This article first appeared in The Edge Malaysia Weekly on July 15, 2019 - July 21, 2019

IF you pay income taxes, you are among only 15% of Malaysia’s 15 million workforce who do so. Incidentally, personal income taxes contributed about 15% of federal government revenue last year — about half the corporate tax haul.

Being among the two million or so people in the country paying income taxes would be something of a status symbol,  if you are not an average wage earner that even tax accountants can’t do much for.

A closer look at the current rate of income taxes find that one does not need to earn very much to have two months of salary being paid as taxes. You are likely to be filling the state’s coffers two to three months a year if you earn more than RM20,000 a month. You are likely to have spent at least a month working to fill government coffers if you earn about RM10,000 a month, back-of-the-envelope calculations show.

RM10,000 would look like a tidy sum — even when the monthly take-home pay falls below five figures to about RM7,800 — given that half of Malaysians earned less than RM2,160 a month in 2016. Even among skilled workers, the median income is RM3,600 a month. Half of degree holders earn less than RM4,890 a month, data from the Department of Statistics of Malaysia (DoSM) show.

Yet, is RM10,000 really that much?

With the ringgit hovering around 4.00 to 4.20 to the US dollar — 5% to 10% below the 3.80 it was pegged at post the Asian financial crisis — there is significant dilution in purchasing power. Just across the Causeway, that RM10,000 would slide by a third — well below the city state’s median income of S$4,400 a month (including CPF contribution).

If one swapped the fairer dollar-for-dollar comparison with a direct foreign exchange conversion, at least half of Malaysians would meet the S$2,300 monthly income threshold for Singapore’s Workfare Income Supplement (WIS) programme that gives up to S$4,000 a year in aid of the older and vulnerable 20% of the workforce.

Malaysia’s relatively low-income level is also why the tax burden is concentrated among a small group and weighs on the middle-income group.

Some 30.2% of the income share went to the top 10% of households in Malaysia in 2016 — nearly the same amount that went to the bottom 60% of households, according to DoSM data. The top 10% of households’ share of income was, on average, five times the bottom 20% and 13.7 times that of the bottom 10%.

It is no surprise that a call to reduce the tax burden on the middle income was made at the ongoing consultation sessions in the run-up to the tabling of Budget2020 on Oct 11. The Pakatan Harapan government had promised that personal income tax rates would be reviewed to reduce the burden of the middle 40% (M40).

According to DoSM data, M40 households are those whose monthly income range from RM4,360 to RM9,619 and their share of income was 37.4% in 2016. Half of the M40 households have less than RM6,275 a month.

While the top 20% (T20) had a 46.2% share of income,  the bottom half of the T20 households took home RM9,620 to RM13,148 a month. The monthly household income for T20 averaged RM16,088, significantly above the median,  suggesting a higher concentration of wealth on top.

While DoSM data does not provide a breakdown for the top 1%, we can take a leaf from Oxfam, which tells us that in 2018, the net worth of the 26 richest people on earth’s net worth was equal to half the world’s population, or 3.8 billion people.

In Singapore, for instance, it was reported that the top 20% of taxpayers, with chargeable income of over S$80,000 per annum, paid S$9.8 billion in income taxes for assessment year (YA2017). Nearly 40% of that haul, or S$3.7 billion, came from only 20,877 top earners with a chargeable income of more than S$500,000 each. Singapore’s personal income tax collection was S$10.72 billion in 2017 — 14.1% of government revenue (11.8% if net investment teturn contribution is included).

Malaysia’s current income tax brackets have seen several changes in recent years. In YA2015, not only was the top bracket lowered from 26% to 25%, the income level at which one would hit higher tax brackets was also adjusted upwards. In YA2016, new 26% and 28% tax brackets were introduced but it was only in YA2018 that the 5%, 10% and 16% tax brackets were reduced by 2% to 3%, 8% and 14% respectively.

Before YA2016, one would already have hit the top 25% tax bracket with a salary of about RM35,000 a month. Now, hitting the top 28% bracket would require a monthly income of about RM85,000 or just over RM1 million annually.

Dollar-for-dollar, tax rates still look more competitive in Singapore, which is known as a low-tax regime globally. While Singapore, like Malaysia, also has 10 income tax brackets, the income level at which one would cross the 10% and 20% tax thresholds are significantly higher there.

For example, someone with more than S$80,000 annual chargeable income in Singapore would only hit the 11.5% tax bracket. In Malaysia, the equivalent in ringgit will see 14% tax. Someone earning RM10,000 a month (RM120,000 per annum) would already be in the 21% tax bracket in Malaysia; in Singapore, those with an annual chargeable income of above S$280,000 would fall into the 20% tax bracket.

Malaysia has said it wants its tax rates to be competitive regionally when it comes to investments as well as attracting and retaining talent. While it has a 15% concessionary income tax rate for talents returning from abroad, do Malaysians who have stayed all along, especially the middle-income, not deserve similar treatment?

Can government coffers afford significant changes to the income tax brackets?

At RM34.8 billion in 2018, contributions from personal income taxes are significant, making up about 2% of GDP. The personal income tax collection was also higher than RM28.9 billion in 2017, despite the 2% cut in the lower tax brackets starting YA2018, which benefitted those in the lower-middle income group more than the rest.

While the 5-year compound annual growth rate (CAGR) for personal income taxes slowed to 7.4% per annum from a 10-year average of 8.41% per annum, government data shows the absolute collection has continued to see a year-on-year rise every year since 2005.

If the estimate of RM10,000 collection per person holds true, the 486,360 individuals who disclosed their income under the Inland Revenue Board of Malaysia’s Special Voluntary Disclosure Programme (SDVP) so far would have added RM4.9 billion to the personal income tax collection, estimated at RM34.95 billion for 2019. (IRB is reportedly targeting RM10 billion collection from one million individuals from the SDVP, which is still ongoing.)

That may well provide room for the government to deliver on its promise to relieve the tax burden on middle-income professionals.

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