Wednesday, December 9, 2009

GST & Tax Reform for Malaysia

In the current furore over the GST, I have been having a rethink on the tax regime in Malaysia.

1. It is not a good reason for the government to tax the people for the purpose of building a bureaucracy or to stimulate the economy. The only good reasons are: affordable or free and good quality education and healthcare for everyone, urban public transport, security and law and order.

2. If the government have to raise taxes, how can it do it most efficiently, in the sense of with minimal cost to the government but without overburdening the people to the extent that the economic growth suffers.

3. In the past, the thinking on tax was that the rich should be taxed more than the poor. The progressive income tax regime of today was designed precisely for the reason of redistributing income. The wealth tax and the property gains tax are to redistribute wealth.

4. The current fashion in tax thinking is to tax consumption rather than income. A major reason for doing this is to reduce consumption and encourage income, so that savings and investment will rise. If this is the reason, then income tax should be abolished and be replaced with the consumption tax which is a tax on both goods and services bought.

5. Abolishing the income tax is not that far-fetch an idea. Many big companies are exempt from paying the corporate income tax, for one reason or another, as an incentive to invest. It is just a matter of extending that privilege to the many small companies as well as salary-earning employees.

6. In turn, the GST can be imposed across the board, although there are many potential problems of implementation. (It creates a huge load of paperwork for many small establishments. Presumably, this can be computerised which implies the need to itemise every transaction. The GST is also subject to abuse by establishments who happy impose a service tax and a government tax. There seem to be no enforcement on extraneous charges on bills.) The poor can be compensated by increasing their allowance, if they have any.

7. The GST may not be the main source of revenue. Other sources should be explored, including taxing stock market transactions.

8. In the absence of the income tax, the government can really go into the Public-Private Partnership (PPP) by designing and specifying public projects which the corporate sector or rich individuals can offer to finance.

9. There should also be a freeing up of government restrictions on areas of entry by the private sector, such as healthcare and education, so that more of these services can be privately funded as charities or business organisations.

10. Alternatively, another way to reform the tax regime is for the government to do a 5% across the board - on corporate incomes, personal incomes, retail transactions on goods and services, stock market transactions, without exemptions for big companies. This will really broaden the tax base.


de minimis said...

Excellent points. You've put the issue of GST and tax revenue in general in its proper macroeconomic and fiscal policy context. You teach me much, Guru.

walla said...

walla said...

Perhaps the govt realizes that it is not possible to achieve high income by generating high value activities because the people and their industries are too lagging to make a difference in one year.

So they inject the consumption tax to reduce spending resulting in relatively higher savings equated to higher retention of income.

The notion of high income thus falls to higher month-end retained old income and not new additional income from more value-added activities.

Over the last few days there seems to have been some palpable defense of the proposal to introduce GST. The defense is that the the sales and service tax segments which in many cases have been embedded in pricings will be proportionately reduced when GST is introduced.

Perhaps a bonus will be given with some reduction of income tax as well, although one would think if the govt is willing to risk massive administrative costs in all sectors to make this regime transition for just an additional rm1B collection, then it may not be so eager to relax its present tax revenue standing.

The thing to consider is that there has been no assay on the question of multiplier effects across industries from multiplier effects within the GST chain.

Proponents may argue that the Lagrange multiplier test for serial auto-correlation in this case may yield insignificant results.

However it may depend on the sophistication of the economy on which the test is made.

In ours, there is no ready reassurance that the test won't yield significant results which would require a more prudent and cautious approach to its introduction - especially when we have an oil bill a-coming and tepid investment climate as immediate challenges - which will coincide with the transition.