By Joseph Teo
I was watching a presentation by Emeritus Professor Richard Wilkinsoni at the University of Nottingham today. He was talking about how economic inequality harms societies. I was struck by how unequal income was in Singapore. It turns out that the top 20% of Singaporeans make 9.7 times, almost 10 times, the bottom 20% of Singaporeans (video time mark 3:00m). This is highest on the chart, more than the USA. Professor Wilkinson then goes on to detail the costs of such high income gaps: a decrease in trust, increasing homicides and imprisonments, increasing mental illness, lower social mobility and so on (video time mark 9:15m).
Some of this must sound familiar to my fellow Singaporeans. Of course, the government has recognized some of the problems and is now pushing for “inclusive growth”. However, many of our policies continue to be regressive – taxing the poor more than the rich, exacerbating the income gap. I cite four areas where government policies can be improved to address the rich-poor divide.
GST
Even Mr Thaman Shanmugaratnam, then the Second Finance Minister, said that the Goods and Services Tax (GST) “on its own is a regressive tax as it takes up a bigger portion of a lower-income person’s wages compared to that of a high income earner ”.ii He goes on to claim that “GST plus other schemes will not be regressive”. The only problem with this claim is that the GST is permanent, while the “other schemes” are temporary and have a finite lifespan.
While there is always a need to raise revenue in order to meet the needs of citizens, there are other mechanism and taxes which are not regressive – corporate taxes, stamp duties on high-value private property transactions, a luxury goods tax perhaps. While taxes are needed to raise revenue for public works, there are ways to do this without exacerbating the income divide.
Taxes on Public Goods
Because of the government policy of making public services profit-oriented and a mistaken application of market efficiencies, public goods and services such as public transport have resulted in what is effectively a tax on the population.
SMRT has just announced its second quarter results, showing that it has made S$53.1m in the first half of its financial year through its train operations alone. This is before the price rise of 2 cents per trip took effect on 8 October 2011. The price rise was sanctioned by the Public Transport Council (PTC) without an increase (and some would argue with a decrease) in service levels. With an efficient government agency, the trains could be run at a breakeven without the excess S$100m or so a year in profits. The 2 cent per trip increase is effectively a tax on all train commuters since all of it ends up as additional profits, and SMRT is 54.28% held by Temasek Holdings, which is in turn wholly owned by the Ministry of Finance. This would also be a regressive tax, since the lower-income groups are more likely to travel by train.
A much better way of achieving the goal of good and affordable public transport may be to specify service levels : such as 150,000 passengers per hour during peak periods, train intervals of 1.5 minutes, seats for 50% of the passengers; and then have operators bid to fulfill these requirements at the lowest cost per passenger-kilometre. This will then ensure that costs are truly competitive, and that the needs of the commuting public are met.
Sometimes this “tax” is invisible, since it appears as revenue from the government in a public tender for a license – the license to operate a hawker centre or wet market for instance. One of the largest costs in the provision of cooked food or raw food in wet markets is rentals. By awarding the license to operate a hawker centre to the highest bidder, the government obtains maximum revenue. However, this revenue must be paid for – by the stall holders in the form of higher rentals, and eventually by the ordinary Singaporean in the form of higher food prices. The same applies to awarding power generation contracts to the highest bidder, or radio spectrum to the highest-bidding mobile phone companies.
This mistaken use of “market forces” to maximize revenue rather than maximize service delivery to citizens results in a regressive tax, since the largest consumers of public goods would come from the lower-income groups.
The one good thing that the government has done is to relook at the policies surrounding hawker centres. By finally taking the profit orientation out of the hawker centre management, it may now be possible to keep rentals low, and provide affordable cooked food to our citizens. This is a marked shift in policy from that expressed by former PAP MP for Aljunied GRC, and CASE president, Mr. Yeo Guat Kwang. It is laudable and should be applauded.
CPF Life
Even in our annuity schemes for retirement, inequity seems to be built in.
In the National Longevity Insurance Committee (NLIC) Reportiii, Professor Lim Pin noted that there were public concerns that “The scheme benefits those who are wealthier as they will live longer”. However, the NLIC noted that “there is as yet no robust local data to support the use of any other factor (apart from age and gender) to price the premiums”. The NLIC Report is silent as to whether such robust data exists in other countries, and did not propose that we try to obtain such robust data before making a key policy decision. Apparently robust data does exist – at least for the UK (video time mark 1:30) which clearly shows that the rich live longer than the poor. If the same applies in Singapore, it means that poorer people subscribing to the CPF Life Scheme are subsidizing the richer ones, since even though everyone pays the same premium, the richer people will collect the annuity over a longer period and so enjoy bigger payouts.
It has been three years since the NLIC report. Has more data on Singapore been obtained? Will the premiums be adjusted to reflect reality?
Ministerial Salaries
One possible cause of the income divide is the way our politicians are incentivized. Because they are rewarded on increasing GDP, less care has been given towards inclusive growth. Since their salaries are pegged to the private sector, the higher the bonuses paid to private sector CEOs, the higher their own salaries. It would not be in their fiscal interest to ensure income equality.
Of course, the current committee reviewing Ministerial salaries, headed by Mr Gerard Ee, is hard at work. There were some signs that the situation might change, since the Prime Minister said that “Politics is not a job or a career promotion. It is a calling to serve the larger good of Singapore.”iv However, equal signs emerged that suggested that the underlying principles which cause wrong incentives would not be examined. These included questions raised by Mr. Gerard Ee in framing his review: “What fair compensation would accord political office holders due recognition for their contributions; and what discount on the compensation would reflect the value and ethos of political service?”; and Mr. Inderjit Singh’s insistence that comparing Singapore Minister’s salaries with those of their counterparts elsewhere was not useful.v
In particular, Mr Ee’s second question seems to assume that there would be some benchmarking to the private sector, and then some “discount” applied. Pegging ministerial salaries to the private sector is precisely what is wrong with the current system, and I am deeply concerned that the review will only tweak the edges of the formula, and not seriously consider the basis upon which ministerial pay is computed.
I would like to suggest two things. First, that ministerial pay should be computed on the basis of benchmarking the jobs to similar jobs in other countries. This would be a like-for-like comparison, and remove the fundamental inequity in making public office equivalent to a job in the private sector. The excuse given by Mr Inderjit Singh that “we don’t have any added perks as they do in other countries, such as housing, cars or holidays” is weak, since all of these perks can be monetized by assigning an equivalent cash value to them. I believe that any competent human resources professional will be able to assist in this. With this approach, no discount is necessary, since equivalent jobs are being compared.
The second suggestion is to peg salaries to some multiple of the lowest 20th percentile salaries. This provides a direct incentive for ministers to raise the income of the lowest earners. The multiple can again be obtained by deriving benchmarks from other countries. For example, by determining if the President of the United States earns 20, 30 or 40 times the lowest 20th percentile earner in the United States.
In this way, our Ministers can be properly incentivized to close the income gap.
Conclusion
There is evidence that a wide income inequality can harm society. Singapore has one of the widest income gaps amongst all the countries and this needs to be addressed. Some policies create regressive taxes that exacerbate income inequality and should be re-examined. Similarly, the leaders of our country, our Ministers must be correctly incentivized to address this issue.
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i Professor Wilkinson is also Honorary Professor at the University College London and Visiting Professor at University of York
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