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Is GST a regressive tax?

May 22, 2010
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In an article on tax rates in Singapore, Adam noted this at Wikipedia:-

Some critics consider GST to be a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich. However, defenders contend that GST can be considered a proportional tax if tax payments are expressed as a percentage not of income, but of lifetime consumption. Others point out that the more important question to ask is not whether GST is regressive, but whether GST is more regressive than the alternative indirect taxes, namely, sales, excise and turnover tax (not income tax because that is a direct tax). In addition, they argue that what affects poverty and fairness is not the impact of any particular tax, but the impact of the tax system as a whole.

To maintain the progressive nature of total taxes on individuals, Singapore reduced income tax on lower income-earners, as well as instituted direct transfer payments to lower-income groups, resulting in an overall lower tax burden for most Singaporean households. These offsets included lower income taxes, lower property taxes, rebates on rental and service & conservancy charges for public housing, and additional subsidies for health, education and community services. As a result of the income tax cuts, additional tax reliefs and rebates in 1994, about 70% of individuals that used to pay income taxes no longer needed to do so

Some critics contend that basic essentials such as food and healthcare should be made exempt from GST, in order to help lower-income households. The 2002 Economic Restructuring Committee argued that having such exemptions would actually help the high-income more than poorer Singaporeans, because well-off households usually spend much more on essentials (whether food or healthcare or other basic necessities) than a low-income household. If essentials were to be exempted from GST, there would be a need to make up for the revenue shortfall through a higher GST rate on other goods and services, which lower-income households would also have to bear. The committee also argued that the experience of other countries have demonstrated that granting exemptions will distort production and consumption decisions, and result in a contentious and highly complex process of determining which goods and services merit exemption. This would increase compliance and administration costs for businesses.

Suggestions to exempt necessities such as sugar and rice from GST were again raised during the 2009 Budget Feedback process. The Singapore Ministry of Finance replied that as the bulk of GST revenue from basic necessities comes from the higher income and foreigners, exempting these taxes would be giving relief to those who actually do not need help, and that it is far more advisable to keep a single GST rate on all goods, and use part of the revenue collected to provide targeted assistance to lower-income families through the GST offset package.

There might well be some pointers for NZ in the future here. Though in some respects, the compensation adjustments it would seem National may have looked at the Singapore example. Note as well that Singapore’s corporate tax rate is 17% and the income tax rate maxes out at 20%.

An interesting riposte to those who would exempt foods for example from GST in the article

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