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To what extent are the recent tax changes announced by the Singapore Government justified?

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Introduction

To what extent are the recent tax changes announced by the Singapore Government justified? The recent tax changes mentioned in the title refer to the Singapore government increasing Goods and Service Tax (GST) by 1%, from 3% to 4%, starting from January 1st 2003, as well as reducing personal and corporate income taxes. The effects of these changes vary depending on which view we take when looking at these changes. There are three main perspectives to consider when looking at this. They include that of the Keynesian economists, the Monetarists, and the Supply-side view. Each of them deal with the aggregate demand and aggregate supply in the Singaporean economy, and how they are structured, as each of these groups have different views regarding the aggregate demand and aggregate supply models of the economy, both in the short and long run. GST is an ad-valorem tax, meaning that it is a percentage of the good or service purchased. The effect of this can be shown in the diagram below: The change in tax will have an impact on aggregate demand and supply, as they affect prices, which has a major say in deciding the level of both aggregate demand and supply. The other changes announced by the Singapore government regarding taxes are the decreases in both personal and corporate income taxes, (PIT and CIT) to a new low of 20% (eventually), from 26% and 24% respectively. "The aim in proposing these changes is to attract more businesses to Singapore and generate higher growth, more jobs and better incomes for all Singaporeans". ...read more.

Middle

An example of what the multiplier can achieve is shown in the diagram below: So the reason why the Keynesians prefer to see government expenditure rather than changes to taxes and restructuring schemes is because of the fact that they believe the aggregate supple curve is very elastic, which would negate the effects of tax changes, and would allow for government intervention to work much more effectively. Another reason why Keynesians do not prefer tax changes is because of the stickiness of wages and prices. With the tax changes, wages and prices would have to vary immediately for the effect to take place. However, it is believed that wages and prices do not often change at the same time as other changes such as tax increases, rather they remain the same for a period of time, and only of they believe that the change is likely to be long standing, do prices and wages become altered to reflect other changes within the economy. However, is has been argued that the trickle down effect loses its effectiveness when coupled with government intervention, as the trickle down effect needs to work independently and government spending might interfere with the trickle down effect and stop it working as it should do. With the Keynesian view in mind, the tax changes proposed by the Singapore Government might not be fully justified as they may not benefit as many people as they would harm, although, to an extent, they could be seen as an improvement over the previous situation. ...read more.

Conclusion

Prices may still rise in the economy due to the GST hike but with a larger disposable income for most households, they may still end up spending more on goods and services so as to create economic growth in the Singaporean economy. So it can be seen that the Singapore Government has made certain tax changes with careful consideration and has kept the individuals at mind when introducing these changes. Only after it became apparent that the government would be facing too great a revenue loss from the decrease in income taxes did they decide to increase GST from 3 to 5% (still one of the lowest rates in the world), and then revised that to just 1% this year with a further 1% next year. It has to be justified, considering that Singapore must boost its flailing economic fortunes in the face of newly found competition from the much bigger market of China, and has done so by reducing corporate and personal income tax as incentive for businesses to set up in Singapore to boost their economic growth through the multiplier effect and the trickle down effect. There will be a few negative effects of the changes in the short term, such as some people not being aware of and therefore not being able to take advantage of the ERS scheme, but in the long term, the tax changes are vital to Singapore maintaining its status as business hub in Asia and across the world. ...read more.

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