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Date: March 29, 2011
Reporting From: Undisclosed location

Sticker shock in grocery store checkout lines and gas pumps around the western world is starting to set in. At this point, you have to be living under a rock to not notice that prices of goods and services around the world are increasing substantially.

Much of the blame for rising prices has rightfully been levied on the uncontrolled expansion of central bank balance sheets– the US Federal Reserve, for example, created more money in the last two years than it had created in the previous 200. Rejecting reject the possibility that any of this money could impact consumer prices is just intellectually dishonest.

There is another factor, however, that weighs heavily on inflation, and it is seldom discussed in this context: taxes.

Everybody hates paying taxes… but what few people realize is that tax hikes fuel rising prices. When payroll tax rates, import duties, corporate profits tax rates, sales tax rates, etc. increase, it’s always the end consumer at the cash register who gets stuck footing the bill.

This is happening across the world right now, including in the United States. While governments in places like Illinois have made headlines for infamously raising their income tax rates in the middle of the night, local government tax hikes are going largely unnoticed.

At present, 14 cities across California are raising their local sales tax rates, the highest being in Union City and El Cerrito (near San Francisco) to 10.25%. Then there’s Prattville, Alabama, a town of 30,000 near the capital Montgomery, which just raised its local sales tax rate 1% to 9.5%

This has the effect of making everything more expensive– instantly. Now, 1% might not seem like that big of a deal, right? This is how politicians think– do we really care if we pay $50 at the checkout line, or $50.50? Of course not, it doesn’t matter.

It’s not about a single purchase, though, it’s the aggregate of all of our purchases, and its starts to add up. Not to mention, there’s the slippery slope of thinking “well, if 1% didn’t matter last time, let’s hike tax rates another 1%.”

Over time, the same thing happens when income tax rates rise. When individuals have less disposable income to spend, everything certainly feels more expensive… and when corporate and payroll tax rates increase, those increased costs get passed on to consumers in the form of higher prices.

There are some places in the world, however, that are getting it right. Singapore is one such place. Rather than concerning itself with dropping bombs and establishing military bases in other countries, the government of Singapore is living within its means setting conditions for the continued growth and prosperity of its residents.

This morning, I received a welcome email from one of my prime contacts on the ground in Singapore. As it turns out, the government there is cutting its tax rates. Again. And my friend, a “who’s who” in the Singapore corporate structure industry, sent along a very helpful guide to show me just how serious Singapore is about growth.

Individual income tax rates, which are already among the lowest in the developed world, are being cut. For example, income in the range of S$80,000 to S$120,000 (S$ is the Singapore dollar… this is roughly $65,000 to $95,000 USD) will now be taxed at a marginal rate of just 11.5%, down from 14% before.

For companies, corporate profits below S$100,000 (roughly $80,000 USD) under the old rate schedule were not taxed. This is still the case… and one of the reasons why Singapore is such an attractive draw to entrepreneurs– because, for a startup, those initial profits are incredibly important.

The next S$200,000 in profits (roughly $160,000 USD) used to be taxed at 8.5%. This has been cut to 6.8% under the new scheme, so the effective tax rate on roughly the first $240,000 USD is only 4.5%. Pretty reasonable.

The next S$194,118 in profits (roughly $154,000 USD) used to be taxed at 17%; this has now dropped to 13.6%… and finally, all profits above S$494,118 (about $392,000 USD) are taxed at 17%.

As corporate profit tax schemes go, this is incredibly low. A company with roughly $400,000 (USD) in profits would have an effective tax rate of just 8%, and a company with $1 million (USD) in profits would pay an effective tax rate of just 13.5%.

Singapore has also made new allowances in how businesses can deduct expenses through the “Product and Innovation Credit (PIC) Scheme.” The PIC Scheme allows businesses to deduct up to 400% of the actual expense for things like research and development, design, acquisition of intellectual property rights, etc.

While these tax benefits are advantageous for all companies, Singapore lends itself particularly well to entrepreneurs and professionals who generate the preponderance of their income online: it’s a strong, independent, transparent jurisdiction to structure, it’s one of the safest banking jurisdictions in the world, and the government provides generous allowances for royalties and intellectual property.

I’ve been traveling in the US for almost 3-weeks now, and as usual, I’ve been pretty amazed at all the gloom, bad news, and overall economic malaise. I’m here to tell you that there are still plenty of places in the world with significant opportunity, where productive, talented people are treated like valuable assets instead of milk cows.

Singapore is one of those places, and I think it makes a lot of sense to consider relocating there (if you’re a skilled professional, investor or entrepreneur) or looking to structure a foreign business (especially an online company).

Tomorrow, I’ll be releasing interview I just conducted with a friend of mine who is a very successful online entrepreneur. He is another Atlas 400 member, and a phenomenal teacher about what he does.

I hope that, between the valuable insights he provides in the interview about building a new online business, and what we’ve discussed about places like Singapore, it may give you some ideas for a different direction.

Until tomorrow,
Simon Black

Simon Black
Senior Editor, SovereignMan.

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