PARSING PROF BEN LEONG'S TAKE ON THE INCREASE IN GST

I confess I am an addict. To coffee, that is. I used to down up to 15 cuppas a day. There was a time my secretary was so worried she had to intentionally place 2 big glasses of cold water on my desk every day to make sure I had some H2O intake daily. I am however, no connoisseur of coffee. Not the type to discuss Arabica, Robusta or Liberica, nor whether it is washed, natural, honey processed or by anaerobic fermentation, or how they are roasted. Not for me the high end outlets of Starbucks and the likes. For me the old kopi-o in days of ole where coffee shop employees in prison-style striped pajamas rose at 6am from slumber on their canvas beds along five-foot ways, to roast the coffee beans, where the aroma filled the air for a hundred metres away. By mid-1970s, such coffee had disappeared. I used to have Saturday morning jogs at MacRitchie Reservoir with some pals and then drove all the way back to a little coffee shop at High Street for typical Singapore breakfast of coffee, toasted bread and half-boiled eggs. In the mid 1970s, that was the last coffee shop to roast their own beans. As situation changes, personal habits change to cope. From kopi-o I resorted to coffee-white to make the fully-roasted imports palatable to my taste buds. In recent years, with rising prices, coffee-shop cuppas are a luxury. I have resorted to 3-in-1 ready-made coffee, more particularly to one "Ye-Ye" brand which is the cheapest and 'mostest' with 45 satchets per packet. How the king has fallen.

I am late on the discourse following Prof Ben Leong's take a few weeks ago on the impact of GST where he used the cost of a cuppa for his illustration. You have a right to agree or disagree with Ben's views. I have always said I like to see academia and the Singapore intelligentsia step up to educate and lead discussions on matters of civil and national interest. This has seldom been the case in Singapore. Failure of this creame de la creame of our society to step up is what French philosopher Julien Benda (1867-1956) called “La Trahison des Clercs” or “The Treason of the Intellectuals.” From this perspective, I appreciate Ben's article. Ben totally rejects opposition leader Pritam Singh's claim of "turbo-charged inflation", but to his credit, the data-analytics professor sticks to issues and not ad-hominems, as it should be.

Before addressing Ben's specific points, let me relate some aspects of GST.

GST was first introduced in 1994 at 3% with a promise of no further increase for next 5 years. I remember very well although I cannot recall which Minister said at the time, the purpose of GST was not to increase additional revenue, the government had no need for additional revenue. The government had acted on the recommendation of the 1986 Economic Committee for a structural change from direct to indirect taxes to maintain international competitiveness in attracting investments, and to sustain its economic growth to create well-paying jobs for Singaporeans. So the game plan was reduce direct taxation and increase GST over time. As a result the highest band for personal tax has come down from 33% to 23% and corporate tax from 30% to 17% today. To ensure that the change is not regressive and onerous for the lower income, a slew of subsidies and aid packages both long and short term in tenor, and cash and non-cash in kind, including an increase in the minimum taxable income band, were crafted and implemented over the years.

I do not recall anyone doing any studies whether the spirit of the structural change has been achieved. The government has calibrated the micro levelling mechanisms but no one can really ascertain if the outcome has been equitable.

However, in recent years, the purpose of GST has been changed and no one has taken the government to task on a broken promise. Increases in GST is now for the purpose of raising revenue. It is to support infrastructure development and increasing healthcare cost of an ageing population. While GST has been increased to raise revenue, Estate Duty was abolished in 2008. This was not in the 1994 recommendation for structural change in taxation. And of course, Singapore has never had Capital Gains Tax, unless the gains came about in a manner considered as trading instead of investment. So apparently absence of Estate Duty and Capital Gains Tax have not been enough to make Singapore competitive despite the fact all the countries that we are fighting against for FDI have these taxes. The argument against not having Estate Duty and Capital Gains Tax is generational wealth concentration in the hands of a few while wage earners bear a disproportionate tax burden.

In my prevous blog on "a window-dressing line in the budge" I showed a simple confirmation bias with this data representation:

We can show there is insufficient budget for corporate grants/subsidies, or Other Expenses (e.g. health care). It is of course easier to sell to the public the burden of increased taxation is for their healthcare, than to say it is for freebies and benefits for the business class, including foreigners, or for some funds locked up for years for future development projects.

Using a cuppa that cost $1.00 for illustration, Ben says :
(1) In the absence of inflation, a GST increase of 1% means a cuppa should be $1.01, but the difficulty of collection necessitates the vendor to price up $1.10.
(2) With inflation and GST the vendor may also price it up to $1.10
(3) Hence "simple Math tells us that the impact of a GST increase would likely be smaller in a period of high inflation rather than that during a period of low inflation."

Let's ignore all other factors how a vendor prices his products, such as competition and psychological pricing. Ben's point (1) is a truism. Almost all vendors will round-up, seldom round-down, and never round-down in the case of small value products.

Ben's points (2) and (3) is saying the 10 cts increase is split between inflation and GST causation. A low inflation of 1% means 1 cts is attributed to inflation, 9 cts to GST. With higher inflation of say 9%, 9 cts is inflation and only 1 cts is GST. Thus the higher the inflation, the lower the impact of an increase in GST.

The proposition Workers' Party leader Pritam Singh made in parliament was the increase in GST at this time may "turbo charge" inflation. With his "simple math" Ben asks where is Pritam's "turbo charge"? Ben does not actually address the proposition. He sidesteps the real issue and presents a misleading comparison that does not logically refute the original proposition. In logical argument, Ben commits a straw man fallacy and a non sequitur (faulty reasoning). Here's why: 

Straw Man Fallacy – The original proposition states that a GST increase during high inflation exacerbates inflation. However, the criticism reframes the argument into a narrow, simplified math problem about whether a vendor's final pricing would be more or less impacted. This misrepresents the actual argument, which concerns broader inflationary pressures rather than isolated pricing adjustments.

Non Sequitur – The conclusion that “the impact of GST increase would likely be smaller during high inflation” does not logically follow from the example given. Just because inflation already pushes prices up does not mean that an additional GST hike has less impact; rather, it can compound existing inflationary pressures by adding another layer of cost increases across goods and services. For example, a 9% inflation pushes a cuppa up to $1.09 which of course the vendor rounds up to $1.10. A further increase of 1% in GST then pushes the cuppa up to $1.111 which the vendor rounds up to $1.20

To help us to understand, we should be asking has there been any studies of this nature and what are the findings? The answer is yes, there have been studies and experiences we can learn from.

We should firstly understand the specifics we are talking about. VAT is value-added tax which is a pass-through tax. Each vendor in a supply chain pays a tax for which he obtains a credit against the tax he collects from his customer. The net effect is it is the final customer who bears the tax. A Sales or Consumption Tax is simply a tax levied on the ultimate consumer.

Singapore's GST is a variation of VAT. Vendors are either GST-Registered or Non-GST Registered. A GST-registered vendor is in exactly the same position as a vendor in a VAT system. He pays tax for his purchases for which he receives a credit which is applied against the tax he collects from his customer. The net he pays over to the IRA. This net tax represents the tax on the value he has added to the cost of the product or service. A non-GST registered vendor pays for tax on his purchases like any consumer. He receives no credit for the tax he paid and he collects no tax from his customers. He may choose to absorb the tax, or he may pass it on to his customer, more often not, this is the case.

What this means is in the case of a non-GST registered vendor, the tax he paid becomes a cost to him which he embeds into his sales price. This creates an incident of a tax-on-tax thus increasing the cost to the final consumer beyond the actual increase of GST. In the example of the cuppa, Singapore's coffee consumption per capital is about 1.12 kg per year. The coffee market for 2025 is projected to be about $240m, a sizeable amount would be from the coffeeshops. The aggregate tax-on-tax is substantial to the benefit of IRA. The logic flows that the more non-GST registered vendors there are in a supply chain, the higher is the impact of tax-on-tax. The cost is amplified where each vendor in a supply chain rounds up his prices. Therein lies Pritam's "turbo charge".

Studies have shown VAT and Sales Tax increases lead to short-term price hikes, but the overrall long-term impact on inflation varies depending on factors such as the breadth of the tax base, the ability of business to absorb the tax, and the overall economic environment. At times of sustained general inflationary trends, such as in current times, it would be foolish to expect business to absorb the cost of increased direct taxes.

In 2024 Germany increased VAT from 7% to 19%. Research using the Synthetic Control Method indicated 31% of the tax increase was passed on to consumer prices immediately, with pass-through rising to 58% over the following 6 months. This corresponds to consumer price increase of 6.5%, which is a notable short-term inflationary effect in the specific sector affected by the tax hike.

In 1997 when Japan was having deflationary pressures, consumption tax was increased from 3% to 5% which contributed to reduced consumer spending and prolonged economic stagnation.

In January this year, UK extended VAT to private school fees, leading to nearly 13% increase in those fees. This increase alone contributed in the overall inflation rate to 3%, up from 2.5% in December 2024.

Ben's "simple math" does not take into account market psychology. He admits the possibility of profiteering but made no attempt to understand what actually happens on the ground. Is profiteering prevalent? Profiteering is the practice of making excessive or unfair profits exploiting a situation where consumers have little choice or where prices are expected to rise further. This often occurs in monopoly pricing and during crises, shortages or regulatory changes (such as tax hikes). Rounding up is a form of profiteering for low value items where in percentage terms, the rounding up far exceeds the tax increase. Profiteering occurs frequently where customers do not fully understand the tax calculations, prevalent in cases where there are bundled costs. In the retail markets, profiteering occurs where businesses expect weak enforcement. And most logically, profiteering occurs in an environment where there is a general inflationary trend because a price hike won't stand out -- this describes the situation we are in right now.

In 2015, Malaysia's introduction of GST saw businesses rounding-up excessively laying the price increase on tax compliance costs. It forced the government to set up a hotline for price gorging complaints. Japan's Consumption Tax hike from 5% to 8% saw prices increased by more than 3% with business blaming higher supplier costs. UK increased VAT in 2011 from 17.5% to 20% saw restaurants raising prices by more than 2.5% claiming it was "for simplicity".

But don't worry about profiteering in Singapore. We have the Committee Against GST Profiteering. CAP is convened with each GST hike in 1994, 2003, 2007, 2023 and 2024. It has no teeth. It listens to consumer complaints and reaches out to businesses to mediate and adjust their prices. Members of CAP comprises of MPs, grass-root leaders and others. Same-O same-O ownself-check-ownself mechanism that assures us no profiteering in Singapore.

Ben tells lower income Singaporeans they never had it so good with the $800 GST vouchers (I believe it is $850). This subsidy covers the 1% increase in GST for an annual consumption of $80,000 which is certainly much more than the lower income families' expenditure. He is right about this. The government pays out more than it collects. Since 1994, the government has always provided subsidies in the year of GST increases. However, in 1994 the government described such subsidy as a means to let the public to first learn to live with the additional tax burden. In other words, it is meant to give the public time to normalise the pain of extra tax burden. Machiavelli would have approved of this. It is better to impose a tax and give a subsidy in year 1 rather than to impose tax in year 2 without subsidies.

We are told the GST increase is necessary to collect more revenue to meet expected increase in healthcare cost for an ageing population. The government is certainly not at the stage of impending budget deficits when one takes into consideration the contributions from national reserves and the vast amount of cash stashed away in long term endowment funds. This is a topic best covered by Kenneth Jeyaratnam. I don't wish to be branded a "reserves raider" so I shall therefore avoid this topic.

I would like, however, to compare how the business world reacts to expected deficits in their revenue. If solvency is not the issue and liquidity is a short term problem, debt is of course a solution. But if the business environment has changed and profitability is down, the knee jerk reaction is to cut cost. When Elon Musk took over Twitter in 2022 and found advertising numbers were not what he was led to believe, exacerbated by woke advertisers pulling back ad placements, Musk cut cost aggressively by mass layoffs, reduced infrastructure spending and renegotiated contracts. Within 2 years he had stabilised the company and 'X' valuation has now returned to where Twitter was when he acquired the company. Bill Clinton did the impossible of balancing the US budget in 1998 to 2001 by aggressive down-sizing of the government, letting go between 380,000 to 480,000 personnel. In 1993 his Budget Reduction Plan raised taxes on high earners and reduced spending. Trump is trying to tame the US gargantuan budget deficit and national debt by down-sizing government and cutting waste and financial abuse. And he is doing this by lowering tax rates and re-imaging the economy.

Let's look at a more realistic figure of a lower income family's annual spending. How about $2,000 a month, that seems reasonable. That means annual expenditure is $24,000. Assuming this is all taxable, that would mean an additional tax burden of $240 with a 1% increase in GST. Now I'm going to take the picture in another direction instead of comparing to the GST vouchers like what Ben did to say you guys had it good, receive $800 and pay out $240. What if the government raises additional revenue by a capital gains tax instead, let's say a very reasonable low rate of 5%. The Law Minister would have to pay up only $4,400,000 of his $88m gains on the sale of his house. The IRA could collect from one person, and spare 18,333 lower income families from additional tax burden. By not taxing the rich, and assuming interest of 3% p.a., the Minister earns interest income on the $4,400,000 which is $132,000 each year. By taxing the rich, the lower income families, having a higher propensity to consume, would have $240 to spend  instead of paying for the increase in GST. The 18,333 lower income families would be able to spend $4,400,000 adding to the economy each year.

I find Ben presented a simplistic and PAP-apologetic-sque view and this is evidenced no better than by the Law Minister sharing the article on his Facebook page and grading it "Excellent". The Minister's enthusiasm of the article betrays the kind of tone-deaf attitude we have long come to expect of our government.

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