Raise taxes — really?

 

Raising taxes means taking money from the rakyat and giving it to the government to spend.

So when politicians say that the current tax system is unsustainable, which is code for “raise taxes”, we need to ask some hard questions.

First, do you really want to give a leaky government more of your hard-earned income?

The prime minister, auditor-general, attorney-general, Malaysian Anti-Corruption Commission, courts and many others tell us daily that there is a great deal of wastage, leakage and theft from government coffers.

Until this is stopped we simply do not know whether the amount raised from taxes is already sufficient and sustainable. If we increase taxes will they just add to the trough and be stolen?

Second, is the current tax revenue really insufficient? Comparing tax as a share of gross domestic product (GDP) needs to be nuanced.

The difference between 11.5% share in Malaysia and 14% in Thailand and the Philippines or 13% in Singapore is relatively small and actually has been affected by the lockdown when viewed over time.

It is also not correct to compare Malaysia to developed economies like the US, UK or Japan because they are very different. The UK and Japan have higher social payments due to older populations for example.

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Government income and spending would rise by RM400 billion, more than double what it is now, if taxes in Malaysia rose to the same percentage of GDP as the UK.

Third, looking at tax as a share of GDP is a ratio fallacy. Tax revenue has risen by 20.9% since 2019 but nominal GDP rose 25.3% pushed by excessive government spending. As GDP rises the tax ratio will fall which is exactly what has happened in Malaysia.

By contrast, tax as a share of government revenue rose from 68.3% in 2019 to 74.9% estimated for 2023.

Other revenue fell as a share of the total. So, the structural sustainability issue is not in terms of tax but in terms of other revenue sources.

These certainly need to be addressed. For example, income from Petronas might only last for 15 years. However, it could last for 40 years if managed in a sustainable way.

If the petroleum income tax falls then other taxes will have to rise unless alternatives can be found.

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Another error made in the recent debate in Parliament is to connect tax to debt and debt servicing.

Debt costs can be reduced through prudent debt management and the overall debt is reduced by holding down additional borrowing, paying off existing debt either steadily, in lump-sums or quietly monetising the debt.

This could be achieved in 30 years and is not necessarily connected to tax, now or in the future.

Instead of defaulting to tiered higher tax policies, the government must focus on cleaning up the current system so that we know whether taxes are sufficient or not when the wastage is removed.

Without this we do not know which taxes should be changed or what tax rates should be applied.

They must also look at other revenue sources and innovative ways of financing government commitments.

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For example, consolidating underperforming government-linked investment companies into a Malaysian Superfund and even topping up with partial privatisation of Petronas and other assets can create a new sovereign wealth fund to take many social protection costs off the current budget.

This would reduce the need to raise taxes to finance social protection.

Above all, in the increasingly competitive global investment environment, Malaysia needs to compete as a low-tax, low-intervention, vibrant, agile and innovative economy. So, the reform of tax needs to be handled carefully. - FMT

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