Why targeting the rich is not the silver bullet

 When politicians run short of money to pay for subsidies, they want to squeeze the rich ‘until the pips squeak’ but this almost never works as a sustainable solution.

The Malaysian government is currently scrambling for a solution to the petrol and diesel subsidy bill that has exploded tenfold.

The most attractive political targets are “the rich”. Taking away subsidies from the wealthy feels socially equitable and satisfies public envy with “Robin Hood” economics.

However, as is often the case in public policy, the political quick fix is rarely the most effective economic solution.

First, you cannot target the “rich” efficiently or effectively. Relying on the T20 classification is flawed because a household may fall into the T20 bracket collectively but the individuals within it, stay-at-home parents or children, have little or no personal income.

Second, the MyKad, technology cannot identify these individuals at the pump and the Padu system is incomplete.

Third, factoring in net disposable income shrinks the “no subsidy” group significantly.

If the goal is fairness and efficiency, tiered pricing, like we have for electricity is better. Instead of a binary “yes or no” based on income brackets, we should make the transition to a use-based model where the more petrol you use, the less subsidy you receive.

For instance, a full subsidy could apply to the first 100 litres per month. The next 50 litres could be subsidised at 50% and the next 50 litres at 25%. Above 200 litres, the market rate would apply.

This system is naturally progressive. Low-income groups, who typically buy less fuel, would enjoy full subsidies.

Wealthy individuals with high-consumption vehicles would pay more but importantly, they are given the choice to economise.

If a T20 individual chooses to drive a fuel-efficient car or drive less, they can benefit from the baseline subsidy too. This solves the identification problem and focuses on consumption behaviour rather than flawed income data.

Broadening the debate, we see a similar obsession with taxing the T20 to pay for the subsidies. Yet, the rich already shoulder the greatest share of the burden.

The top 15% of earners contribute 80% of total individual income tax. In contrast, those earning below RM100,000 annually contribute only 14%.

When you factor in consumption taxes and investment taxes, the wealthy are already the primary contributors to government revenue.

Basic economics warns us that there is a “Laffer Curve” effect. The more you tax the rich, the less revenue you eventually collect.

High taxes act as a disincentive to work and drive talent and entrepreneurs toward low-tax jurisdictions. We risk losing the very human capital needed to make Malaysia a high-income nation.

It is time for a fresh look at revenue that moves beyond the “Groundhog Day” debate of SST versus GST. The latter, while transparent, is often preferred by businesses because they can reclaim it, ultimately leaving consumers, especially the poor, to bear the cost.

Instead, we should look at the modern reality of our economy.

Over 80% of transactions are now electronic, totalling RM1.4 trillion annually. A tiny electronic payments tax (EPT) of just 1% on both buyers and sellers could raise RM14 billion.

The rate is low because the tax base is so massive. It is easy to collect at the point of sale, nearly impossible to evade and so small that it does not distort consumer behaviour or punish hard work in the way income tax does.

The discussion on tax and subsidies is not a clear-cut choice between equity and efficiency. Rather, it is a delicate balancing act.

If we continue to rely on blunt instruments like T20 targeting, we will only create more distortions. It is time for expert input and new ideas that reflect the digital age, rather than recycling the failed economics of the past. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.