GST Hike 1 - Econs (H1/H2/SL/HL)
It seems very highly that a GST (Good and Service Tax) is coming our way, I just like to use this article to link it to the Economics syllabus.
GST also known as Value Added Tax (VAT) in some together countries is an indirect tax, a tax levied not on a specific entity meaning its responsibility can be transferred between parties unlike direct tax like income tax (my income tax bill is my sole responsibility). In GST, the tax body (IRAS in SG) is not concerned whether the buyer or seller is paying so long as a tax of (currently 7%) is paid due to the transaction (of goods or services) taking place. We see this sometimes when merchants say they will absorb any GST, which obviously seeks to lower the out of pocket expenses for customers in order to increase demand.
What are the pros and cons of an increase in GST?
Pro 1 - The rich will pay more tax as part of their expenses while the not so rich receives GST rebates, the extra tax collected will be used by the government to help the not so rich - hence the tax hike serves to lower income inequality.
Pro 2 - The public sector is expected to incur more expenses in future and raising the tax now helps the government maintain a budget surplus in the foreseeable future. This will help maintain SG's excellent international credit ratings.
Con 1 - The disposable income of the average consumer will decrease
Con 2 - Some business will have a dent in net profits as: a) consumers switch to businesses not charging GST (there are laws on this but I won't cover them here)
b) they choose to adsorb the increase in GST themselves
c) they have to pay more for their supplies (note that an increase of 2% does not imply a straight forward increase of 2% in cost - the real picture is more complicated than that)
Notably in the short run there ought to be a knee jerk reaction in the form of Con 2a to be observed. I will explain more of these from macroeconomics lenses in the next few articles!
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