Monday 29 October 2012

Revolt of the single taxpayer

Even as my tax dollars help support today's poor, I'm not assured of help when I'm old
By Chua Mui Hoong, The Straits Times, 28 Oct 2012

Like others seized by the ongoing conversation on Singapore's future, I've been ruminating on the kind of society I want to live in.

But rather than think of ideals and values, an exercise I consider unproductive (would anyone not want a kinder, gentler, happier, more gracious, more equal Singapore?), I prefer to contemplate the kind of political system I want, and the tax and benefits system I desire. I'll leave politics for a later date and focus on taxes today.

Many of us project our wants and desires of today into the future. We forget one thing: In 2032, we will be 20 years older. And as we age, our needs and desires change.

At 44, I favour a society with sufficient buzz with pockets of serenity. I want the economy to go for growth now while we can. I like Singapore's pro-business, open, competitive stance, because these translate into a good job with good pay, and a relatively low tax regime.

If you ask me today, whether I would support higher income tax rates, I would say "no", because I am a taxpayer and because the country's fiscal position remains strong.

In 2032, when I'm 64, I would want a quieter city, of slower growth, with low cost of living. I would likely support higher taxes, because I won't be paying taxes, but want high taxes to fund benefits I can draw from.

The distinction between what you want today and what you want in 20 years' time is too often overlooked in the national conversation.

And yet it can make all the difference in policy.

If you asked me: "Are you in favour of paying higher taxes?" I would say "no".

If you reframed the question: "It is Singapore in 2032. Are you in favour of paying high taxes?" I would say "yes", in secret hopes that I would be retired by then.

Also overlooked is the potential rift between the generations.

Those born in the 1980s are growing up in an era of very low personal income tax rates, and rising social benefits like Workfare and housing grants. Corporate tax is now 17 per cent; and the top personal income tax rate is 20 per cent. They used to be around 40 per cent in the 1980s.

If we mend the social safety net well, they are likely to retire in 2040 with better pension and health-care benefits than today's old.

In contrast, those born in the 1950s would have paid taxes throughout the 1970s and 1980s when tax rates hovered around 40 per cent or higher; and the social safety net was much more sparse, with no unemployment benefits or housing grants. But asset prices were quite low then.

When this group heads into retirement this decade, they are staring at a future with no pension benefits, rising health-care costs and rising inflation. In other words, they've paid a lot of taxes, for not very much social security.

Worse, the tax structure is shifting against them as more tax revenue will come from consumption, not income taxes. Income tax rates will decline (which they won't benefit from since they're no longer working), while they will bear the brunt of inevitable increases in the goods and services tax which is applied to all purchases, even those by retirees with no incomes.

Which generation has the better deal? The 1980s millennials or the 1950s baby-boomers?

Splicing the future this way, by life-cycle of each cohort, yields insights into the tensions implicit in each generation's conception of the future.

It is perfectly rational, if self-centred, for each cohort and individual to calculate tax and benefits, and draw their own conclusions as to the level of taxes they will support.

Even if you eschew the life-cycle approach and just view tax and benefits through the lens of what you get back today, you will end up with startlingly different concerns from different people.

You may be prepared to pay higher taxes today, if you are a married man with elderly parents and children who benefit from subsidies.

Not so the single taxpayer.

At 44, with a good income and no children, I am a net tax contributor. I don't enjoy subsidised health care. Singles can't buy a subsidised flat. I have no children to soak up childcare or school subsidies. I used to console myself that my taxes subsidised my parents' polyclinic fees - but they're both dead now.

Where do my tax dollars go to? Childcare subsidies for folks who can afford $1,000-a-month childcare centres. Housing grant of $30,000 to young couples with joint monthly income of $10,000 who splurge on a million-dollar penthouse executive condominium.

What don't they go to? An old age pension for those in their 60s or 70s who must take on back- breaking cleaning jobs to survive. Paying the expenses of families with an ill or imprisoned breadwinner so the children can stay in school, and not need to work part-time or worse, stop school because they don't have money for bus fare.

These days, to avoid tax resentment, I have to hark back to the past and hope for the future, to justify the taxes I pay. The past: I benefited from a subsidised education system that sent me to university with taxpayers' money. The future: I hope that just as I'm supporting today's children and old folks, tomorrow's young will support me when I'm old.

But I'm not holding my breath. Because no government can assure the future.

Most countries use a pay-as- you-go system for social welfare. At each point in time, benefits are paid for out of today's tax revenue. This means today's young, energetic taxpayers are paying for today's retirees. This is called inter-generational transfer.

Each era's young pays for its own set of old folk. And so it goes, until the last generation which has no young ones left to help support them. It's not for nothing that this system of tax and welfare benefits has been compared to a Ponzi scheme.

Financial Times writer John Kay summed it up this way in a recent article: "We feed the generations of our parents and grandparents in the expectation future generations will come along and do the same for us. But the consequences of this arrangement do have the character of a Ponzi scheme. One day, the world will end and the last generation of workers will have been cheated of their expectation of a peaceful retirement."

The troubles in Europe are in part due to the dynamics of this Ponzi scheme working out: Angry protests by those who paid high taxes for 30 years in expectation of a good payout, only to see their benefits today cut or gone.

Given the high risks of a Ponzi scheme, and the Singapore Government's traditional aversion to state-financed welfare, I have my doubts as to whether higher taxes today will result in wider social security schemes for me tomorrow.

Given all that, I belong squarely on the side of those who would say "no" to higher taxes today. Unless the benefits system undergoes a major overhaul, and we provide more assistance to the old and sick and those who need it, and trim the slew of populist subsidies given to the young and the middle class.

But raise taxes in 2032? Oh yes.

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