I attended the
National Unity Youth Fellowship workshop conducted by one of the leading
think-tanks in Malaysia, IDEAS Malaysia during the last weekend, which focused
on socio-economic and national unity in Malaysia. The founder of the
think-tank, Mr Wan Saiful presented his views on free-market economy or
economic liberalism as preached by the demi-god Adam Smith. He also questioned
the need to be afraid of the rich and advocated for reduction of taxes in
Malaysia.
Whilst it was a good
presentation, nevertheless I choose to differ in opinion. Should we be afraid
of the rich and reduce the taxes?
No, to both questions.
The rich or even the super-rich are “capital accumulators”, which means they
play significant roles in providing economic opportunities to the masses or as
in Karl Marx's term, the proletariat. While the government can also partake in
domestic investments to spur the economic growth, it is unsustainable as the
monies in the public purse may be exhausted in the long run as the monetary
resource should also be used to fund infrastructure developments and domestic
welfare programmes.
Not only that, to have
the government as the only economic engine would mean more revenue generation.
Knowing that revenue from commodities, namely natural resources are not
sustainable and bound to deplete, the only way is to impose taxes on all,
regardless of their economic status. But, astronomical increment of taxes will
only hurt the people or ironically, cause less tax-revenue generation as
presented by the Laffer's curve of taxation. Apart from all these, government's
intense participation in business sphere will also crowd out private investment
and “de-motivate” the private sector from engaging in economic investments.
Having said that,
private sector is very vital in the economic well-being and here is where the
capital accumulators or the rich play their role. So basically, there is no
need to be afraid of the rich or their accumulated wealth. However, it does not
necessarily mean that the rich should be taxed less. In fact, the rich should
be taxed even higher compared to now and in different forms.
As I mentioned above,
the rich are the capital accumulators. But they also have a different form of
existence in the economy. The rich are the “wealth hoarders”. Reading into
Thomas Picketty, a French economist's argument in his magnum opus, Capital in
the Twenty-First Century, it is deduced that “rate of return on capital is
higher than the rate of return on economic growth”. This effectively means, the
return from economic activities enjoyed by the rich is higher than the return
by other participants in in the economy i.e. the working class.
While the return from the capital investment
by the rich may be re-invested and further spur more economic activities, a
significant portion of this “new-found wealth” is hoarded in the form of
savings (not to mention “parking” the money in sealed Swiss banks), real
estates, equities, etc. These form of assets can be considered as
“unproductive” and have little multiplier effects on the economic growth.
Anyone with an academic background in economics can surely recall the first
“mantra” thought in class, which is “resources are scarce”. It is true, and
this applies to financial resources. When the rich “hoards” the financial
resources in these form of unproductive assets which are incapable of creating
more jobs and opportunities, it causes reduction in resources for further
economic activities to take place.
For example, Mr GK is
a super-rich industrialist. For the fiscal year of 2014, he made an extra
wealth of RM1, 000,000,000. But since he choose to “park” his money in Swiss
bank accounts and to buy four more bungalows, he is left with RM1,000,000 in
hand and this is the portion of wealth that he re-invests. This is how vast
financial resources are hoarded by the rich and contributes to the reduction of
“productive” assets that generates the economy.
This situation is
worrying as it presents more negative implications that we can imagine to the
economy. Inequality is a major problem arising from this scenario. Going by the
official records in 2009, 2012 and 2014, inequality in Malaysia as measured by
the Gini coefficient is going down. The Gini coefficient is a measure to show
the inequality of wealth between the rich and the poor. A zero coefficient
shows an equal distribution of wealth in an economy while the extreme end,
which is 1 shows the most unequal distribution of wealth. Malaysia's records
are 0.44, 0.43 and 0.42 in 2009, 2012 and 2014 respectively. Although it shows
a declining trend, the coefficients show us an unequal distribution of wealth
and that wealth is concentrated in the hands of some. As a contrast, Norway
which imposes high taxation rates, stands at 0.25.
So, the question is,
how do we solve this?
Increase Taxes and
Introduce More Types of Taxes
These solutions may
not invite the acceptance of many at the first sight. Ordinary working class
Malaysians will absolutely be fumed over such “ridiculous suggestions”. These
suggestions are not to be imposed on the low income and the middle income
earners, but rather, on the rich group of Malaysians.
Many people around the
world have always seen taxation only as a tool to raise national revenue. But
apart from that, taxes can also redistribute the wealth of a society. Official
records from Department of Statistics show that Malaysian workers' wage share
of GDP (or economy size) in 2013 stood at 33.6%. However, the employers' share
of GDP is at 64.2% and merely, 2.2% was collected as taxes.
In contrast, in 1971,
wages to GDP stood at 33.8%. 51.7% was employers’ share whilst taxes comprised
a higher share of 14.5% of GDP. To note, a higher proportion of return on GDP
is retained by the employers now compared to in 1971, due to the low rate taxes
imposed in recent times. However, I would not say that society was more equal
in wealth distribution in 1971 as the Gini coefficient was 0.513 then. So what
went wrong? The problem lies in weak social safety net of Malaysia in 1971.
My argument is, high
taxes should be imposed on the rich and the proceeds from the taxes should be
channelled to the poor in the form of social welfare programmes, targeted
subsidies and cash transfers (although the current form of cash transfer, BR1M
is not recommended). World Bank in 2014 mentioned that Malaysia's Gini
coefficient – although reported as 0.43 in 2013, after taxes and transfers, it
remains at 0.41. For OECD countries, the inequality index after taxes and
transfers is 0.32, 0.14 points less than the initial coefficient of 0.46.
This is the impact
created when high taxes on the rich are channelled to the poor through strong
social safety net programme. This is where Malaysia needs to emphasise on.
However, having said that, I do not advocate on raising the corporate taxes as
Malaysia's highest rate of corporate tax is already one of the highest in the
region. Low corporate tax is needed to entice multinational companies to invest
in production capacities within Malaysia. Low corporate taxes also prevent
home-grown companies to flee the country to invest abroad, and thus weakening
our domestic direct investment.
To substantiate this
argument, it is worth noting that Singapore's highest corporate tax is at 17%,
Thailand at 20% while Malaysia's at 24%. Indonesia recently has indicated to
reduce its tax from 25% to 17.5%. Hence, to remain competitive, Malaysia also
needs to reduce its corporate taxes and present itself as an investors' haven.
To be fair to the
Najib administration, it has done a good job in introducing GST (despite
certain flaws and silly remarks from ministers) and in restructuring the income
taxes. Compared to the previous years where above RM3,000 incomes are taxed,
from 2015 onwards, only those earning above RM5,000 will be taxed. Highest tax
income bracket has also been increased from RM100,000 to RM400,000 to focus
more on the rich. However, the highest tax rate is reduced from 26% to 25%. I
personally do not see this as a good development.
What Type of New
Taxes?
The Malaysian
government should introduce Capital Gains Tax (on equity transactions),
inheritance tax on inheritance of huge sum of estates from one individual to
another and Malaysian version of under-occupancy penalty (Bedroom Tax) on the
rich who owns huge residentials despite having small families.
Apart from that,
Malaysia should also introduce a flat-rate tax on Malaysians living abroad but hold
Malaysian citizenship. Currently, Malaysia's income taxes are imposed on income
earned within Malaysian borders, regardless of the individual's citizenship. Income
earned abroad is not taxed. Malaysians living abroad should be taxed at a
minimum flat-rate as an obligation to the citizenship and for the nation's
well-being. But of course, these Malaysians should be appreciated and allowed
to vote in the general elections without the need of returning home, unlike the
current scenario.
Taxes are not bad, but
should be imposed on the individuals with the capacity to pay. Taxes on
everyone, regardless of rich or poor, can be devil's toy. But again, high taxes
coupled with imprudent spending by the Government, only destroys the society.