PETALING JAYA: Initiatives in Budget 2023 to increase revenue for the country – such as the luxury goods tax and higher income tax rates for the T20 – show efforts to address inequality and the redistribution of wealth, say economists.
However, they say a consumption tax is still the way forward to broaden the country’s tax base and increase revenue streams.
While the government did not reintroduce the Goods and Services Tax (GST) in the tabling of Budget 2023 amid concerns about the high cost of living, economists say it is worth revisiting the idea once the economy is more stable.
Prof Dr Yeah Kim Leng, who is one of the five members of a special body set up to advise Prime Minister Datuk Seri Anwar Ibrahim in his capacity as Finance Minister, said Malaysia’s income inequality has risen in recent years, especially following the pandemic.
“Thus, increasing the tax rates for the topmost income brackets will help to raise government tax revenue, which is among the lowest for upper middle-income countries,” said Prof Yeah, who is attached with Sunway University.
While the increase in T20 income tax rates and the luxury goods tax do not help to broaden the country’s tax base, given the smaller numerical size of those in the upper income brackets, the revenue gains will still help to offset the tax cuts for the middle-income group, he said.
“The economic impact of the tax rate adjustments will be positive for consumption growth, given the higher spending propensity and numerically larger M40 group,” he said.
Malaysians are categorised into three different income groups – top 20% (T20), middle 40% (M40), and bottom 40% (B40).
Based on the Statistics Department Household Income and Basic Amenities 2019 survey, the T20 are those with monthly household income above RM10,960, the M40 between RM4,850 and RM10,959, and the B40 less than RM4,850.
Prof Yeah said there is now wider acceptance – including in the business community – of the need to reintroduce the GST, as it will greatly strengthen the government’s tax revenue base and enhance the country’s fiscal resilience.
“The government will be in a better position to implement it after putting in place a sound framework that addresses the various shortcomings encountered when it was first implemented in 2015.
“It is also best implemented when economic and financial conditions, including inflation, are more stable,” he said.
Prof Dr Chung Tin Fah of HELP University said the government has to strike the right balance in taxing the rich and that it has to be benchmarked against other countries.
“If not properly done, it will create capital outflows. The rich will try to preserve their wealth by going to tax havens.
“As long as the message of addressing income equality is there, it is good enough,” he said, adding that the list of luxury items should also be widened to include assets and properties.
Prof Chung also said that taxing the rich too much is a disincentive for growth, while growing the economy is the best way to help the poor and collect more revenue.
Broadening the tax base is therefore the best way, as is focusing on economic growth through foreign direct investment to provide jobs.
He also suggested looking into the gig and underground economies to broaden the tax base as well as reintroducing a consumption tax.
“Consumption tax is the best way to collect more revenue. Whether it’s GST, sales and services tax (SST), or value-added tax (VAT), these are names we can modify to get the idea across.
“A less painful way for resource-rich countries is the tax on commodities and land,” he said, adding that government auctions of land in land-scarce countries like Hong Kong and Singapore have netted the government a lot of revenue.
Tax revenue from commodities has helped the Norwegian and Australian governments implement a socially desirable and distributive policy.
“These countries have very good social insurance schemes to help the poor and unemployed. We can learn from them,” he said.
Prof Chung reiterated that growing the economy is the best way to help the poor, as handouts will only be temporary and are also a disincentive.
“A better way is to provide incentives for job upgrading and skills development. The government can pay for their tuition fees, and a better organised Human Resources Development Fund (HRDF) will help matters,” he said.
On Budget 2023, Prof Chung said it will be subjected to many constraints and uncertainties, both global and domestic.
