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

Taxes as a Two-Way Deal

Published in The Edge Malaysia, July 2017.

In Malaysia, a discussion of current events almost always inevitably ends up with some form of discussion on taxation one way or another. Curbing property booms and speculation? Here is the Real Property Gains Tax (“RPGT”). Want to ostensibly raise money for tourism in Malaysia? Here is the Tourism Tax (but only for foreigners, of course). Of course, the most en vogue tax of the past few years is the Goods and Services Tax (“GST”), typically blamed for everything from inflation to crime to politics.

Here is the rub. If I were a betting man (note the “if”), I would go all-in on the bet that taxes, whether defined in quantum or in type, are just going to increase as we move into the future. Like it or not, the Malaysian taxation system is only going to get wider and more comprehensive moving forward after decades of, arguably, over-leniency, especially with regards to personal income taxation. After all, if only about one in ten people in the workforce pay income taxes, surely tax rates are too lenient. Unless, of course, one believes that 90% of Malaysians earn below RM3,000 a month which is anathema to the concept of inclusive growth, but that is a different discussion altogether.

I have been fortunate to be invited to be part of the Transformasi Nasional 50 (“TN50”) Circles and, in particular, the Work and Value Creation Circle which is, basically, the Economy Circle. The other Circles are Society, Governance, Lifestyle and Living and Well-Being. Now, while the Circles are still narrowing down and sharpening their ideas for incorporation into the TN50 document, one thing is becoming even more clear. The Malaysia of the future needs a lot more money. Whether it is by virtue of our demographic transition as we become an ageing society by 2040, or by virtue of ambitious goals set by the Circle members, implementing the TN50 proposal will require a substantially larger government budget than currently exists.

To be clear, even in the status quo, this notion of an even more expansive and expensive government budget would also hold. After all, as I mentioned, Malaysia will become an ageing society by 2040. The implications of an ageing society are not pretty – healthcare costs will rise significantly, public pensions will take up an even bigger proportion of the fiscal budget, more people will have to defer retirement out of necessity and so stay in their jobs which negates some of the effects of the shift from emoluments to pensions in the government’s operating expenditure

All these things – and the new stuff from TN50 – will need to be funded. Unlike the Economic Transformation Programme (“ETP”), private investment may not be a good solution here as many of the initiatives are social and public in nature – good luck finding a private hospital willing to charge a consultation fee of RM1. Hence, the money needs to come from taxes. There are many ways in which this may happen. Common ideas for increasing tax revenues are via capital gains taxes, estate taxes, inheritance taxes, even more progressive income taxes – essentially, trying to tax the wealthy.

Personally, while all these taxes have their justifications – and also certainly their disadvantages – I would like to add to the fray a progressive consumption tax where the more you consume, be it in totality or by item (as is done in India but with tremendous difficulty), the more taxes you pay. A consumption tax is desirable to me for two main reasons. First, it is a tax on choices you make – after all, you can choose not to consume that Playstation 4 if you do not want to. A quasi consumption tax is already in place. Excise taxes on cigarettes and alcohol are effectively much higher consumption taxes for those goods relative to the standard 6%. Second, the single largest contributor to environmental impact is human consumption; taxing consumption would buy humanity more time to maintain Earth as a human habitat. Moreover, governments can also introduce a carbon tax to appropriately price the social cost of one’s carbon footprint.

Whatever the taxation system of the future may look like, it will be difficult for the rakyat to accept higher taxes. This is true not just for Malaysia but for most countries. Besides the obvious need to increase incomes for Malaysians – and therefore potentially reduce the proportion of taxes paid to total income – a mind set shift is also required. We need to think of taxes as the price for government services. On the taxes supply side (i.e. the taxpayers), we need to believe that we are paying taxes in exchange for public goods such as, for instance, road maintenance, traffic lights, quality education and healthcare. Justice Oliver Wendell Holmes Jr. puts it right when he argues that taxes are the price paid “for civilised society.”

With that said, the taxes demand side also matters. If we want Malaysians to pay more taxes because they believe that their tax money is going to be used on quality goods and services, that is what the government needs to deliver. The government does not own this money – it merely holds it in trust to do what is best for the rakyat. If the government wants to raise taxes, it also needs to be disciplined and responsible.

The 2017 Auditors General (“AG”) Report threw up more instances of waste and leakages. One such case is TEKUN Nasional who suffered accumulated losses at the end of 2015 amounting to RM209 million, with total bad debts written off of RM411 million. Similarly, a new school surau in Sabah was built for RM469,960 despite the previously repaired surau being under the defects liability period, all because there was ineffective communication between the Implementation Coordination Unit (“ICU”) and the Ministry of Education. I encourage everyone to read the AG Report – there are certainly some good successes among government projects, but there are still some worrying signs of unnecessary leakages and wastages, to say nothing yet of the corruption scandals that the Malaysian Anti Corruption Commission (“MACC”) is investigating or will investigate.

Looking to the future, it is an inevitability that taxes will rise. I will submit that it is simply an outcome that the rakyat should accept, even if we do not necessarily embrace it. On our end, we should do as best to uphold the idea that taxes are the price we pay for civilised society while, the government – as de facto trustee of these public funds – must uphold its end of the bargain to provide high quality goods and services as efficiently, effectively and prudently as possible.

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