fbpx

Income Inequality & How to Not Fix It

by Davin Ng

Source: policyschool.neu.edu


The spectre of income inequality (“the rich get richer, the poor get poorer”) has never been greater in recent years. This is not a problem confined to just Singapore, but a good chunk of the developed world as well. The dialogue of income inequality has been raging across the media in the US, UK and even China. Not one statesman can deny that it has been a problem, it is now a problem, and if unchecked can prove to be an immense problem.

The UN Development Program produced a report recently with a portion that takes a good look at worldwide income inequality. Rankings are made based on a couple of factors like GDP, percentage share of income/expenditure amongst the richest and poorest 10% including the Gini coefficient. The Gini coefficient is an income inequality index named after Italian statistician, Corrado Gini. It measures income inequality from the scale of 0 where everyone has the same shared equal income, and 1 where one man owns all income. Scandinavian nations (Sweden, Norway, Denmark, etc.), Japan & the Czech Republic have the lowest Gini scores. Guess who's on the big 3?

Hong Kong: 0.43

Singapore: 0.42

USA: 0.4

No wonder MM Lee told SMU students to ignore the Gini coefficient.  A recently-published book, "The Spirit Level" has a steadily growing following, which speaks of how countries with greater income disparities tend to fare worse on many social indicators. Now that we're No. 2 on the global scale of income inequality, with Hong Kong also beating us for the top spot of lowest fertility rate (depressing, really.. Singapore ought to be #1 in all things, right?), I cannot say that I agree fully with "The Spirit Level" – it has conveniently left out several factors and nations that could mess around with its thesis. But it has a point about income inequality causing trouble for society. The UK occupies #7 on Gini with 0.36 and I've personally witnessed the atmosphere of social decay in England where badly-dressed chavs (we know them as “Ah Bengs” here) loaf around, harass and mug people for the purpose of purchasing Burberry, and chavettes ("Ah Lian") are renowned for amongst other things, pumping out 4 babies by the time they're 18. That was the result of the Davos consensus that inequality itself was less important than ensuring that those at the bottom were becoming better-off. Tony Blair personified that consensus by famously saying that he was “intensely relaxed” about the millions earned by David Beckham provided that child poverty fell.

Source: tomang.com

I don’t think that you, dear reader, need to be reminded of the usual complaints that have been tossed about when it comes to income inequality: foreign talent flooding the job market deflating salaries with lower demanded wages and eager to work extra hours, GST and increased public transport costs contributing to painful inflation rates, unable to purchase a HDB flat, etc. What I bring here are broad outlines of policy reform that we should at least keep in mind and consider.

As any random undergraduate will point out, the crucial ways of alleviating the problems of income inequality are:

1. Increase in social services
2. Decrease in taxes that affect the low and middle classes
3. Increase in taxes for the rich to pay for #1 and #2.

There has been the implementation of Workfare as a manifestation of #1. But it's not enough. It doesn't adequately help our lower classes and as much as I recognize Workfare as a somewhat effective solution, no, I am not advocating a minimum wage. Nor am I advocating an efficiency wage. What I advocate are those three points above.

What are the social services that can be implemented, however? There is so much that can be done that will not cause the upheaval in the job market like a minimum wage could. Things like heavily subsidized healthcare, free childcare centers, disability help, elderly help, et al. It is not as if Singapore is lacking heavily in such services – most of the crucial work done is carried out by charities and they deserve a massive jab of funds in the form of grants. Not to worry about where the funding may come from – that will come in the outlining of #2.

#2 should be a decrease in GST, so that the low and middle classes won't have to spend as much when it comes to purchasing goods for everyday life. But the claim to increase GST to "help out the poor" is difficult to believe, for anyone with a basic knowledge of economics. The principle of redistribution is sound only when more money is taken from the wealthy to be redistributed to the poor.

On 2007, our GST was hiked from 5-7% predicated on the promise of using the marginal revenue to fund social services for the poor. It was not the most convincing plan to me, but there’s no use crying over a policy that was in force since 3 years ago. Here are some figures for us to consider, kudos to Tony Tan from the Reform Party for crunching these figures from the Ministry of Finance.

GST Marginal Revenue [increase in revenue] after increasing to 7%

2007 - $1,028m
2008 - $1,853m
2009 - $1,903m

Govt Expenditure on Social Transfers, Subvention by MCYS, Workfare, GST Credit, Senior Citizen Bonus

2007 - $539m
2008 - $766m
2009 - $299m

I hate to sound like a broken record here, but I have to echo Dr. Chee: where has our money gone to?

Normally, nations that suffer from catastrophic national debt like Greece or the UK tend to resort to sales tax increases in an attempt to pay it off. Even in the US, it can be foreseeable that the Obama administration, or perhaps a government after this current term will have no choice but to raise sales taxes in order to pay off their immense debt owed to China. Our national finances are in the pink of health and looking at the figures, if we have raised our GST by 2% on the pretext of helping the poor with increased social services, let’s do it. This is no call for wanton waste, but such stinginess is just as needless.

As for #3, I think Adam Smith, the father of modern economics and capitalism put it best in, “The Wealth of Nations”

The necessaries of life occasion the great expense of the poor. They
find it difficult to get food, and the greater part of their little
revenue is spent in getting it. The luxuries and vanities of life
occasion the principal expense of the rich, and a magnificent house
embellishes and sets off to the best advantage all the other luxuries
and vanities which they possess. A tax upon house-rents, therefore,
would in general fall heaviest upon the rich; and in this sort of
inequality there would not, perhaps, be anything very unreasonable. It
is not very unreasonable that the rich should contribute to the public
expense, not only in proportion to their revenue, but something more
than in that proportion.

But not everyone agrees with this line of thought. Jack Lin, a Young PAP member had this to say in the Young PAP Facebook page in a discussion thread about this very topic.

Each of those measures that Davin propose, comes with a tradeoff,
solve a evil, create a bigger one. Often policy makers are stuck
between a hard rock and a very hard place.

#1 increase in social services can also increase incentive for people
to contribute less to the economy, as leisure-work tradeoff increases.

#2 GST is a consumption tax. A consumption tax is often fair. By
increasing consumption tax, the govt has actually reduce income tax
and corporate tax as a mitigation. The poor already don't pay much
income tax. The govt also requires a budget to work on, through good
times and through bad, its not possible for them to be running a
deficit forever, infact a healthy surplus with some going into the
reserves or for active investment is encouraged

#3, increasing taxes for the rich comes with its own set of problems,
many of the rich can just pack up and go, and there is no lack of
countries welcoming them. Robert kiyosaki, a renowned author, has
often question why the rich, that often puts in more effort and more
creative thinking, are taxed. Increasing tax for the rich may then
deter people many from working too hard and setting up businesses. The
rich also creates jobs through companies, fuels demand which in turn
fuels more jobs. Overall a win-win situation if the rich has incentive
to stay and not unfairly taxed.

For the uninitiated, what Jack Lin espouses is “trickle-down” economics. Otherwise known as Reaganomics, or supply-side economics, it’s the policy of giving tax cuts and/or benefits to the rich and businesses in the belief that the freed-up money will indirectly benefit the broad population. One may also note that the term, “trickle-down” was attributed to Will Rogers, a Depression-era comedian who said that, “money was all appropriated for the top in hopes that it would trickle down to the needy.”

“Trickle-down” economics proponents claim that this extra money will be funnelled into more investments in business infrastructure so that it will facilitate job creation. But that has not been the case, especially in the US in recent years. 8 years of Bush-era Republican policies filled with “trickle-down” economics policies have resulted in the giant bloated bonuses, and “golden parachute” CEO severance packages we have been reading about for the past three years. Robert Kiyosaki, whom Jack Lin cited frequently, is the author of the well-known, “Rich Dad Poor Dad” book, and is known to subscribe heavily to “trickle-down” economics.

“increase in social services can also increase incentive for people to contribute less to the economy, as leisure-work tradeoff increases.”

Source: news.xinhuanet.com

The fear of implementing any form of increase or improvement of social services is a widespread state ideology that serves to freeze our people in fear at the very mention of it and triggers an immediate catharsis of the oft-heard response of, "increase incentive for people to contribute less to the economy". Can we deny that the low income folks need help? Can we deny that the mentally-ill and -handicapped who need not be institutionalized and yet lead somewhat typical, happy lives with a decent sum of financial assistance? Can we deny any help for all low-income kids who cannot afford textbooks, stationery and proper school bags?

There is nothing wrong with increased and improved social services like all these. It is morally and ethically wrong to give pay unemployed people $8,000/month to sit at home. This is true, but there are other social services that are heavily in need of extra funding. What we have right now that we call as "social services" on the national level is a job that rightfully belongs to the government, gets delegated and deferred to small-scale private and religious charities. Under the bleak, dark shadow of hopelessness, a thousand tiny pinpricks of light provided by these small charities is insufficient - the entire canvas of shadow has to be ripped away to avail that hope. It's time we stop kidding ourselves that spending money for this sort of assistance to lower income families will leave the state in severe disrepair - it's not as if we're in huge national debt and can hardly afford to spare the money for this endeavour.

“GST is a consumption tax. A consumption tax is often fair. By
increasing consumption tax, the govt has actually reduce income tax
and corporate tax as a mitigation. The poor already don't pay much
income tax.”

GST is not a "fair" consumption tax. Considering how consumption as a percentage of the rich income group's total income is substantially lower compared to the lower and middle classes, to increase the GST will be a pound of flesh exacted from the lower and middle classes, as opposed to the tiny pinprick on the rich. After all, it is the rich who offload most of their income into further investments into other businesses and such in order to avoid the income tax.

“increasing taxes for the rich comes with its own set of problems,
many of the rich can just pack up and go, and there is no lack of
countries welcoming them.”

If the rich are so concerned about maintaining their businesses here, they would've had an appreciation for our favourable business environment of decently transparent bureaucracy when it comes to business, a location mostly free from natural disasters and a relatively low threat of terrorism and/or military agitation. Hurting their pocketbooks in this manner will not matter if they're here for the long haul - a decent, well-run business here will yield more income than they will lose through increased taxes.

The real problem when it comes to taxes for the rich in Singapore isn't about consumption tax, or income tax: it is capital gains tax. That's where it really hurts the rich, where the substantial dividends and whatever money you make off investments can be potentially taxed by a capital gains tax. Singapore has no capital gains tax, and Western nations have substantial capital gains taxes, which they use to pay for a proportionately substantial amount of government expenditure.

All in all, one may observe that Jack Lin’s advocacy of “trickle-down economics” sounds a lot like what we have in Singapore. This is true. Many American financial writers cite us to have the freest economy in the world, even if they have no great love for our lack of political freedoms. But that lack of love should no great surprise or news to us – American governments have often chosen to turn a blind eye to this lack of freedoms as long as it is to their economic or military benefit. Examples are legion in their attitude towards Egypt, Turkey, Jordan, and here in Singapore. Striving for a better life for all Singaporeans remains in our hands, and we don’t owe our political freedoms to anyone but ourselves. Not even the Americans.

Links

1. http://finance.yahoo.com/banking-budgeting/article/107980/countries-with-the-biggest-gaps-between-rich-and-poor

2. http://www.temasekreview.com/2009/10/21/mm-lee-never-mind-the-gini-coefficient/

3. http://votingrp.wordpress.com/2010/12/24/further-tax-burden-to-enhance-our-social-safety-nets/