Tax the Malaysians More

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.