Monday, 16 March 2015

A Tax before Dining

Previously, I had looked into who pays how much of tax because of a remark by a Minister.

Then I re-read this "parable" about the 10 diners - and wondered.
Every night, 10 men met at a restaurant for dinner. At the end of the meal, the bill would arrive. They owed $100 for the food that they shared.

Every night they lined up in the same order at the cash register. The first four men paid nothing at all. The fifth, grumbling about the unfairness of the situation, paid $1. The sixth man, feeling very generous, paid $3. The next three men paid $7, $12 and $18, respectively.

The last man was required to pay the remaining balance, $59. He realized that he was forced to pay for not only his own meal but the unpaid balance left by the first five men.

The 10 men were quite settled into their routine when the restaurant threw them into chaos by announcing that it was cutting its prices.

Now dinner for the 10 men would only cost $80. This clearly would not affect the first four men. They still ate for free. The fifth and sixth men both claimed their piece of the $20 right away. The fifth decided to forgo his $1 contribution. The sixth pitched in $2. The seventh man deducted $2 from his usual payment and paid $5. The eighth man paid $9. The ninth man paid $12, leaving the last man with a bill of $52.

Outside of the restaurant, the men began to compare their savings, and angry outbursts began to erupt.

The sixth man yelled, "I only got $1 out of the $20, and he got $7," pointing at the last man.

The fifth man joined in. "Yeah! I only got $1 too. It is unfair that he got seven times more than me."

The seventh man cried, "Why should he get $7 back when I only got $2?"

The nine men formed an outraged mob, surrounding the 10th man.

The first four men followed the lead of the others: "We didn't get any of the $20. Where is our share?"

The nine angry men carried the 10th man up to the top of a hill and lynched him.

The next night, the nine remaining men met at the restaurant for dinner.

But when the bill came, there was no one to pay it.

How would the Singapore parable match with the above? How would the 10 diners split the $100 bill in Singapore's tax climate?

Well, there are about 700,000 Singaporeans who earn less than $20,000 a year and they don't pay any income tax. They make up about 33% of workers. So 3 (maybe 4) of the 10 diners will be eating free.

The top 8% pays about 85% of the taxes - So one rich man pays $85 of the $100 dinner bill.

The next richest guy (81st to 90th percentile) pays $10.

The third richest (two) guys (71st to 80th percentile) pays $3 in total, or $1.50 each

The remaining 3 diners split the $2 left between them - about $0.67 each.

Income Group # people $ share
Poorest $20,000 & below
33.8% 3
Lower middle Class $20,001 - 50,000
31.1% 3  $   2.00
Middle Class $50,001 - 80,000
15.7% 2  $   3.00
Upper middle Class $80,001 - 150,000
11.7% 1  $ 10.00
Richest $150,001 & above
7.8% 1  $ 85.00

SG's tax framework is quite progressive. The top 0.2% pays over 20% of the total income tax revenue for YA2013. That's almost $1.5 billion from that group of 4231 tax payers. On average they pay about $350,000 in tax!

But they make over $1m a year, so any tears I shed are crocodile tears... in baseless anticipation that one day I might be in that rarified atmosphere of people making $1m a year.

And the tax rate for the top 5% or so will go up by 2017 so the Richest will pay even more.

The table above simply shows the distribution of the tax burden on different category of workers/taxpayers. If you earn very little, you pay little or no tax. If you earn a lot, you pay more income tax. That is a fundamental principle of progressive tax systems.

Previously I had compared HK's tax regime with SG and I do not (completely) understand their system.

There is a tax rate table from 2% to 17%. There is a tax reduction of 75%, with a maximum of $20,000 for 2014. I do not know what this means. Then there is a standard tax rate of 15%.

The website explains:
How to Calculate the Amount of Tax that You Should Pay?
Your net chargeable income, i.e. assessable income after deductions and allowances, is charged at progressive rates. But if what you need to pay on the basis of your net chargeable income exceeds the tax charged at standard rate on your net total income, i.e. assessable income after deductions but before allowances, then you have to pay the lower amount of tax.

If I understand this correctly, you pay the lesser of the two tax rate,  but on different basis (chargeable income at progressive, net total income at standard rate, whichever is lower).

My math may be a little rusty, but I think the flat standard rate is a concession to the really high income earners. I may be wrong, but it doesn't matter.

But let's talk about the parable and how it relates to SG.

It is of course easily recognised as a pro-rich guy story. Originating in the US, the obvious message is, don't hate the rich - they pay more taxes and they subsidise your social services.

The richest in Singapore pay 85%. The richest 10% in the US only pays 59%. SG's tax rate is more progressive than the US. The first 80% only pays 5% of the tax, and 33% don't pay any taxes at all.

In the US, the lowest 80% pays 23% of the tax, though 40% (approx) pays nothing.

Is one system (SG, HK, US) better than another? That depends on whether you are in the top 10% or the bottom 10% or whether you are closer to one or the other. Singapore certainly isn't giving the top 20% a free ride - they pay 95% of the income tax. If you are rich (top 10%), you may want to go to the US - you only pay 59% of the tax. If you are poor (bottom 40%, the US is also a good place to be.

But the US is not a good place to be if you are middle class (41st - 90th percentile). You pay 41% of the taxes. In SG, you would pay 5%.

So it is good to be middle class in SG.

Rich... well, you can go anywhere, so if you choose SG over the US, you must have your reason(s).

If you are poor in SG, well, you can't go anywhere can you? In fact you shouldn't even be reading this blog piece.

Link: Are US Taxes low compared to other countries'?

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