Questions on fiscal policy

IN life, only two things are definite – death and taxes. Attributed to a distinguished foreign statesman, this oft-quoted phrase has proven to be correct globally.

The basic function of any tax is to meet both the developmental and operational expenditure of a government elected to serve the people. To this end, a myriad of taxes is imposed, such as personal income tax, corporate tax, excise duties, sales tax, road tax, petroleum tax, sin tax on unhealthy activities, and the list goes on.

In the more developed countries, the tax rate is high and the monies collected are used to provide services which benefit the citizens at large. In the more welfare-oriented economies, healthcare, infrastructure and unemployment benefits are prioritised.

The progressive tax regime ensures equity as those who earn more would pay more to help those who are less fortunate through a redistribution process facilitated by the state.

Abuse of tax collected for grandiose or unwarranted expenditure is a betrayal of trust. On the developmental side, expenditure on projects which improve the wellbeing of current and future generations through improved infrastructure is an example of monies well spent.

In this respect, the amount collected through tax is important as it determines how much flows back to the taxpayer, personal or corporate, in terms of benefits.

It is in this context that the recent statement that “the reduction of corporate tax is not pos- sible for this year, the next year and possibly for a couple of years” is not surprising. Blaming it on 1MDB or debt levels is a distorted perspective.

Comparisons of Malaysia’s corporate tax rate at 24% with Singapore at 17% and Vietnam at 20% do not paint a pretty picture. It is at odds with the stated objective to be business-friendly and to attract foreign direct investments (FDI). It is obvious as to where FDIs will flow.

The fundamental trade-off is that with the widening of the tax base with the Goods and Services Tax (GST), there is the complimentary step of lowering both personal and corporate tax. This is evident in our previous years’ tax regime.

Effectively, this lowering of tax increases the amount of disposable income. This fuels consumption. Unfortunately, with all the negative hype surrounding GST, this basic fact was subsumed, no thanks to irresponsible and unscrupulous parties who fuelled price hikes.

Collecting about RM21bil from SST (which is less than half from GST) obviously is fulfilling an electoral promise. The electorate were cajoled into believing that GST would be scrapped, not realising that another tax would replace it.

Already, there are admissions that some prices will go up coupled with tax thresholds being reduced in some sectors.

The key questions are: “Has the economic future of the country been compromised? Is it better to pander to retail consumers (includ- ing the irresponsible businessmen who abuse loopholes in the SST framework to either evade or pay less tax) or to reduce corporate tax levels?”

The core tenet of GST, being broad-based, is to cut down on tax evasion.

Corporates faced with high tax rates will defer expenditure on reinvestment, R&D initiatives and new investments in plant and machinery. Such expenditure, which is justifiable in a lower tax rate regime, would result in lower costs of production and increased competitiveness. At the end of the day, the electorate will benefit ultimately through lower prices and higher standards of living as there is more disposable income on hand. This is basic economics.

To what extent will prices go down? Who will be the primary beneficiaries of the tax regression to SST? How robust will the efforts to diversify the tax base be, or will we rely on high oil prices to meet revenue targets?

Will businesses lower prices with the removal of GST and how effective will the actions of enforcement authorities be in ensuring compliance? How will corporates realign their financing to remain competitive? These are the burning questions. Malaysia’s future should not be compromised with the implementation of populist economic policies. There is much more at stake. Fiscal policy has to be both visionary and far-sighted!

WALTER SANDOSAM