About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

Give GST a Chance

Published in The Edge Malaysia, 3 Nov – 9 Nov 2013.

On the 24th of October 2013, when I went to sleep, I was a citizen of a country which had not yet introduced the Goods and Services Tax (GST). When I woke up, I saw a bunch of unread Whatsapp messages telling me that I was now a citizen of a country which had announced that it would introduce the GST into the economy.

In my half-awake state, my first thought was, “Oh, wow.” My second thought was, “The knives are going to come out now.”

To twist the metaphor around completely, I agree that almost every policy decision has knives out for it – no policy is unquestionably all good – but I also think we should introduce forks and spoons onto the table setting to see that there is also at least some good for a given policy. My personal take is that there are sound moral and economic arguments for the GST that should be considered by knife-holders and that some of the knives that the knife-holders carry really are not as sharp as they think they are.

From a moral perspective, I am of the camp that taxing me for a choice I make is more morally permissible than taxing me for something on which I have no choice. Thus, when I choose to buy a pair of Nike shoes, for example, the fact that I still choose to buy the luxury-good-type shoes despite knowing that I will pay a higher tax indicates that I am still willing to pay that higher tax. Otherwise, I will just purchase cheaper shoes and pay a lower tax amount. On the other hand, when income is taxed, I am being taxed even before I get to make any choices. The income tax arbitrarily takes some of my earnings away completely without my control, whereas a consumption tax like the GST takes some of my earning away as a result of the choices I make. If you prefer having more say over your disposable income, which I do, the GST holds more moral validity.

From an economic perspective, the GST is far more efficient in collecting tax revenues – badly-needed tax revenues too – than income taxes. In the case of income taxes, there is always the incentive to, shall we say, discover loopholes in the tax system whether it is to increase disposable income or, as the Pakatan Rakyat shadow budget puts it, “…to avoid paying taxes because of their unhappiness with the way the government spends public funds.” In the case of the consumption tax, if done well – and I recognize that this is a fairly big if – there is no room for discovering loopholes. You get taxed on your consumption decisions and nearly all of your consumption of goods and services has an un-loophole-able tax attached to it.

I think it is also worth trying to blunt some of the knives that are generally out whenever the GST is mentioned. The most common argument against the GST is that it is a regressive tax and so, will harm the low-income more than the middle-income more than the high-income. I think this argument is incredibly naïve. Yes, on a per good basis, the low-income group pays as much as the high-income group on taxes and thus, as a percentage of overall income, the low-income group pays more. But that is on a per good basis. The regressive tax argument only holds if you assume the consumption baskets are the same across all income levels. We know that this is not the case. For instance, the knife-holders of this argument tend to also argue that the subsidy on petrol accrues mostly to the higher-incomes because they drive more and have more cars. This therefore assumes that the spending patterns of the lower-income groups and the higher-income groups are roughly similar. So, why should this assumption not apply as well to the GST? One cannot make the “GST is regressive” conclusion and “subsidies accrue more to the rich” conclusion in a consistent manner, because the assumptions underlying both contradict each other. Thus, because consumption baskets are different, the GST is not necessarily regressive. Moreover, many of the goods which make up a large proportion of the consumption basket of the lower-income households will be made tax-exempt; this is not necessarily true of the consumption basket of the higher-income households.

A common follow-up counterargument to this point I raised is that, “But that limits the poor from enjoying the types of goods that middle-income and high-income households enjoy.” My take is that if you can only afford a RM10 meal, you really should not be consuming a RM15 meal. This is basic financial literacy – do not consume more than you earn, especially for non-durable goods. As a related side note, I am also very glad that financial literacy education will be introduced in the Malaysian school curriculum beginning 2014.

Another counter-argument raised by knife-holders, and especially well-raised in the Pakatan Rakyat shadow budget, is that GST could be the source of inflation. They make a fair point that businesses may misuse the GST to raise their prices discretionally. Yet, is that really a case a stronger argument against GST or a stronger argument for strengthening enforcement of the Anti-Profiteering Act, the Competition Act or other acts? It is not clear to me why not implementing the GST is the clear policy here versus efforts to strengthen these various acts. One can argue that it should be sequential, but even then I am not certain the argument is persuasive; you could imagine implementing both simultaneously, supposing it fits within the budget constraint.

There are other arguments which are commonly raised which have been resolved by the Minister of Finance’s budget speech – abolishment of current Sales and Services Tax, reduction of personal and corporate income tax (though one wonders if it is sufficient), statement of the types of goods and services that are GST-exempt. Other arguments raised in the Pakatan Rakyat shadow budget seem unwarranted to me such as a minimum necessary level of national household income for GST implementation or adequately wide personal income tax bands to prevent the middle-income group from “falling” into the high top tax brackets at an accelerated speed.

To address the former, there are many countries in the world with lower incomes than Malaysia which have some version of the GST – Indonesia, Vietnam, Thailand etc; if a person is to argue that you need some minimum level of income, that person must argue that the GST is ineffective in those countries as, by the transitive property, if GST works effectively in those countries despite having lower incomes than Malaysia, then the argument that the GST would not be well-timed in Malaysia due to not achieving some minimum level of income is misguided. To address the latter, I only offer an anecdotal counter-argument – I would very much like to “fall” – at an accelerated speed – from middle-income into high-income especially if I know that the personal income tax is going to decrease, so I really am fine with this inadequately wide personal income tax bands.

To close, I think the most substantive argument against the effectiveness of GST implementation in Malaysia is neither economic nor moral; it is political. Will there be sufficient political will to see it through and to properly enforce the GST implementation? Will there be ongoing commitment to ensure that the GST system is implemented fairly and without misappropriation and abuse vis-à-vis dealings with the rakyat? I sincerely hope that the answer to both questions is a resounding yes, but I think we should also be fair, on our end, as the rakyat to, with warranted healthy skepticism, objectively evaluate the arguments for and against the GST rigorously and to, if we believe the arguments for the GST are stronger (as I do), give the government a chance to show that it can implement the GST in an effective manner.

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