Wednesday, January 16, 2013

Payroll tax to replace GST

I wrote an earlier article on why tax is necessary to collect revenue to pay for public services that are enjoyed by all residents.

Ideally, everybody who enjoys the public service should contribute to the taxation. However, there are people who earn below the poverty line that cannot afford to pay the tax.

By giving a minimum wage above the poverty line, it should be possible for everyone to be able to pay tax to contribute to the public service.

The best form of tax is a payroll tax. This is a tax that is calculated at a certain percentage of the wages and other income.

In Singapore, most people at the lower income level spend nearly all of their income. They pay GST at 7 percent. GST can be replaced by a payroll tax of 7 percent. If this is collected on wages, there is no need to collect GST on every item that is purchased.

Strictly speaking, the payroll tax should be paid by the employer. To avoid increasing the business cost, the employee should be allowed to deduct the payroll tax from the employee's salary, as it is to replace GST. However, for employees earning below a certain level, the cost should be absorbed by the employer.

As most employees do not spend of of their income, it is possible for employers to collect a lower rate of payroll tax (say 5%) instead of 7%.

Collecting payroll tax is simpler and neater than collecting GST. It will also avoid the add-on effect of GST, i.e. the GST collected at the earlier levels are added to increase the final product cost, i.e. the compounding effect. Currently, the administrative cost of collecting GST is also added to the final product cost; this cost can be avoided if the payroll tax is implemented.

Singapore is used to paying CPF contribution on salaries. This infrastructure makes it easy to collect payroll tax.  The remaining issue is to collect the payroll tax on self-employed people, professionals and business people. It should be possible to levy the same payroll tax on their earnings.

Ever since GST was introduced, I have been against it for two reasons; it is regressive (i.e. the lower income bears a bigger burden) and it is wasteful (i.e. a lot of administrative work has to be done to collect the tax).

If we have to accept that the tax should be collected at 7% on all spending, it is better to adopt the payroll tax approach.

1 comment:

Kin Lian Tan said...

A tax expert challenges my idea and thinks (wrongly) that I am not aware of the value added nature of GST.
I invited him for a discussion, so that he can understand my viewpoint - instead of challenging me based on his wrong understanding of my concept.

Here are the details of this conversation.

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