Should
the government tax the rich more and distribute the revenue to the poor? Or
rather, should the government own all the properties (factors of production) to
create an equal (or equally poor) society? The answer is, give tax breaks to
the “capitalists” in order to reduce inequality. Yes, this may seem as a case
of juxtaposition, yet it is not be necessarily so.
Inequality
matters, especially in Malaysia. Here, inequality can spark not only
inter-class conflicts, but more worryingly, inter-ethnic tensions. In Malaysia,
although the public perception on wealth inequality has only worsened, official
data has shown otherwise. Over the last decade, wealth inequality has reduced
rather significantly. In 2002, the Gini coefficient (a tool to measure income
inequality ranging from 0 to 1, with 0 indicating an equal society and 1
indicating an extremely unequal society) stood at 0.46. However, as per the
latest Household Income Survey, the Gini coefficient has dropped to 0.401.
Statistically, this means Malaysia is getting more economically equitable. On a
more interesting note, the intra-Bumiputra Gini coefficient is 0.389, the
lowest compared to the Chinese and Indian community. This is interesting as the
Gini coefficient of the Bumiputra has on average, been the highest of all three
groups in the years, hitherto.
Not
only that, to further substantiate the argument, the bottom 40% mean household
income has grown 6.1% annually from 2002 till 2012, in contrast to only 5.6%
for the middle 40% and 4.6% for the top 20% of households. Taking the figures
into consideration, one can deduce that the growing concern of worsening
inequality in Malaysia, is unjustified. However, there will always be caveats.
The statistical findings may not be entirely representative of the Malaysian
populace, as out of 6.7 million households, 81,137 households were surveyed.
This is only about 1.2%.
Now,
this article is not to argue whether absolute equality is possible or not, but
rather to highlight ways to reduce inequality and move in the direction towards
an equitable state. There are many ways to achieve equality, for example
through Marxian type state control of factors of production (which will hamper
individual liberty) and also through taxes. Even the World Bank advocates for
the use of taxes and transfers to facilitate wealth distribution within a
society. This can be best exemplified by the Nordic welfare state model, in
which high taxes are levied to provide essential services as public goods at
zero cost (although it is paid indirectly through taxes). Such model has
remarkably succeeded, registering low Gini coefficients compared to other
sovereign states.
But,
taxes alone should not be the option. The state needs to look far beyond.
Whilst welfare state concept may seem altruistic and compassionate towards the
needy, it may not be sustainable, especially during the economic cycle’s
recessionary period. This article agrees that public spending on key areas in Malaysia
such as education and healthcare needs to be increased (and means-tested at the
same time), however, over-reliance on the public purse is detrimental as well.
The need to find the middle ground is inevitable.
Therefore,
Malaysians need to discover the concept of “welfare society”, rather than too
much dependence on welfare state. Welfare society basically extends the idea
that the society itself plays a major role in re-distributing wealth. Sounds
too utopian? Pretty much, yes. As aforementioned, there is a need to find a
middle ground between welfare state and welfare society. While the government
should levy higher taxes and introduce appropriate transfers, it should also
encourage corporations and business entities to reduce inequality in their payrolls.
This is how it works. Inequality exists everywhere, especially in one’s
workplace. The senior manager of the company may pocket a high monthly salary,
but this may not replicate among the ordinary staff. In such companies,
intra-company Gini coefficient will be high.
Not
only that, there are concerns that capital owners (owners of business entities)
do not reward their employees appropriately in relative to the profits made by
the business. This concern is also justified. In Malaysia, the compensation of
employees, CE (labour cost) stood at 34.3% as of 2014. Shockingly, in 1971, the
CE stood around 33.8%. Not much difference along the years. CE needs to be
increased to more than 40% to ensure better allocation of reward for the labour
of the workforce. Some countries have even CE above 50%. A higher CE ensures
that wealth is not extremely concentrated in the hands of the “capitalists”.
This
article suggests that the Malaysian government provide attractive tax breaks and
other perks for companies that has low intra-company Gini coefficient (say,
below 0.35) and high intra-company CE (say, 40%). The figures are made-up to
simplify understanding, but should be altered appropriately according to the
current situation. Such initiatives will
help to reduce the inequality within corporations and companies, and further
complement efforts to boost equality at macro level. This measure may also help
to reduce the gender-wage gap in Malaysia that discriminates the women, if
computed for the eligibility of tax breaks. The Department of Statistics’
findings has shown that there are differences in the wage received by the women
compared to their male counterparts. In 2014, the median monthly salaries &
wages of male employees was RM1, 600 compared to female employees at RM1, 500.
The gender wage gap in 2014 stood at 5.8% compared to only 4.6% the previous
year.
However,
it has to be reminded that these measures will not create income equality out
of nowhere, but rather, it will facilitate the reduction of inequality. We have
to be mindful that the shadow economy (unregulated economy) in Malaysia is
large at about 30% of the national gross domestic product (GDP). Thus, these
measures may not produce much success under the unregistered companies.
All
in all, achieving equality in income is not about forcing the corporations to
pay more. A higher pay should commensurate with better productivity and skills.
At present, only 27% of Malaysians are categorised as “skilled workers”, having
tertiary education. And only 10.4% of the workforce are degree holders. This
needs to change. The corporations and the government need to collectively find
ways to enlarge the pool of skilled workers in favour of knowledge-driven
economy. Past evidences have shown clearly that higher education does
contribute to better income. As highlighted by Khazanah Research Institute, in
2013, those with a degree would have a median wage of RM 3,890, which is 159
percent higher than those with SPM qualification. Thus, reducing inequality
should not be a zero-sum game, but rather a win-win situation.
Inequality
in Malaysia may not be too over-whelming, but a sudden downturn in the economy
can worsen economic conditions, may create ripple effects on racial relations.
The Chinese are still seen as dominating the economy although the real
situation is, most Malaysians are somewhere in the same range of economic
standards. In tough economic times, fuelled by ridiculous racial slurs incited
by unscrupulous beings (politicians in many cases), inequality may invite
racial divide. Thus, it is pertinent that this subject matter be dealt with
great concern. Welfare society may be idealistic, but through education and
appropriate government policies, the transition to a welfare society can be
facilitated.
Nice thought.. Dividing malaysians according to their socioeconomic status maybe is a better way rather than their race and religion. But its not as easy as that. Lack of trust to other races, discrimination and etc.. Creating a bangsa malaysia is a fundamental issue that need to be settled as soon as possible, and it is everyone responsibility, from the government to the citizens
ReplyDeleteHi, this is a good effort in summarizing Malaysia's pursuit for greater inclusiveness. You certainly have touched on a couple of pertinent points, particularly the lack of educational attainment (especially at the bottom of the income distribution). This is by far, a far more pressing issue than the tax we can levy on capital income.
ReplyDeleteNonetheless, just one small point - the Household Income Survey, in which the Gini Coefficient is derived, can safely be taken as representative. No nation surveys every households. Each of the 81,137 observations sampled are attached weights (the estimated households they represent in reality). Thus far, I haven't come across much criticisms on DOSM's methodology.
Good work, keep it up!