Several years ago, a friend of mine from Germany visited Singapore. They were really impressed with the well maintained roads, excellent public transportation system, and infrastructure. However, they wondered how it was possible for the Singapore government to fund all this with such low income taxes.

In countries like Germany and Australia, they have very high income taxes in order to pay for public goods such as healthcare, education, transportation, and infrastructure. In contrast, Singapore has relatively low income taxes and public goods that are the envy of the world.

So how does Singapore pay for all this stuff?

Low income tax

Singapore follows a progressive tax rate with its highest personal income tax rate of 22% for those who earn over SGD320,000 per year.

Central Provident Fund

Each month, up to 37% of our salary goes to our CPF which can be used at a later time for healthcare, housing, education, and retirement.

In the meantime, our CPF monies, which make up a portion of our reserves, is invested through our sovereign wealth fund. The investment returns from our reserves is then used to pay for public goods.

If we think of CPF as a form of tax then our total income tax goes up significantly and would be even higher than many other countries.

However, CPF isn’t actually a tax because we get to use our monies at a later stage of our lives. It’s effectively a long-term loan to the government which gets paid back to us with interests of between 2.5% and 6%.

High taxes for car ownership

Owning a car is not a necessity in Singapore because of our well connected public transportation system.

If you want to buy a car, you have to pay for a Certificate of Entitlement (COE) and Additional Registration Fee (ARF) on top of the cost of the car itself.

Of course, you also have to pay for road tax, high petrol costs, and parking fees which all have taxes embedded in them. These taxes are then used to pay for better transportation infrastructure.

Low tax for home ownership

To encourage home ownership, property taxes are lower for public housing and owner occupied properties.

High taxes for vices

Singapore also has high taxes on goods such as cigarettes, alcohol, and gambling. The so called “sin” tax is essentially to discourage people from engaging in unhealthy and undesirable behavior.

Conclusion

Economics is about incentives and disincentives and this is very much true in Singapore. We have low income taxes to incentivize people to work. We contribute to a fund to help pay for national development and our financial needs later in life. With high taxes on luxury goods and vices, we have to prioritize things that are more important to us.

While this approach does not come without its own set of challenges, its a system that has worked well for Singapore.


Have a question or suggestion? Reply to this post via email.