Saturday, January 19, 2013

Move to a flat rate tax

Most people still think that a progressive income tax system is fairer to society. Those who earn more should pay more tax. 

Many countries are moving closer to a flat rate tax system, where the majority of tax are paid at a flat rate of the earnings, rather than at a higher rate on the top bands of income. This move is a subtle one, and many people may not have noticed it.

When countries introduce GST or VAT, they are actually moving to a flat rate system. Most people spend 80% of the current earnings and they have to pay the same rate of GST or VAT on their spendings.

Singapore is mostly on this model. As a further example, look at the way that dividends on shares are taxed. In the past, the shareholders at the lower income brackets were allowed to claim back a part of the tax paid by companies, if their personal tax level is lower than the corporate rate. This has stopped for several years now, under the concept of a flat rate tax.

A flat rate tax is acceptable, even for the lower income, if the wages are set high enough so that the net income, after tax, is sufficient to meet the cost of living. This is the approach used in several countries; which I subscribe. Most of them have a high minimum wage.

The situation in Singapore is quite bad. We have a troublesome system of collect tax in "bits and pieces" through the GST system, and then to give permanent GST vouchers to the lower income. Our system is administratively wasteful and unfair (as some lower income people do not get the GST).

Some people will disagree with me, after they have given thought to the idea. There will be a large number of people who will disagree with me without much thinking; they just want to appear to be "smart"; want to justify the status quo for some "political purpose" or may have not given much analysis to the matter.

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