Budget 2024: Don’t tax the poor … or the rich

Unfortunately in many cases the same designers of past policies are in charge of policy design now and this is the main problem.

Geoffrey Williams, Free Malaysia Today

The government should not reintroduce GST on spending or raise taxes on incomes until wastage, leakages and corruption are under control

Many quarters are clamouring to raise taxes in Budget 2024 either through higher taxes on the rich or reintroducing the goods and services tax (GST).

This insistence on broadening the tax base does not mean fair, efficient or even necessary tax reform. It just means higher taxes for everyone.

Personal income tax is small, around RM39.3 billion in 2022, less than 10% of the government budget. Petronas funded RM50 billion so non-tax revenue is greater than personal income tax.

Around 85% came from the T20 with the M40 contributing 13% and 2% from other sources. So the T20 pay most because incomes for everyone else are too low to tax.

The T20 also pay more through SST and other spending taxes. So they are contributing a great deal when we combine the effective tax on T20 incomes and spending.

The World Bank recently estimated wrongly that tax revenue would be RM19 billion more under the GST. If this was true it is equivalent to a 4.7% increase in tax for those on the minimum wage, a 2.7% tax increase for those on median wages but only a 0.4% tax increase for the T20.

If the government switches to GST everyone will pay more tax, especially those on low-income. This is regressive which is why government policy must resist bringing more people into a wider scope of taxation and focus on raising incomes before broadening the tax base.

On the other hand, subsidy rationalisation is essential but will mostly affect the M40 and T20 groups who must be compensated as subsidies are reduced. The best way to do this in Budget 2024 is to convert the Sumbangan Tunai Rahmah (STR) into a cash transfer below a minimum threshold and reduce taxes on high earners.

Everyone below a minimum threshold would be compensated as subsidies are rationalised. The compensation would be less for higher incomes and more for lower-income groups.

Another way is to introduce tiered pricing for petrol just as we have for electricity. Those who use more pay a higher rate as the subsidy is removed gradually on bigger purchases. This is by far the best solution. It also encourages less fuel consumption and a switch to EVs in the long-term.

Above all the government is losing far too much in wastage, leakages and corruption. Until this is cut we will not see the best outcome from spending and we will not know how much needs to be raised in revenue. By cutting waste we may not need higher taxes.

Once these basic inefficiencies are removed there must be better focus on management of resources to get the best results from limited budgets. Procurement practices must be improved but also day-to-day management and monitoring needs to improve. This could revolutionise public service delivery.

The biggest change needed is in policy design. Currently policies are designed specifically to allow scope for middlemen and rent seekers. They cascade patronage through projects which are often already allocated through direct contracts before the policy is announced. The NIMP is one classic example of this.

Another example is in subsidy reforms with policy discussions focusing on e-wallets, MySejahtera, ID-based discounts and voucher schemes allowing target groups to buy only specific products from specific vendors at specific outlets. This is rife with leakages to middlemen. So even the schemes to help the poor are designed in ways to channel money to the rich.

This mentality must change in Budget 2024 so that meaningful reforms can be put in place. Unfortunately in many cases the same designers of past policies are in charge of policy design now and this is the main problem.