GST: A recipe for economic disaster

To stop fiscal policy disaster caused by GST, the government merely need to stop spending, taxing, inflating and interfering in the market economy

COMMENT

By Medecci Lineil
One of the great and striking facts of recent weeks is the growing resistance to further taxes on the part of the long suffering Malaysian public famously known as Good and Services tax (GST) or Value Added Tax (VAT).

This article hopefully will represent an Austrian economics analysis which is based on logic and praxeology (human action).

Unlike the market economy, only government acquires its income by coercive imposition of taxes. Refuse to pay your taxes and you will be thrown in jail. Where the government is there is the power to tax, for they cannot rule without taxation.

As Ludwig von Mises wrote in Human Action “The funds that a government spends for whatever purposes are levied by taxation” Or as Murray Rothbard put it in Man, Economy and State “…all state actions rest on the fundamental binary intervention of taxes…”

We have too many government activities, too much bureaucracy, too many elective officers, too many ballots, too many politicians, too many laws and too many elections. From these alone I can see the growth of government at the expense of others for their own benefit.

Every income, every activity, every piece of property and every person in Malaysia is subject to a package of taxation, direct and indirect, visible and invisible.

Probably Malaysians do not realise that government has done a wonderful public relation job. They call you the taxpayers, not victims and the taxes are somehow collected, not stolen.

Taxes are also called contributions, as if it had been a matter of free choice. I rather would regard my action to donate some money to my church every Sunday as free choice. And when there are the attacks on tax “loopholes” or “avoidance” when you are allowed to keep some of your own money. As Mises said, “it is through these loopholes that capitalism breathes.”

Taxation is the wealth destruction that we are subjected to all year long.

In regard of GST, I feel sad though when the taxpayers “victims” easily become angry with the GST proposal for the wrong reason – they simply hate the ruling Barisan Nasional, that’s it. They still love the brutal government and coercive taxation.

At capitalism camp, we have a different view. Nobody really likes paying their taxes. You have a right to what you earn and keep what you earn. Some of them want lower taxes but I believe most of them want no taxes. Real democracy comes with voluntary action not force and coercive action.

The politicians blab about spending cuts, tax cuts, fighting corruption and leakages but it is all lying propaganda in return of GST implementation.

For me, the spending and tax cut debate is more about politics than serious economics. Some say these will raise revenues by increasing economic activities thus providing government with even more money to spend.

Nothing escapes tax

Some say mega projects should be halted and free corruption before the implementation of GST. Others say lowering taxes and spending cut will simply lower revenues and increase deficits. One thing certain is the ability of government to reach in and openly extract funds from everyone’s income has reached its political limit in Malaysia.

The GST is essentially a consumption tax, a tax on the value added by each firm and business imposed on goods and services produced and sold and purchased by consumers. It is levied at each step of the way in the production process: on the farmer, manufacturer, jobber and wholesaler.

Essentially, every time a producer of goods purchases raw materials, he must pay a percentage tax. When the producer sells his goods to a wholesaler, the wholesaler pays another percentage.

The GST makes every businessman an agent of Lembaga Hasil Dalam Negeri (LHDN). In the end the higher cost of goods is passed down to consumers. So the tax is more politically efficient and insidious.

The only difference is that, before this your dissatisfaction rises and point the finger directly at the politicians in government but now you point the finger at the businessmen and trade unions.

Consumers blame the businessmen for inflation while government escapes the blame and join in to denouncing all of these businessmen for causing inflation. As a result, capitalism again has turned into a dirty practise.

From the perspective of the government, this is a near perfect tax and a revenue generating machine, I believe unmatched by any other form of taxation. Nothing escapes the tax.

It touches every stage in every process from new homes to haircuts and allows the government to keep track of every business’s buying and selling. They want to manage the details of business which is impossible.

The GST is a rare and heinous type of government policy that attacks the structure of production; they also attack the time preference rates. When we speak of structure of production, we also must refer to type of goods in production, how they are valued and used, and more important time consuming roundabout method of production for creation of a product.

Every good in a structure of production takes time and involves different sets of individual’s role. For how long a period (roundabout) of production is limited by time preference rates. Put another way, the GST has the ability to increase in real terms the prices of every good produced and sold.

Each step of each productive process with each subjective value of good becomes less efficient and in this manner, the GST necessarily decreases the material standard of living for all of a nation’s consumers.

Goods are viewed as heterogeneous instead of homogeneous. It means that different goods have varying physical features, uses and attributes to every unique individual.

Products like automobiles, laptops, LCD televisions, furniture that result in consumer goods valued much more highly by consumers than the raw inputs. These products are involved in long roundabout in which businesses and entrepreneurs tend to heavily invest capital and labour. Austrian economics recognises that there is a complex structure of production.

A house, for example, would be a consumer good, in Austrian economics, a good of the lowest order in the capital theory. Numerous goods such as wooden beams, drywall, heavy machines, cement, windows etc must be used in constructing the house.

The goods necessary to produce the wooden beams are hammer, nails and human labour. Without the hammer and nails as necessary goods, there is nothing to produce the wooden beams.

The entrepreneurs meanwhile who involve in long processes roundabout goods would find themselves in very difficult position to stay in competition especially in high living cost and recession environment.

At the other hand, middle and lower income group who wish to demand for these products become less apparent to entrepreneurs, less and less affordable to these groups.

Therefore the entrepreneurs must in an attempt to return to profitability either by decreasing or halt production of these long processes roundabout good or reducing their price to market affordability thus allowing more middle and lower income groups to enjoy them.

But, the GST would make the price reduction, impossible. During recession, the only way for such entrepreneurs facing the GST is to even more intensely halt their production of those goods – the rise of unemployment of labourers within those industries.

The GST is not just a punishment of consumption without any effect on productive efforts, it is also an attack on production as the only means of providing for and possibly increasing standard of living and prosperity.

Not only do all consumers face high prices for goods, but the introduction of GST would tend to alter market signals of consumers’ time preference rates – a proportion of consumption to savings is determined by each individual’s rate of time preference.

Again, time preference we are dealing is subjective in nature. The degree of time preference will differ from one person to person and for the same person will differ from one moment to the next.

Higher time preference is whereby each individual prefers present good to future goods. They therefore consume a greater proportion of their income and save less i.e. leads to a shortening of the period of production.

While lower time preference will tend to consume less now and save more i.e. the roundabout structure of production will be lengthened and consume more time come to fruition.

Keep it simple, children have high time preferences because they are living day to day from one to another. As they become adults, their time preferences fall as they have for future obligations. Old folks have higher time preferences.

Fiscal policy disaster
With the GST in place, it reduces our real income and presently possible level of consumption. It reduces the present incentive for future production (initiated in the past) and therefore also lowers future income (initiated in the past) and the future level of available consumption (initiated in the past). Because potential present consumption is foregone in return for an increase in future consumption.

The GST is challenging free market expression of those preferences. Those preferences that all saving is directed toward enjoying more consumption in the future and lead to a greater supply of consumer goods in the future.

The GST hits both current consumption and future consumption so to speak.

The suggestions and reasons to implement GST are laughable. It’s something like asking someone to review the method of stealing after being ‘unsuccessful’ in the previous method of stealing.

The politicians are purposely ignored and government spending is the problem. Yes, the real issue is total spending by government because all government spending also represents a tax.

Taking earnings out of the economy through taxes is always harmful. Just like in the United States and Japan recently, our politicians claim they have to implement GST to deal with deficits and debt.

With a huge of ‘stolen’ amount, RM27 billion excluding other forms of taxation, this provides a powerful incentive to raise funds by borrowing. Without taxes to pay interest and principal, a government cannot issue large amounts of debt at the expense of future taxpayers.

Politicians are motivated by a desire to finance bigger government i.e. institute programmes that distribute wealth, create dependency, create government support among dependents who fear losing their handouts from the government.

To summarise, the GST would be a fiscal policy disaster. It would guarantee that the government would cripple our people living socially and economically.

There is a very simple way of stopping this horrible outcome. The government merely need to stop spending, taxing, inflating and interfering in the market economy.

Medecci Lineil is a young Austrian libertarian who lives in Kuching, Sarawak. He is also the Association Executive of STEM States.