This article first appeared in The Edge Malaysia Weekly on October 21, 2019 - October 27, 2019
FINANCE Minister Lim Guan Eng wants to qualify for Malaysia’s new 30% top tax bracket for people with taxable income of more than RM2 million a year come assessment year 2020 (YA2020) — and if he were a minister in Singapore, he would have.
Ministers in the city state earn salaries that are among the highest — when compared with their peers in other countries — on this planet, pay cheques that they argue are necessary to prevent corruption as well as to keep top brains as policymakers and in civil service. Singapore Prime Minister Lee Hsien Loong does not get a pension but his annual remuneration is reportedly S$2.2 million (RM6.7 million). The island state’s top tax bracket is 22%, which one would hit if one’s annual taxable income is above S$320,000.
Singapore does not have a systemic fiscal deficit, having made sure with legislation that income that is not earned during a particular parliament term cannot be spent without special parliament permission.
Malaysia, which already spends over 45% of its annual revenue on salaries and pensions, has a lot to do before the country can afford to do away with taxpayers’ honesty and love for the country.
It is understood that Tun Dr Mahathir Mohamad’s annual pay as prime minister and member of parliament is just above RM400,000 while that of the finance minister is just over RM300,000. The Pakatan Harapan ministers and members of parliament took a 10% pay cut when they came into power, to do their bit for the government’s coffers.
“We’re not penalising you [for doing well]. We’re just asking you to contribute a bit more to the country. This is progressive taxation. I want to be able to pay … ministers still get our pay cut by 10%. We don’t have to, but we want to contribute that 10% … and we’re not asking for 10%, just 2%,” Lim tells The Edge.
While Malaysia’s top individual tax bracket is above that of Singapore, which is known globally as a low-tax regime, the 30% rate is the same as Indonesia’s and below the 35% in Thailand, Vietnam and the Philippines; the 40% in Taiwan and South Korea; and the 45% in China, Japan and Australia.
In fact, Lim told attendees at a Budget 2020 forum last Monday, the World Bank thought Malaysia’s marginal tax rates were low and had recommended a 35% top bracket for the country, but policymakers thought it too drastic and opted for 30% instead.
“Malaysia faces a twin challenge in that public-sector revenues fall well below comparators and the current fiscal policy has limited effectiveness as a redistributive tool for shared prosperity. As such, we welcome the finance minister’s announcement to introduce a new top rate of personal income tax at 30% as an important step in finding ways to raise revenue and, at the same time, shifting towards a more progressive tax structure in Malaysia,” Richard Record, lead economist at World Bank, says in an email reply. He did not elaborate on the 35% rate mentioned by Lim.
Singapore actually raised its top tax bracket from 20% to 22% in 2016. Taiwan, however, cut its rate from 45% to 40% this year to make itself more competitive for investments relative to low-tax cities such as Singapore and Hong Kong.
One observer argues that Malaysia remains competitive without having to cut the headline rate for all, noting that a 15% concession tax rate has been given to Malaysian talent returning after years of being abroad. Still, what of those already contributing here? Others wonder if it is right to raise personal income taxes when corporate taxes are being lowered, believing that more should be done to plug tax leakages instead of penalising those already paying taxes.
According to Lim, the government is working to plug tax leakages, including from the shadow economy. As it is, the government expects to get about RM100 million more from the 2,000 people or so in this new 30% tax bracket — who could be earning well over RM2 million a year — which works out to RM50,000 per person, on average.
“At least they see that we are using the money for a good purpose and they see that the government is saving their money by cutting leakages. Hopefully, they will find it more meaningful to pay tax and they are more willing to pay because they know the organisation is clean and they can see projects happening on the ground,” says Lim.
The two-percentage-point increase would bring in about RM20 extra from every RM1,000 taxable income above RM2 million. Someone with RM3 million taxable income, for instance, would have to pay about RM20,000 more in taxes — bringing the total tax payable to RM817,650 under the 30% bracket, compared with RM797,650 under the 28% bracket.
The additional amount of taxes received from the new top tax bracket is small relative to numbers reported in Singapore — a reflection, perhaps, of the lower average income here and a lower number of jobs paying the desired high income.
The city state’s top 20% taxpayers (each with chargeable income of over S$80,000 per annum) collectively paid S$9.8 billion in income taxes for YA2017, just over 91% of the total income tax haul.
Singapore’s top 20,877 earners alone (with chargeable income of more than S$500,000 a year each) paid S$3.7 billion in income tax. That works out to 34.5% of the S$10.72 billion personal income tax collected by the city state in 2017 and 4% of total government income that year.
Only 16.5% of Malaysia’s 15 million-strong workforce are subject to individual income tax, according to the Fiscal Outlook 2020 report. That works out to only 2.475 million individual taxpayers contributing the projected RM37.36 billion total individual income tax, or 15.3% of the projected federal government revenue for 2020.
It is understood that only about 9,000 people are reported to have more than RM1 million taxable income in the country, a figure that the Inland Revenue Board has yet to dispute at the time of writing.
Malaysia’s top individual income tax bracket was 26% for YA2014, but the income level at which that bracket took effect was much lower at RM100,000. The income level at which the top tax bracket kicked in was revised to RM400,000 when the tax brackets were revised and the top tax bracket was reduced to 25% in YA2015. The RM1 million income threshold came in in YA2016 when the 28% top bracket was introduced. It was then that the 26% bracket was brought back for those with taxable income of above RM600,000. The new 30% tax bracket takes effect at RM2 million.
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