF contributions which gets locked up, how would they be able to have a better standard of living in Singapore?
Meanwhile, the high-income earners have seen the fastest rises in their incomes, and the most relaxed curbs on their wages, with comparatively lower taxes and CPF contributions. The question to be asked is, why did the government allow the rich to pay staggered tax rates, and why did they cap the CPF contribution to the $5,000 wage ceiling, so that the rich do not have to pay further CPF on top of higher earnings?
Plainly, there’s not enough to spend for the poor and elderly in Singapore because unlike in other countries, because of low taxes on the rich, the country hasn’t been able to accumulate more tax monies and also, has the government has chosen to invest disproportionately in their own investment companies. I do not blame the rich people, but the government needs to take on a fairer stance to protect the poor.
Should We Value Someone Based Only On Their Wealth?
For the high-income earners who are reading this, perhaps let me explain myself better. What I’m saying is this – whether someone is rich or poor, there are always people whom we can term as “not hardworking” or “leeching on the system”, if we may so say, but there are as well people who want to do good and want to help others, and all these attributes can be found in anyone, regardless of their wealth status.
I’m discussing about this not of us looking at this as a matter of personal interest. I’m asking about what a government should do, as a matter of public policy. Is it fair for the government to believe that only the poor might over-consume on the system, for example, when there are just as well the rich who might do so? Is it a fair to have a blanket policy that favours the rich while discriminating against the poor, even if what distinct the two groups of people are not the constructed beliefs of their personality traits about them, but their level of wealth?
What I’m saying is this – as a government, there is a responsibility to ensure that the poor are provided for at least a subsistence standard of living. Once the government can do that, if it wants to talk about what it can do for the rich, by all means, go ahead and do so. But in Singapore, the starting point of the conversation has been this – what can we do for the rich, first and foremost? Then after we have taken care of the rich, then let’s look at the poor. By then, there’s nothing much left for the poor. That’s our current situation.
To put it in the simplest terms, if we put aside wealth, what makes one person more deserving that the other. Or in other words, is anyone person more deserving that another, if we don’t look at people by how much they earn or the status we then confer to them? Would anyone be better than the other then?