Unrealistic, economists say on taxing the rich to cover GST revenue

While interesting in theory, economists have played down the extent to which a wealth tax on the country’s richest would replenish the government revenue lost from the abolishment of the goods and services tax (GST) some four years ago.

Talk of a GST return began after Prime Minister Ismail Sabri Yaakob said in an interview with Nikkei that the government was keen on reintroducing the consumption tax.

He said Putrajaya had limited options, and that it had lost RM20 billion in annual revenue after the tax was abolished.

Malaysia’s 6% GST was implemented in 2015 but scrapped three years later after Pakatan Harapan (PH), led by Dr Mahathir Mohamad, took over Putrajaya.

PH itself had objected to the prospect of a return, saying any move to this effect would cause a drastic spike in the price of goods.

Parti Sosialis Malaysia meanwhile said that taxing the “super rich” could bring the government RM20.52 billion in revenue.

But Veerinderjet Singh said Malaysia already has higher income tax rates for those earning RM2 million and above.

“If we start imposing much higher rates, say 40% etc, on those with higher incomes, what message are we sending if other countries around us don’t impose the same rates?” Veerinderjet, the former president of the Malaysian Institute of Accountants, said.

“Developed countries impose high tax rates on individuals as everyone needs to pay more to enjoy the benefits of a developed country. But Malaysia is not near the level of a developed country yet.”

Veerinderjet said high personal income tax rates would also deter wealthy investors.

“It may be true that if we impose a supertax on wealthy individuals, we can collect a large amount,” he said.

“But remember that we have to keep imposing that every year. Will that last?”

Logically, he said, people would then seek to invest or move their funds to other jurisdictions with lower tax rates. “Who would lose in such circumstances?”

Adding that both direct and indirect taxes are needed, he said Malaysia would eventually need to move towards a greater reliance on the latter as consumption taxes present a more stable source of revenue.

Corruption and leakage

Meanwhile, economist Ahmed Razman Abd Latiff said that many rich people have assets in the form of shares, which are assets that have yet to be realised.

He said these would be difficult to tax as the market value of shares constantly changes.

Razman, of Putra Business School, said the more important question was on the need for a new tax, whether the GST or a wealth tax on the rich.

“Is it because spending has been on the rise due to the giving of subsidies?” he said.

“If so, then perhaps targeted subsidies should be given so that only those who qualify receive them and the government doesn’t need to spend so much.”

Razman said other important issues include leakage and corruption that have not been adequately addressed.

He said any introduction of a tax would be ineffective if the country still faces these problems.

He cited data from Transparency International estimating that between 4% and 6% of the country’s gross domestic product is lost due to corruption – approximately RM50 to RM60 billion.

He said this sum could be saved if corruption is successfully handled.

‘Not a solution’

The GST, implemented to replace the sales and services tax (SST), was reportedly able to bring the government about RM40 billion a year.

Economist Geoffrey Williams said PSM’s suggestion of taxing the wealthy would only generate half of this amount.

“The rest must come from somewhere else, whether from a lowered GST rate or by maintaining the SST or by introducing another form of taxation.

“So this is not a solution,” he said, adding that the move to replace the GST with the SST had reduced government revenue by RM20 billion a year due to its smaller tax coverage.

Williams, of Malaysia University of Science and Technology, agreed that while interesting, the idea of bringing in revenue in order to avoid a GST would not work.

Speaking to MalaysiaNow, he said tax is collected whether from the people’s income or when they spend.

“In countries around the world, like in Malaysia, it’s easy to avoid paying income tax by declaring a lower amount of income,” he said.

“People don’t really reduce their consumption rate to avoid GST. So it’s better to tax them later when they spend.”

The same applies to the rich, he said, adding that it is easier to tax this group when they spend than to tax their income.

And while bringing back the GST made sense, it should not be done at this point in time, he added.

“Once inflationary pressure subsides, the GST should be part of broader tax reforms,” he said. “We do not expect major chances in taxation until the next general election.”

He said tax reforms should involve other tax reductions and make the system as a whole more effective.

“People should be given a tax number to allow a negative tax system for tax credits to people below the low-income threshold,” he added.

“This will increase social welfare and can be paid for in part with the higher GST revenue.”