Potential Revenue from Possible Hikes in Personal Income Tax for Top 10% Income Bracket

Mr Leong Mun Wai asked the Minister for Finance what is the amount of tax revenue that can be raised from a four-, six- and eight-percentage point rise in the personal income tax rate for those whose assessable incomes are within the top 10% income bracket in 2019.

During the Debate on the Budget Statement, Mr Leong Mun Wai claimed that a four-percentage point increase in the marginal PIT rates for the top 10% will generate the same amount of revenue as the two-percentage point GST hike. But he is mistaken.

First, Mr Leong Mun Wai has incorrectly applied the personal income tax (PIT) rate to assessable income (AI). The PIT rate should be applied to chargeable income (CI) instead. The CI of an individual is the AI minus any personal reliefs allowed.

Second, it is also not correct to apply a change in PIT rate to the total CI of those in the top 10% to derive the additional PIT revenue. Rather, the additional PIT tax payable or additional revenue generated is computed by applying the revised marginal PIT rates for each CI band to only that portion of CI for each taxpayer, and then summing their revised PIT.

So, for instance, if Mr Leong Mun Wai simply uses a four-percentage point increase and applies it to the total CI of all taxpayers with CI within the top 10%, he is, in fact, increasing all marginal PIT rates in the entire PIT schedule by four-percentage points. This means that the four-percentage point increase in tax rate applies to all taxpayers, not just those whose CI belong to the top 10%. He can get the revenue yield he wants, but only because the additional tax is collected from all taxpayers, not just those in the top 10%.

In Year of Assessment 2020, the top 10% of all taxpayers, whether PIT-paying or not, had a CI of at least $120,000, and the relevant marginal PIT rates are currently 15%~22%.

If we were to raise the marginal PIT rates for the portion of CI in excess of $120,000 by four-percentage points so as to only affect those whose CI are at least $120,000, the relevant marginal PIT rates will be raised from the current 15%~22% to 19%~26%. This will yield at most an estimated additional $1.8 billion per year.

For a six-percentage point increase, the relevant marginal PIT rates will be raised from the current 15%~22% to 21%~28%, and yield, at most, an estimated additional $2.7 billion per year.

For an eight-percentage point increase, the relevant marginal PIT rates will be raised from the current 15%~22% to 23%~30%, and yield at most an estimated additional $3.5 billion per year. Effectively, this will mean a sharp increase in taxes for upper-middle-income earners with CI of at least $120,000.

The above is a static analysis that assumes the tax base remains unchanged. Realistically, individuals will respond to changes in tax rates. A top marginal PIT rate of 30% will be higher than the Asian average of 28%, and well over the top marginal PIT rate of 17% in Hong Kong. Some Singaporeans or foreigners may choose to work elsewhere. Others may choose to arrange their affairs differently, thus increasing tax administration and compliance costs.

In other words, even with an eight-percentage point increase in the marginal PIT rates that affect only the top 10% of taxpayers, we will, very likely, end up generating much less than $3.5 billion in additional taxes per year. The bigger problem is that we will, significantly, undermine our competitiveness for talent, investment and jobs and, ultimately, Singapore and Singaporeans will be worse off.