In the continuing newspapers articles on the potential increase in taxes in SG, there were a few interesting nuggets of info on the country’s sources of income in a Straits Times article today by Chia Yan Min.
- First was that NIRC (Net investment return contribution – i.e. SG’s passive income) had exceeded SG’s corporate tax income for the first time in 2016.
- Then, the article asked (rhetorically I’m sure) “What is Singapore saving for? How big do the reserves actually need to be?”. (I’m actually going to try to answer and will get back to this in a while.)
- The third point cover expenses. So yes I’m sure people are generally aware that the government is trying to reduce it’s spending budget and basically do more with less. That’s prudent and is basic common sense.
Now taking those three points, imagine that Ms Singapore (cos we’re all about equal representation yo!) is a salarywoman who’s on her journey to FIRE. She’s built up a very respectable portfolio of investments (rumoured to be over $1 trillion) whilst managing a day job. A few years ago, the total investment returns from her portfolio (NIRC) crossed a major milestone where it exceeded her main salary (income from corporate taxes) for the first time! It’s an amazing achievement and naturally she feels elated!!! What does she do after that? Nothing much actually, she continues growing her portfolio and works on her main career.
At this stage Ms Singapore has reached a pretty comfortable place financially. Her family is asking her questions like, since you’re getting so much from your investments, why don’t you scale back to part time work to relax a bit?
Nice….but the thing is, her family is missing two bits of info. How much her expenditure is, and how much her other sources of income are. Can she chill or must she continue to work on increasing her active income? We’re back to the questions raised earlier:
- What is Singapore saving for? My guess: Perhaps eliminating its dependency on taxation income?
- How big do the reserves actually need to be? Answer: Analysed below.
(As I type this out I realise I don’t have info on how much govt expenditure is relative to it’s total income so can’t really come to a conclusion. The info is out there, but while I sip on my coconut, I’ll let the more industrious readers find out and fill me in. I guess this means more scenario analyses….what fun ;p)
Scenario A) At this point, lets assume Ms Singapore has no other income source. Lets also assume that her expenditure is lower than her actively sourced income. Very simple assumptions. Although it would be easy to assume that she can quit because NIRC>Expenditure, that would not be sustainable. On the basis that long term NIRC is roughly 8%-10% p.a. which is approx. equal to the long term return of equities, quitting now would mean she is going above the 4% withdrawal rule so would be drawing down her capital. Essentially, her NIRC would have to be double the corporate income tax before she can stop her active work of taxing companies! Said another way, if Ms Singapore’s total expenses is less than half of her NIRC, she can stop working to get taxation income. (I know…there are two things certain in life….yada yada)
Anyway I’ll go out on a limb here and guess that the 4% withdrawal rate is roughly the basis for the “net investment returns (NIR) framework, which allows the government to spend up to half of the long-term expected real returns from the assets managed…“. Who would have guessed? The first FIRE aspirant is actually the Singapore nation!
Scenario B) But the scenario A above is too simple, Ms. Singapore is not a one trick pony…she’s got “multiple sources of income” of course!!! (I’m SEO-ing this SippingCoconuts page like crazeeee man… What with buzzwords like “retirement”, “passive income”, “quit work”….lol). Besides her corporate income tax, we are more than familiar with her other sources of income like GST, personal income tax, property tax, stamp duties, etc. Very industrious…
Following this train of thought further, we know that Ms Singapore’s expenditure is significantly more than her total NIRC.
Ergo, she cannot quit. And when faced with increasing expenditure because of ageing parents, would it not be rational of her to try ways to boost her active income? Therefore, higher taxes is the painful but right (?) way to go…and no she shouldn’t draw down on that nest egg yet Ms Chia…
Do drop some comments if you liked this thought exercise! Do you disagree and think Ms SG shouldn’t raise its taxes? Or maybe you have info on Ms Singapore’s expenditure and amount of income from each source (probably the Budget or Accountant General report). Just shout out in the comments.
p/s: I’m planning to do a post on one part of the article discussing how reining in healthcare costs is one way to deal with this. What could this mean for our investments? As the Chinese say, in crisis there is opportunity.
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