Simplify taxation

A government needs to collect tax to pay for its expenses and social benefits. It should simplify the system of taxation and make it equitable. Those who earn more can pay higher taxes. The exemptions and reliefs should also be simplified.

Income should only be taxed once. As owners have to pay property tax, they should be exempted from paying income tax on the rental income. The rate of property tax can be adjusted for this loss of tax.

The worst type of taxation is GST. Apart from being inequitable and regressive, i.e. the lower income pay proportionately more tax, it imposes a heavy burden on the economy to account and collect the tax, and add to the cost of doing business. GST of 7% can be replaced by a flat rate of 4% deducted from the payroll and on investment income. The payroll tax of 4% should be paid by the employer and treated as the cost of doing business. This may be recovered from employees earning above a certain threshold.

Even a sales tax, used in USA, is better than a value added tax (like GST). The sales tax is simplier and less costly to administer. (The accounting firms love GST as it gives them business and profits.)

As we introduce new taxes and make changes, we must also take the opportunity to simplify and streamline our tax system. We need to take a bold step in this direction.

Some countries have introduced a flat rate tax system, for ease of administration. To relief the burden on the lower income, they provide generous deductions, so that the lower income do not need to pay tax. More details are provided here.

Tan Kin Lian

Relief from income tax

The earned income and wife relief for income tax had remained at $1,000 and $2,000 for the past forty years or longer. If this relief has been adjusted for inflation, it should be $5,000 and $10,000 respectively today.

Guide to Pro Investor

Here is a soft copy of my book, Guide to Pro-Investor. It has about 50 pages. You can download and print it and read the book  It will give an explanation of the logic behind the simulation game and some strategies that you can follow.

You can click here to play this simulation game.

Survey: The Stingy Nanny

Here are the results of the survey, based on 35 respondents.

The majority agree with 4 motherhood statements. However, for the statements that show tangible results, the majoirty disagree. The lowest level of agreement is for the statement that the poor in Singapore can live in dignity.

Here are the comments from the respondents.

Promotion (15% discount) will end on 28 Feb 2010

The Promotion (code - BLOG) to earn 15% discount on my books will end in 3 days time - 28 February 2009. Order now.

Temasek 15 year bond

My bank told me that Temasek 15 year bond is available in the secondary market at a yield of 3.65%. There is a commission of 0.5% payable to the bank. The minimum investment amount is $200,000.

Decreasing Term Insurance

I have been advising consumers to buy a Decreasing Term Insurance (DTA). This will cost less than half of a Level Term Insurance.

For example, a male aged 30 can insure for $300,000 for 25 years by paying an annual premium of (say) $500. If this person buys a DTA, the annual premium can reduce by at least half, i.e. $250. (Note: the actual premium is likely to be lower, if you ask for competitive quotes from several companies).

Under a DTA, the sum insured will reduce proportionately each year. In the above example, the sum insured is $300,000 during the fitst year, and will reduce by $12,000 each year (i.e. $300,000 divided by 25). In the final year, the sum insured will only be $12,000.

It make sense to buy a DTA as the consumer is likely to have savings each year that will cover the reduction in the sum insured. For example, the savings can be $12,000 a year in the above example.

In the event of premature death, the sum insured under the DTA can be added to the accumulated savings to make a total sum that is sufficient to take care of the needs of the dependents. The policy payout can be invested with the accumulated savings in a low cost investment fund to earn a market rate of return (perhaps 5% per annum, after averaging out the good and bad years). The family can make a monthly drawdown (say $1,500 a month) from the accumulated savings to meet their needs. The total amount can last for many years, depending on the amount that has been saved.

A good combination is to have a DTA to provide a large sum to be supplemented with monthly savings that are invested in a low cost, well diversified fund.

A DTA is similar to the cover provided by a life insurance policy. Although the policy provides a level sum insured, the amount that is being insured actually reduces over the years, as the cash values are built up from the investment of the net premiums.

Many of the insurance companies in Singapore do not offer attractive rates for DTA. It may be neccessary for consumers to buy DTA outside of Singapore. You can try to get quotes from websites in America that offer this type of policy. When consumers have a choice, the life companies in Singapore will be forced to offer this type of policy on competitive rates.

Tan Kin Lian