Capping income tax at 10% won’t stimulate economy, says economist

An economist says it is better to give money to the lower-income group to spend as any tax cut for high-income taxpayers is likely to go into their savings.

PETALING JAYA: An economist has poured cold water on a proposal by the Federation of Malaysian Manufacturers (FMM) for the personal income tax rate to be fixed at 10% at most.

Yeah Kim Leng, a professor of economics at Sunway University, said cutting taxes was less effective in stimulating the economy and would only give a significant increase in disposable income for middle and upper-income households.

He told FMT that direct government spending such as through cash handouts to the lower-income groups would be more effective in stimulating the Malaysian economy.

“This is because a higher portion of the tax cuts will likely be saved rather than spent by the high-income taxpayers.

“In the absence of an offsetting tax revenue source, such as the consumption-based goods and services tax (GST), the proposal is less likely to find favour with the government in addressing the severe economic impact caused by Covid-19,” he said.

Yeah Kim Leng

Yeah said capping the income tax rate at 10% would see Putrajaya obtain less than half the RM38 billion collected last year, which had formed 14% of the government’s total revenue.

He warned that this will further aggravate Putrajaya’s expectation of total revenue this year, adding that the collection forecast was already low.

“With increased spending due to the stimulus packages, the fiscal deficit will balloon if revenue shortfalls worsen,” he added.

FMM yesterday suggested the government cap the personal income tax rate at 10% to help employers and employees.

With some companies suffering a drop in revenue of up to 50%, it said cost-cutting measures such as layoffs, furloughs (unpaid leave) and job freezes may be expected in the next three to six months.

No tax if businesses go bust

Meanwhile, the Institute for Democracy and Economic Affairs’ Carmelo Ferlito said tax reductions are always welcome in difficult times such as now, with the movement control order (MCO) affecting all.

Carmelo Ferlito

He stressed, however, that such measures would have a very limited effect as long as the MCO is still in place.

“In the end, if profits are not made or if businesses are going bust, there is no tax to be collected,” he told FMT.

He had previously advocated for the MCO to be lifted in stages to kickstart the economy, with employees screened and workplaces disinfected first to prevent a possible outbreak of the virus.

He said the severe economic impact felt by all was mainly due to the MCO rather than the outbreak itself, adding that job losses can be prevented by ensuring businesses are supported

The prime minister is expected to make an announcement on the MCO this Friday. The third phase of the MCO, which began on April 15, is set to end next Tuesday (April 28). - FMT