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Staying competitive, but for whom?

ON 16 June 2009, the government tabled an amendment to the Inland Revenue Board Act 1995 — a minor amendment that enables the board to meet once every two months, instead of once a month as in the original legislation.

However, as is the practice in the Malaysian Parliament, when any amendment is opened for debate, parliamentarians have the liberty of bringing up issues that aren’t directly related to the amendments being tabled. It was in this context that a Parti Keadilan Rakyat (PKR) Member of Parliament (MP) argued strongly that both personal income tax and corporate tax needed to be revised downwards.

His main concern was that Malaysia’s rates for both these categories of taxes affected our competitiveness in attracting foreign direct investments (FDIs) and high-earning individuals. He quoted the rates in Singapore, which are markedly lower, and urged the government to speedily revise our tax regimes downwards.

Burdening the poor

Parti Sosialis Malaysia has major difficulties accepting this line of argument. It is not that we are so rabidly anti-business that we want to “punish” corporations with high taxes. Not at all.

Truck pushing tall pile of coins
(© Steve Woods / sxc.hu)

The issue is that the government needs revenue to run the country and to provide essential services to the rakyat. A major source of government revenue is corporate tax which contributes about 25% to total government revenue. Personal income tax contributes another 15% or so. That means a total of 40% of government revenue comes directly from the wealthier sections of society.

If this tax on the richer strata of society is reduced, then one of the following will have to happen.

One is that the government runs a larger deficit, but that is not sustainable, even in the medium term.

The second possibility is that the government cuts back on some of the basic services it is now providing such as healthcare, education and road maintenance. It can do this by either introducing new user-payment schemes, or by the outright privatisation of some aspects of these services. Privatisation, as we know, is already happening.

The third possibility is that the government pushes ahead with the Goods and Services Tax (GST).

Hands about to grab stacks of coin
The poor use a higher portion of their income to pay GST
(© Woodsy / sxc.hu)

The GST, which is also called VAT (Value Added Tax), taxes consumption and not earnings. Pensioners, people on welfare, Socso payment recipients and the unemployed will also have to shoulder a part of the tax burden when the GST is introduced.

Also, it is a fact that the poor consume almost all their income, while rich people are able to either save their income or invest part of it. This means that the portion of income from the poor that goes to paying GST would be higher than that of the rich.

For these two reasons, the GST is considered a regressive tax — a form of taxation that tends to redistribute the national income in favour of the rich and of corporations.

Staying competitive

But what then of the concern of my PKR colleague that Malaysia might lose out in the competition for foreign investors? Addressing this question leads us to two larger issues.

Firstly, what should the primary goal be of a country’s economic activity? Isn’t the main goal the provision of a decent standard of living for all the rakyat, especially those who are disadvantaged?

Surely the economy’s primary goal cannot be about making investors happy by increasing their profit margins. The reduction of corporate taxes would certainly be welcomed by corporations. So, too would the government’s policy of keeping wages low and unions weak.

But I think most Malaysians would agree that it should be “people before profits”. We should bear in mind that about 50% of Malaysian families have a household income of less than RM2,000 a month. The national economy’s priority should be about ensuring a decent level of living for everyone, especially such households.

The second issue is about the meaning of the term “independence”. We were granted formal political independence in August 1957 — after the British had seen to it that the more radical Malaysians were safely in jail or else isolated in the jungle.

Now, after 52 years of this “independence”, we find that we are still beholden to large international corporate interests if we want to grow our economy. This is one of the main reasons for our low wage policy, for our over-liberal stance vis-à-vis importation of migrant workers, and also for the slow but steady decrease in our corporate as well as personal income tax rates.

Black and white photo of Tunku declaring independence
Freedom and independence are subjective terms (public domain/wikipedia)
 

So, are we really free to decide how we wish to use our country’s wealth? Before 1957, the British colonialists ruled directly and siphoned a large portion of the country’s wealth back to their metropolitan centres. Today, the trade and investment regimes fostered by the World Trade Organisation and trade liberalisation agreements have a similar effect. The only difference being that a significant minority of Malaysians now get a better share of the cake.

Is it possible to “merakyatkan” the economy as my friends in PKR would like to do, without first challenging the stranglehold that the largest corporations have over the economies of the developing world?

These are huge issues that cannot be dealt with conclusively here. They obviously need much more debate and discussion. However, the first step would consist of recognising that a serious problem does exist. In the current balance of power, corporate interests control the international trade and investment organisations. They routinely play off developing countries against each other. Hence, the urgency to remain “competitive” even if it is at the expense of the government providing a decent standard of living for a majority of the population. Favicon


Dr Michael Jeyakumar Devaraj is a physician by training and a founding member of PSM. He is currently Member of Parliament for Sungai Siput.

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4 Responses to “Staying competitive, but for whom?”

  1. No Higher Taxes says:

    A higher tax rate can only be accomplished with a less corrupt government. I know as an individual/corporate tax payer that higher taxation needs better representation. If the government is seen taking more money from the people without more transparency and a real effort in cleaning up corruption then it will not be supported by the people or any corporations. It’s the equivalent of the government asking for more money when you have already seen the wastage. It is unsustainable and frankly naive.

    I do believe that this is the primary reason MPs in PKR and DAP will continue to argue for a smaller income tax or no change in the income taxes. A smaller income tax puts money back into the hands of the people who need it, so that companies can put that money to better use. If I had to choose between company/individual and the government at this juncture, I think that everybody will agree the money is ‘safer’ to be withheld.

  2. myop101 says:

    The government of the day should learn to be more cost effective in its operations. I read an article once which stated that our nation has the highest ratio of civil servants per capita compared to our neighbours.

    Why is that so? Shouldn’t the govt re-look at its processes to identify where to trim and streamline while ensuring better efficiency and productivity? I don’t mind the government spending more money to hire and retain good civil servants but if there are deadwoods in there, please take firm actions!

    Also, the govt should intervene by imposing minimum wage. Our national policy on labour actually set the locals versus migrant workers and this has not helped at all to raise the living standards of the locals.

  3. Thomas Mok says:

    VAT at first glance might looked like taxing the poor but the record will show that VAT will benefit the poor in other ways too.

    a) The start up costs would be lower, i.e., with VAT, there ought not be any more import and sales tax, whichever were incorporated into all things imported. Meaning, things would cost either the same or even lower, with VAT.

    b) The government will be able to get higher revenue, even with the reducing of personal and corporate income tax. With VAT, you pay what you use and inevitably, the rich will also pay more as they tend to consume more expensive items.

    c) There will be less tendency to smuggle and/or undervalue the importation of goods, contributing to less leakage in real revenue and tendency to “buy” their way out on the part of importer. Lesser opportunity for corruption is always a good thing.

    d) It is government duty to take care of the people but at the same time, the economy must be humming at maximum efficiency, a very transparent taxation will contribute a big plus to that effect.

  4. Dhanen Mahes says:

    Thomas,

    “The rich will also pay more as they tend to consume more expensive items”

    I think the point trying to be made is they can AFFORD to pay more. The poor however, despite not buying any luxury items, will have their household incomes stretched simply from buying necessities.


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