Understanding the effects of tax policy changes is essential for students taking A Level Economics tuition in Singapore. With real-world examples like GST hikes and income tax adjustments regularly discussed in the syllabus, it becomes easier to grasp core concepts such as elasticity, market structure, and the impact on welfare. This topic provides a practical context that links theory with current affairs, making learning more relevant and engaging.
In this article, we explore how income tax changes influence consumer expenditure, how the GST burden is distributed, and how these ideas are examined in the A-Level Economics curriculum.
How Income Tax Changes Affect Consumer Spending
When income tax rates fall, people enjoy higher disposable income. But what happens next depends on what kind of goods they tend to buy. Here’s how different types of goods respond, based on their income elasticity of demand (YED):
- Normal Goods (YED > 0): These goods see a rise in demand when income increases. However, not all normal goods behave the same.
- Necessities (0 < YED < 1), like vegetables, will see a modest increase in demand. Since these are already part of daily needs, a small bump in income doesn’t massively change purchasing behaviour.
- Luxury Goods (YED > 1), like luxury cars, experience a sharp rise in demand. As consumers feel wealthier, they may switch from basic to premium options.
- Inferior Goods (YED < 0): These are items that consumers buy less of as their income grows—such as budget hotel stays. With more money, people upgrade to higher-quality alternatives.
The overall effect of lower income tax on consumer spending depends on how many normal or inferior goods are being purchased across the population. A population that spends mostly on normal and luxury goods will see a greater increase in total expenditure when income tax falls.
GST: Who Really Pays the Price?
GST is a consumption tax levied on goods, services, and imports in Singapore. Although producers pay GST to the government, the actual cost is usually passed on to consumers through higher prices. GST is an ad-valorem tax, meaning it’s calculated as a percentage of the sale price. When GST goes up, the supply curve shifts leftward, increasing prices.
But how much of that tax ends up being paid by consumers? That depends on the price elasticity of demand (PED):
- Perfectly Inelastic Demand (PED = 0): The full GST burden can be passed on to consumers without affecting demand. This is rare and usually applies to essential goods with no substitutes.
- Price-Inelastic Demand (0 < PED < 1): Consumers react less to price changes, so firms can pass on most of the GST without a major drop in sales. Examples include basic necessities or items without GST import relief.
- Price-Elastic Demand (PED > 1): Demand falls significantly when prices rise. In this case, firms might only pass on a small part of the GST increase, fearing loss of customers. Goods with substitutes, such as those available across the border in Malaysia, are typically price elastic.
As stated in the syllabus: “Given the same size of the tax (t), the extent to which firms can pass on GST to consumers depends on PED.”
Market Structure and GST Absorption
The ability of businesses to pass on the GST also depends on market structure. In oligopolistic markets, where a few large firms dominate and closely watch each other’s pricing, price changes are not easy.
For example, major supermarkets in Singapore like FairPrice, Sheng Siong, and Giant absorbed the recent 1% GST increase in 2024 to remain competitive. If one raises prices but the others don’t, it could quickly lose market share. This leads to price rigidity in the short term.
However, in the long run, these firms are likely to pass the full tax increase on to consumers to protect profit margins, especially since GST hikes are permanent.
The Regressive Nature of GST
GST is considered a regressive tax, meaning it takes a larger share of income from low-income households. This is because these households spend a bigger portion of their income on essential goods and services, all of which are subject to GST.
To address this, the Singapore government has introduced mitigation measures such as the GST Voucher Scheme, which offers cash support to lower-income groups. These policies help cushion the tax’s impact and promote equity.
Conclusion
For students enrolled in A Level Econs tuition, applying concepts like elasticity and tax incidence to real-world policies enhances understanding and exam readiness. GST hikes and income tax changes provide timely, relevant examples of how government policy shapes economic outcomes.
Whether you are just beginning your Economics journey or preparing for the final stretch, choosing the right tuition for Economics can help you better connect theory to practice. Topics like these show why Economics is not just about graphs—it’s about the choices we make every day and how those decisions affect everyone around us.