This article first appeared in The Edge Malaysia Weekly on September 19, 2022 - September 25, 2022

WITH Budget 2023 set to be tabled in just over two weeks, hopes are up for more “good news” that usually accompany pre-election federal government budgets. That Prime Minister Datuk Seri Ismail Sabri Yaakob had considered presenting Budget 2023 himself — after bringing forward its tabling to Oct 7 from Oct 28 — was yet another affirmation that the reintroduction of a broad-based consumption tax like the Goods and Services Tax (GST) would only feature when Budget 2024 is tabled post the 15th General Election (GE15), at the earliest.

Does the likely absence of sizeable new tax income (and possible presence of a still hefty subsidies bill) mean there is no hope for a personal income tax cut?

The short answer is: not necessarily.

To be sure, the biggest cuts to personal income tax (as well as the corporate income tax rate, from 25% to 24% since 2016) the past decade had come on the back of the introduction of GST from April 1, 2015, to June 1, 2018. (GST was reduced to zero in June 2018 and replaced with the current expanded sales and services tax from Sept 1, 2018.)

When individual tax brackets were reduced for assessment year 2015 (for income earned in 2014), the then government had said the move would allow some 300,000 lower income individuals as well as those with family and earning below RM4,000 a month to no longer pay taxes. The move had also cut the tax bill by at least 5.3% for the top individual income earners when the then top tax bracket of 26% was reduced to 24%, 24.5% and 25%.

Budget 2015 did not say how much the cut had cost the government but additional tax collection likely came in when two new top personal income tax brackets (26% for income above RM600,000 and 28% for income above RM1 million) were introduced for YA2016.

Official figures for the past 15 years (2007-2021) show that the federal government only saw a year-on-year reduction in personal income tax collection in 2021 (for income earned in pandemic-stricken 2020) when receipts fell 11.9% to RM27.1 billion from RM39 billion in 2020 (see Chart 1).

This was true even when the lower tax brackets for individuals were trimmed to 3%, 8% and 14% (from 5%, 10% and 16%) when Budget 2018 was tabled in October 2017 — six months ahead of GE14 on May 9, 2018. The government had said then that this had raised the disposable income of 2.3 million taxpayers by RM1.5 billion and resulted in more than 261,000 persons no longer needing to pay tax. Individually, the bracket change for YA2018 would have resulted in RM300 to RM1,000 y-o-y reduction in tax payable, assuming taxable income remained unchanged.

Our back-of-the-envelope calculations, however, show that it had cost some RM280 million (one-fifth of the RM1.5 billion in Budget 2018) in foregone revenue for Budget 2021 to give a tax cut that the government said benefited 1.4 million taxpayers. A one percentage point reduction of the tax bracket for taxable income RM50,001-RM70,000 from 14% to 13% results in everyone with that taxable income and above it incurring RM200 less taxes for 2021, all else being equal.

Those numbers mean that it would likely cost less than RM250 million in foregone revenue to trim that 13% to 12% and benefit a similar number of taxpayers in Budget 2023.

Another RM300 million would be needed if the government also trims the 21% bracket to 20%, a move that could raise the tax reduction up to RM500 for middle-income as well as high-income earners, rough calculations show.

This may help soften the blow when swapping blanket subsidies with targeted subsidies.

The government — which mentioned the word “targeted” 12 times in relation to subsidies and assistance to vulnerable groups in the pre-Budget 2023 statement dated June 3 — has admitted that targeted subsidies are better for the country’s fiscal balance and long-term growth but has yet to set a deadline for implementation, citing inflation-related threats to economic recovery.

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz had highlighted on numerous occasions that 53 sen of every RM1 spent on fuel subsidies goes to the top 20% of households (T20) compared with only 15 sen for the bottom 40% (B40). Some RM37.3 billion or nearly half of this year’s RM80 billion outsized subsidies bill — of which only RM31 billion was budgeted — are subsidies for petrol, diesel and liquefied petroleum gas (LPG), according to data from the Ministry of Finance.

Zafrul, who in early September hosted a casual dinner and even strummed a guitar with his Singaporean counterpart Lawrence Wong in Kuala Lumpur, would know how Wong was able to tell Singaporeans when tabling Budget 2022 in February this year that the lower-income earners in the city state get S$4 in benefits for every dollar of taxes they pay compared with S$2 for middle-income earners and 30 cents for higher-income earners.

At the same time, however, Wong said every Singaporean must contribute their fair share of taxes, with the rich and those with greater means paying more, but the people cannot expect the entire tax burden to fall solely on the wealthiest 1% or 5% because “they will feel it is grossly unfair and very soon you won’t have the rich to tax in Singapore”.

To cover an expected increase in healthcare and other necessary expenses to refresh infrastructure and drive growth as the society ages, Singapore is raising taxes for the wealthy (via income, property and cars) as well as hiking GST from the current 7% (maintained since 2007) to 8% come January 2023 and 9% come Jan 1, 2024. The bottom 30% of households will be given vouchers to offset the higher GST rate.

Singapore expects to raise S$170 million more per year from its top 1.2% individual income taxpayers by raising the tax rate for chargeable income in excess of S$500,000 up to S$1 million to 23% (from 22%) and by taxing chargeable income above S$1 million at 24% (from 22%) from YA2024 (income earned in 2023). Even Singapore admits “there is a limit” to how much more the top marginal personal income tax rate can be raised given that it is above Hong Kong’s 17% and close to Asia’s average of 28%.

If Malaysia decides to lower personal income tax rates, the government may have to find funds elsewhere to compensate as there is less headway with the top bracket already at 30%. Even though there is room to market competitive real estate prices in retaining talent, the tax base is also narrower with a relatively small pool of high-income earners.

When Budget 2020 (tabled in October 2019) introduced a new 30% top tax bracket for chargeable income in excess of RM2 million for YA2020, the government said the move would impact some 2,000 top taxpayers previously paying 28% for income above RM1 million.

The 2,000 would be the top 0.09%, if Malaysia still has only 2.3 million individual taxpayers as it did in 2018. The 2.3 million would make up only 14.4% of about 16 million employed persons in Malaysia.

Personal income tax, which made up about 11% to 14% of federal government revenue between 2010 and 2018, made up a larger portion of annual income in 2019 and 2020 before collection plunged in 2021 (the assessment year for income in Covid-19-hit 2020) (see Chart 2).

As it is, someone earning RM200,000 a month (RM2.4 million taxable income) would be paying about RM633,550 — 3.17 months’ salary or 26.4% of his or her gross annual income — in taxes. Someone earning S$200,000 (S$1 = RM3.23) a month in Singapore, meanwhile, pays about S$502,150 or 20.9% of gross annual income in taxes, excluding GST. (Actual taxes paid likely lower as CPF contributions are [capped but] not taxable and there are up to S$80,000 exemptions.)

“It is never popular to raise taxes, let alone GST, but the [Singapore] government has to do the right thing to uphold the sound management and stewardship of the country’s finances,” Wong, who is also deputy prime minister, reportedly said in March when explaining why GST has to be raised because various alternative proposals “will not generate enough revenue to close [the] funding gap” or shortfall in revenue compared with expenses.

There are certainly lessons here for Malaysia, which shoulders more than RM1 trillion in debt for having covered a shortfall in revenue by spending borrowed money for more than two decades. Incidentally, Malaysia’s debt service charges of RM39 billion for 2021 alone is the size of the entire individual income tax collection for 2020 (2019 income), which is the highest haul to date.

Ironically, the RM5 billion sukuk taken by 1Malaysia Development Bhd (1MDB) with 5.75% coupon will cost RM287.5 million to service every year through 2039 — about the same as giving RM200 tax relief to some 1.4 million taxpayers by tweaking tax rates in the lower-income bracket like the government did in 2021. In 2023, on top of existing expenses, Malaysia will also need to find an additional RM14.4 billion to redeem a maturing 1MDB bond and cover the interest expense due.

It remains to be seen if the Fiscal Responsibility Act that Zafrul intends to table will prove to be a turning point for the sustainability of the country’s finances and future well-being. What’s certain is that the government needs broader sustainable revenue sources if it wants to effectively support the people and economic growth for the long haul.

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