After looking at so many articles and comments online about closing the income gap, I feel a short balancing article is in order in the Singapore cyberspace. I shall argue that income inequality is actually all right and any supposed remedial action we take actually does more harm than good.
Let us look at a simple fact; it is true our income inequality is higher than our independence during 1965. However, Singapore as a whole has grown leaps and bounds since then. It is common for even the poorest 20% these days own a TV set, basic computer and a cell phone, luxuries for the majority in 1965. I know because a few friends who used to be on financial support in JC own this stuff too . What is the issue?
Take a look at this video debate between the former British Prime Minister Margaret Thatcher and her leftist socialist opponents.
As Thatcher puts it to thunderous applause, income inequality is fine as long as everybody is better off. Are all income levels better off than 40 years ago? I doubt anyone will argue otherwise.
Let us look at the some policies suggested by those who wish to close the income gap and my counter arguments.
1. Increase income and corporate taxes
It is common knowledge that majority of Singaporeans don’t pay income/estate taxes. This means raising those taxes to fund social welfare will disproportionately target the rich who already pays the most taxes. This is similar to corporate taxes.
Taxing the rich and companies more will only take money away from the people who will invest them to expand their companies or hire more people. The result is higher economic growth and lower unemployment. If income and corporate taxes are not an issue, why do countries around the world fight to lower them year after year? Hong Kong usually competes with Singapore to see who has the lower corporate tax.
A tax discourages certain behaviour. Like cigarette and liquor taxes serve to deter their consumption, increasing income taxes only deters the work ethic. After all, what is the point of working so hard if the government takes most of it away? This is made worse by income brackets. Imagine if you are worker, if working hard means entering the next income bracket and be taxed more, why work harder?
The rich and MNCs can be very fickle minded. Keeping our taxes low and competitive will ensure they stay in Singapore to create jobs everybody. Raising those taxes is like killing the goose which lays the golden eggs.
2. Lower GST or GST-free goods
I do not disagree with the view that GST on its own is a regressive tax. However, that is a very simplistic view. Look at the big picture. The rich pay more GST due to their higher consumption habits. This GST is then used to fund social benefits like GST vouchers and the like which more than compensate for the regressiveness of the GST.
Of course, critics will say why not implement GST brackets where some goods or service are taxed more than others and some basic necessities are not taxed at all. I put it to the critics, how are you going to determine which good or service is in which bracket or should not be taxed at all.
Take the example of rice, there is the low cost NTUC housebrand rice, and there is the expensive Thai Fragrant rice. Should rice be taxed because it is a basic necessity? If yes, how much for which brand? There are simply too many items in the free market to determine their tax levels.
This is just rice; imagine stuff like cooking oil, soya sauce, canned food. Then we will have arguments like hawker food should not be taxed.Or restaurant food should be taxed because it is a luxury. This never ends. There are plenty of loopholes and government enforcement will be tough. The current flat tax regime is good enough.
Unlike income taxes, GST is a consumption tax. How much tax you pay is solely determined by how much you consume.
3. Increase general social welfare and subsidies
A subsidy is an opposite of a tax, it encourages a behaviour instead of discouraging it. I agree that education should be subsidised as it increases social mobility but it should end there. Potential subsides as suggested by critics are unemployment benefits. A politician once said, “a hand-out once given, can never be taken back”. Once we hand out unemployment benefits, all we do is to encourage people stay unemployed.
I can guess what critics will say next; just limit the length of these benefits to say 6 months. As European nations have shown, once you set a given length, the next politician that comes in will increase to one year to gain votes. The politician after him will promise higher benefits to gain power.
European nations and the US are now on the way to reduce unemployment and other benefits and subsidies as they know its impact on their budgets and the work ethic of their people. It confounds me that critics of the government refuse to learn from their mistakes.
Another example is the fuel subsidy in Indonesia. The subsidy is now burning a huge hole in Indonesia’s budget. Successive governments who have tried to remove or even just reduce this subsidy are met with fierce strikes and riots. The Indonesians are now too addicted to subsidies. We can never let them happen in Singapore.
I can go on and on like the National Health Service in Britain but you all do get my point.
4. Implement a minimum wage.
This argument is done to the death. I shall let the Nobel Prize winning, the late Milton Friedman argue it succinctly in just four minutes.
Paying a minimum age is akin to paying someone more than what they would get otherwise in a free labour market. It is true some workers will get paid more but it overlooks the fact that many workers will be laid off as employers cannot afford the same number of workers at higher pay. How much will they get? You are right, a big fat ZERO dollars. It is doubtful 4 waiters after the minimum wage can do the work of 7 before the minimum wage law. A bus driver cannot drive 2 buses simultaneously. Total productivity as defined as total work done per unit time will only decrease. It may even lead to companies leaving due to higher costs which will lead to mass retrenchment.
Put it simply, there is no minimum wage for the unemployed. Couple that with the proposal to give unemployment benefits like those in the manifestos of opposition parties and we will soon have a huge bunch of lazy parasites living off the work of others.
Even if some companies are willing to pay the minimum wage, who will pay for it? That’s right, people like you and I. Bus fares will increase, hawker food prices will increase. A general price increase will only make the minimum wage futile at that level leading to calls to further increases and the cycle goes on.
Closing the income gap through the measures suggested by critics is tantamount to Robin Hood. The government has to either exercise redistributive policies or company-destroying policies like the minimum wage. My stand is clear and simple; a rising tide lifts all boats. Better to let the invisible hand do its economic work than try to intervene like the collapsed socialist nations of the past-half century. We should in fact lower income taxes to the minimum necessary for government functions and let the free market work.