BY now, Malaysian economists should understand that the goods and services tax (GST) is regressive.
Poor and low- and middle-income families pay more GST as a proportion of their income than their richer counterparts.
In short, GST is a tax that kills the golden goose of consumption.
What should the government do? The government should attempt to restructure the economic model so that in a decade’s time, at least 60% of Malaysian households would earn enough to pay direct income tax.
It will mean that we will have to create jobs that pay better. It will mean that we will have to create new sectors that create those jobs that pay better. It will mean that we need to reduce the portion of unskilled labour and go the automation and technological upgrade route so that, with less labour but more skilled workers, each worker is paid much higher for their labour.
It’s about creating a middle-class society with decent jobs and decent pay.
In terms of government revenue, first of all, 2020 is the wrong year for governments to focus on increasing revenue. The world is in an unprecedented health, political and economic triple crisis not seen since the Great Depression and World War II.
And, at this stage, interest rate and borrowing cost is low.
What the government should do is to go across the aisle in Parliament and seek bipartisan consensus on some agreed long-term investments, such as green infrastructure, that would generate jobs, with a promise of no leakage and corruption.
The government would then move to raise the deficit with bipartisan consensus to borrow for those investments into the nation’s future that would create immediate jobs to deal with the crisis.
In the long run, there are so many more alternatives to GST and consumption taxes in general. For instance, create a new, higher marginal tax rate for the top 1 to 2% of earners, so that they are on a significantly higher marginal rate compared with middle-class professionals. Today, the marginal rate on earnings above RM100,000 per year is 21%, whereas for earnings above RM1 million per year, it’s 28%. For comparison, on earnings above RM50,000 per year, the rate is 8%. This shows that the middle-class bears a disproportionate share of the tax burden.
There are also many foreign investors in Malaysia getting huge tax holidays for many years, often at a disadvantage to domestic small and middle industries. Some of them no longer deserve those tax holidays as they are no longer “pioneers”. The finance minister can tell these foreign firms that to continue to enjoy tax holidays, there needs to be a new “contract”: these firms invest heavily now to upgrade technologically and increase productivity, to create jobs for Malaysians and to pay Malaysians better. If not, their tax holidays would be gradually wound down.
Ultimately, if corporations are making a profit and if Malaysians are doing very well in their jobs, when we have a 60% middle-class society that qualify to pay income tax, it is a virtuous cycle for all Malaysians.
I sincerely hope that the GST ghost will be put to rest and Malaysian economic thinkers rise to realise the follies associated with GST in the past decade.
So much time wasted on nothing just because the powers that be and many economists failed to understand that the fundamental challenge facing this nation is the vicious cycle of low pay, low skill, low technology adoption and low productivity. – The Vibes, January 24, 2021
Liew Chin Tong is DAP political education director and former deputy defence minister
