MySay: Taxes as a two-way deal

This article first appeared in Forum, The Edge Malaysia Weekly, on August 7, 2017 - August 13, 2017.
MySay: Taxes as a two-way deal
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In Malaysia, a discussion of current events almost always leads to the topic of taxation. Need to curb a property boom or speculation? There is the Real Property Gains Tax. Want to raise money for tourism in Malaysia? There is the Tourism Tax (but only for foreigners). Of course, the tax in vogue since 2015 has been the Goods and Services Tax, typically blamed for everything from inflation to crime.

Here’s the rub. If I were a betting man (note the “if”), I would go all-in on the bet that taxes, whether defined in quantum or in type, are going to increase as we move into the future. Like it or not, the Malaysian taxation system will become wider and more comprehensive going forward after decades of, probably, over-leniency, especially with regard to personal income tax.

After all, if only about 1 in 10 people in the workforce pay income taxes, surely, tax rates are too lenient? Unless, of course, one believes that 90% of Malaysians earn less than RM3,000 a month, which is an anathema to the concept of inclusive growth, but that is a different discussion altogether.

I have been fortunate to be invited to the Transformasi Nasional 50 (TN50) circles, particularly the work and value-creation circle, which is basically the economy circle. The other circles have to do with society, governance, lifestyle and living, and well-being.

Now, while the circles are still narrowing down and sharpening their ideas for incorporation into the TN50 document, one thing is becoming clearer. The Malaysia of the future needs a lot more money. Whether it is by virtue of our demographic transition as we become an ageing society by 2040 or by virtue of ambitious goals set by the circle members, implementing the TN50 proposal will require a substantially larger government budget than what exists now.

To be clear, even in the status quo, this notion of an even more expansive and expensive government budget would also hold. As I mentioned earlier, Malaysia will become an ageing society by 2040. The implications of such a society are not pretty — healthcare costs will rise significantly, public pensions will take up an even bigger proportion of the fiscal budget and more people will have to defer retirement out of necessity and so stay on in their jobs, negating some of the effects of the shift from emoluments to pensions in the government’s operating expenditure.

All these things — and the new stuff from TN50 — will need to be funded. Unlike the Economic Transformation Programme, private investment may not be a good solution here as many of the initiatives are social and public in nature — good luck in finding a private hospital that is willing to charge a consultation fee of RM1.

Hence, the money needs to come from taxes. There are many ways in which this may happen — via capital gains taxes, estate taxes, inheritance taxes and even more progressive income taxes; essentially, trying to tax the wealthy.

Personally, while all these taxes have their justifications — and also certainly their disadvantages — I would like to add to the fray a progressive consumption tax where the more you consume, be it in totality or by item (as is done in India but with tremendous difficulty), the more taxes you pay.

A consumption tax is desirable to me for two main reasons. First, it is a tax on the choices you make — you could choose not to buy that Playstation 4 if you do not want to. A quasi consumption tax is already in place. Excise taxes on cigarettes and alcohol are effectively much higher consumption taxes for those goods relative to the standard 6%. Second, the single largest contributor to environmental impact is human consumption; taxing consumption would buy humanity more time to maintain Earth as a human habitat. Moreover, governments can also introduce a carbon tax to appropriately price the social cost of one’s carbon footprint.

Whatever the taxation system of the future may look like, it will be difficult for the rakyat to accept higher taxes. This is true not just for Malaysia but for most countries. Besides the obvious need to increase incomes for Malaysians — and therefore potentially reduce the proportion of taxes paid to total income — a mindset shift is also required.

We need to think of taxes as the price for government services. On the tax supply side (that is, the taxpayers), we need to believe that we are paying taxes in exchange for public goods such as road maintenance, traffic lights, quality education and healthcare. Justice Oliver Wendell Holmes Jr puts it aptly when he argues that taxes are the price paid “for civilised society”.

That said, the tax demand side also matters. If we want Malaysians to pay more taxes because they believe that their tax money is going to be used on quality goods and services, that is what the government needs to deliver. The government does not own this money — it merely holds it in trust to do what is best for the rakyat. If the government wants to raise taxes, it also needs to be disciplined and responsible.

The 2017 Auditor-General’s Report highlighted more cases of wastage and leakage. For example, Tekun Nasional (National Entrepreneurial Group Economic Fund) had accumulated losses of RM209 million as at end-2015, having written off total bad debts of RM411 million.

Similarly, a new surau was built in a school in Sabah for RM469,960 although the older surau was repaired and was still under the defects liability period. This was due to ineffective communication between the Implementation Coordination Unit and the Ministry of Education.

I encourage everyone to read the A-G’s Report. Certainly, there are success stories among the government projects but there are also worrying signs of leakage and wastage, not to mention corruption scandals that the Malaysian Anti-Corruption Commission is investigating or will investigate.

Inevitably, taxes will rise in the future. I will submit that it is an outcome that the rakyat will have to accept. On our end, we should do our best to uphold the idea that taxes are the price we pay for civilised society while the government — as the de facto trustee of these public funds — must uphold its end of the bargain to provide high-quality goods and services as efficiently, effectively and prudently as possible.

Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division