Perspective Unlimited

Wednesday, February 14, 2007

Careful with the Gini

It now stands at 0.472 – which is roughly the same as the US at 0.469. But take this number with a pinch of salt, it has some serious drawbacks.

(a) Singapore is a country but it is also a financial centre, there should therefore be no surprise at the greater income disparity. The City of London recently paid out record bonus, and a Hyde Park apartment recently sold for S$250 million, no typo here. On the other hand, London also has some of the most deprived neighbourhoods. When you mix bankers with workers into the calculation, is there any surprise at the Gini outcome? Global city, global disparity. If one could compute the Gini for London or New York, my guess is that it would show far greater income disparity than their respective national averages.

(b) Non-income redistribution is not effectively factored into the calculations. HDB, healthcare, and education policies for example can lead to sizeable fiscal transfers between income groups – since the higher income group pays more taxes but uses proportionately less government services. Social provision of key services matter as much as income differences.

(c) Gini is a snapshot of the income disparity today. It says nothing about social mobility, which I argue has far more important social consequences.

Income differences are essentially market outcomes. Insofar as society is not destablised by the income differences, there is no right and wrong about it unless one prescribes a certain political view. However, there is a real market failure if good people become less productive or fail to fulfil their potential because they are weighed down by their parents’ circumstances. I am therefore arguing that we should care less about present income disparity than whether the next generation of the lower income group becomes trapped there. The more long-term concern is that Singapore may have become a less mobile society compared to a generation ago.

27 Comments:

  • Harlo Bart,

    The KTM agrees with you. Gini tells us very little -- which is actually why the KTM doesn't even bother to even blog about it. :-) Never quite understood the fixation on this silly number. :-P

    Agree with you that of prime concern is whether there is sufficient social mobility (though what constituents sufficient is up for deabate). At the heart of our local brand of meritocracy is actually social mobility.

    Tell me: what is your expert opinion on the "problem of income inequality"? The KTM is of the opinion that lots of people have no idea what they are talking about. :-P

    By Blogger kwayteowman, at 5:14 pm  

  • KTM,

    I am not an expert on social issues, I am truly neutral on the issue.

    But it is impolitic nowadays to express the view that income disparity is not important. I suspect there is a lot of middle class guilt out there, which explains why so many people talk / blog about it. I don't think the poorest decile blogs.

    As Singapore marches on towards its expressed desire to become a global city, the Gini can only go up. What should be the correct tradeoff between growth and equality? It is a political choice, not an economic one.

    By Blogger Bart JP, at 7:00 pm  

  • Bart,

    The KTM has no qualms about not being politically correct. :-) He simply wants to confirm whether this so-called "income inequality" is an economic problem. Of course, we are talking about the context of Singapore. Income inequality in some other countries is indeed a problem (because of poverty and the low base) -- but again, a lot of people fail to understand the context. *sigh*

    In any case, on what basis do you claim that income inequality is a socio-political problem and not an economic problem? Your hypothesis of middle class guilt is interesting.

    Aaron has this theory that when the incomes of the middle class stagnates, the consumption of the middle class will fall and it's going to be a problem. What are your views? :-)

    By Blogger kwayteowman, at 3:08 am  

  • economic choice = cut tax, boost productivity(keep cost low, increase automation, blah blah). very efficient.

    political choice = increase tax, redistribute wealth, make clowns happy but is inefficient.

    the really rich usually dun bother about conscience. or they actually give away $$. the middle class are middle class because of their values\mentality(work hard, find good job, do good, help the poor,blah blah).

    aaron not economist. a)SG's domestic consumption small proportion of gdp. also matter of sticky wages. and lifestyle expectations. b) 6.5mio pop = another 2 mio middle class wallets incoming. c)he is even wrong about education. it is better to spend more on lower education to ensure level playing field. higher ed is actually quite easy to finance if u qualify for the top schools.

    NoName Ninjia

    By Anonymous Anonymous, at 6:08 am  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 8:15 am  

  • I agree with Noname. Don't think funding education (Masters/PhD) closes the income gap, more likely to exacerbate it. Aaron writes from his perspective. Many studies in US have shown that early intervention is best. A dollar spent on a child at young age is worth a lot more in latter years. Any takers for textbook, meal, education vouchers?

    Latest DOS figures show all deciles having their income increase, perhaps Aaron has not seen it. But the rich are getting richer, that is true.

    If you read the DOS report in full, it has a rather interesting table that shows that when the economy recovers from a recession, the top deciles sees their wages rise first, followed by the middle, before the bottom finally getting the turnaround about 3 years later. Call it trickle down if you must, but the table is quite illuminating.

    Point is - Gini might rise faster 2-3 years post recession (what we see now), may stablise a little after that if economy keeps expanding. I think the best way to help the poor is still for the economy to grow (this is admittedly my growth bias).

    By Blogger Bart JP, at 8:16 am  

  • Bart & Noname,

    Agree with you both that the State should invest more in pre-school education. Currently thinking about whether we should in fact reduce tertiary subsidies and make more people take loans.

    Current system of subsidies seem "regressive". State is giving more subsidies to people who will eventually be earning more money. But I digress.

    Bart,

    The KTM actually has a question for you. The KTM doesn't really give much credence to dunno what GST for the poor lah. The way the KTM sees the Budget, we're simply in the process of restructuring the taxation system and moving towards indirect taxation.

    What the KTM cannot seem to understand are the benefits of indirect taxation in our local context. Would you mind clarifying why indirect taxation is superior to direct taxation? The KTM believes that we cannot anyhow take wholesale what the textbooks say 'cos our economy is quite unique. Many thanks and Happy New Year!

    By Blogger kwayteowman, at 7:03 pm  

  • KTM,

    You are right in smelling a rat. It does not matter whether tax is levied on consumption or income. If you flat tax 10% on all income, or you tax 10% on all consumption, assuming all income is eventually spent on consumption, the general equilibrium effect is exactly the same. No difference at all.

    HOWEVER, the subtle effect kicks in because not all income is spent on consumption in the same time period. Some income will be saved and become invested, for future consumption. Taxing income means taxing upfront. Taxing consumption means taking money away only when it is spent, not when it is earned.

    A 'tax shelter' is thereby created since whatever you don't consume now does not attract tax immediately. This encourages people to postpone current consumption, save and invest. They will only be taxed for future consumption. If one thinks that people are myopic and do not save enough, taxing current consumption may indeed be beneficial in tilting this balance.

    The more cynical view is that this is pure tax competition - to reduce direct income tax to encourage foreign investment here. Since foreigners do not always consume here, they may or may not be subjected to consumption tax. Consumption tax will be borne only people who cannot move away (the captive market argument).

    By Blogger Bart JP, at 12:01 am  

  • Happy New Year to all!

    By Blogger Bart JP, at 12:02 am  

  • Bart,

    The KTM isn't suspecting a rat lah. It's just that the KTM is having some trouble figuring out what's really going on and he's asking around. :-)

    Taxing consumption means taking money away only when it is spent, not when it is earned.

    This doesn't seem to be a major problem for us. How many Singaporeans are worried about "tax shelters" you think? The problems we seem to be grappling with are: (i) Money No Enough (people aren't making enough money); and (ii) people aren't saving enough for retirement.

    Then, there's also some disconnect in the argument that we're raising GST because of competition from Hong Kong. Supposedly we are competing to attract foreign capital by lowering corporate taxes, but according to the KTM’s understanding, many foreign MNCs set up shop in Hong Kong to mainly take advantage of the booming mainland China market. They will never come to Singapore because of proximity reasons (and it’s not like our new corporate taxes are half those of HK).

    Also, the structure of the Hong Kong economy is also very different from ours, so it’s really not entirely clear to the KTM that we’re competing directly with them, and finally, perhaps it is a good idea to reduce our dependence on FDI for growth?

    Basically, the KTM is keen to understand our target taxation structure (the KTM believes that GST will eventually reach 10% if the current trend continues) and the reasons for the new structure. Die die we need to have a sound economic basis, but the reasons are not immediately obvious to the KTM (of course, the KTM is only a hawker and not a economist lah, so perhaps humour the KTM? :-))

    Your comments would be much appreciated. :-)

    By Blogger kwayteowman, at 3:44 pm  

  • I agree that there's no need to worry too much about the Gini coefficient. It doesn't tell us the full story. But then again, which statistic tells us the full story of anything?

    Regarding the GST. A strong argument for choosing consumption taxes is that income taxes (that are progressive) unfairly burdens people who have large peaks and troughs in their income over their life time. I think this problem can be eliminated by proportional taxation.

    If we were to choose a tax regime when our economy began, there's a very great theoretical advantage in choosing a pure consumption tax regime. However, we're not doing this. In fact, trying to move to a pure consumption tax regime is likely to be costly and unfair - retirees who paid their dues via income taxation will not have to pay taxes on consumption.

    What we have done here is enlarge the tax net and then redistributing the income. The change in GST is frankly not that much so I don't expect an equivalent change in income taxes to result in a large distortion. More importantly, any efficiency gains may be offset by the redistribution to the lower income folks in order to appease them.

    By Anonymous gaussito, at 6:59 pm  

  • Gaussito,

    I would heck care the Gini coefficient, but concentrate on monitoring the lowest 20 per cent, particularly the test scores of pupils from these background. The seeds of future income inequality are sown right there. Help may need to be more generous in that area.

    Most of what you say on taxes sound sensible.

    By Blogger Bart JP, at 11:26 pm  

  • KTM,

    I am in the process of writing a post on it. Trying to string some thoughts together for a more complete picture.

    By Blogger Bart JP, at 8:50 am  

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