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Sakmongkol ak 47

ariff.sabri@gmail.com

Tuesday, 9 December 2008

Tax Cuts and the Economy(3)

Now I come to the final part of the story about tax cuts. So far I have put forward some arguments I think are relevant when considering tax cuts. My concern is tax cuts have little influence on stimulating the economy. The other concern is how do we offset the tax cuts?

When the tax cuts ultimately are paid for, the costs will be very large and the choices difficult, especially given the bleak long-term deficit outlook. Once the tax cuts are fully in effect, their annual cost will be equal, in today’s terms, to the entire annual budgets of many government departments. It would be instructive for those economists at MOF, EPU to measure the tax cut costs to annual budgets in the ministry of Education, Home Affairs, Housing and Local Government, either individually or combined. If the tax cuts are extended without offsets, improving the budget such as attempting to balancing the budget, will require cutting welfare benefits to a large portion of the population( mostly Malays), cutting defense budget( possibly cutting off brokerage commissions), cutting helalt care( again affecting the poor), or every other program by the ministries of defense, Health, education and generally, programs to assist the poor. For most Malaysians it would seem going and keeping the tax cuts at the cost of implementing any of the above options would be a bad bargain.

Even if the tax cuts’ costs are eventually paid for through a more balanced package of spending reductions and progressive tax increases, data from the Tax Policy Center show that, on average, the bottom four-fifths of households will lose more than they gain from the combination of tax cuts and the financing for them. That is, once the need to pay for the tax cuts is taken into account, tax cuts are best seen as net tax cuts for the top 20 percent of households, as a group, financed by net tax increases or benefit reductions for the remaining 80 percent of households, as a group. Meaning, the poorer population is paying for the good living of the richer population. No wonder the son of Nazri Aziz, DS Najib and others are enjoying life.

6 comments:

de minimis 9 December 2008 at 20:53  

Sak

This 3-part series is sterling work. I surmise that the reach of this has left everyone speechless which accounts for the dearth of comments :D But not me, I never let the opportunity to give inane comments pass :D

sakmongkol AK47 aka Mat Tomoi 9 December 2008 at 20:57  

de minimis,

thank you bro. but i am actually building a case for tax cuts. this 3 part series is meant to provoke only- haha. thanks again

mekyam 10 December 2008 at 03:36  

hi sak, de minimis et al,

me, i'm speechless because my layperson vocab prohibits anything halfway intelligent, economicswise. :D

i think i speak for many of those who read sak, de minimis, walla, etheorist (and other erudite visitors who contribute with really germane comments and insights) if i say that we are certainly not disinterested nor unappreciative.

many, i think are like me. we are avidly following and in the process are getting better educated on the relevance of our little selves in the grand scheme of things economics. it's just that we find ourselves inadequate to join in. [speaking for myself, heck, i cannot even come up with the great points icarius raised in response to "Tax Cuts and the Economy(1)" and s/he said his/hers were just man-in-the-street observations.]

in any case, please don't let the lack of verbal engagement regarding this important matter by the rest of us plebeians deter the discussions, ladies and gentlemen. it's too important and too pertinent.

maybe i can offer a layman observation of my own. it may or may not have direct relevance to the topic under discussion, but just to show that i'm paying attention. ;D

it's regarding what really happens to the increase of disposable incomes of middle and lower- income groups in the event of state adjusments, whether in the forms of tax cuts or pay rises or tax refund stimuli.

what i constantly heard/read about when such an exercise took place in malaysia is that retailers and wholesellers would straightaway exploit the situation by increasing prices of their goods and services. often these are on staple goods and other daily necessities.

so if the government fails to impose some sort of control on the price hikes first (or simultaneously) before introducing measures to put the needed funds in ordinary folks's hands, whether or not this eventually helps with balancing the government deficit, it will certainly do zilch to help the ordinary folks with their economic ills.

Icarius 10 December 2008 at 10:44  

Hi all,
Apologies to Dato' Sak for digressing from tax cuts.

Regarding what Mekyam said about retailers exploiting price increases in commodities as an excuse to increase prices for everything else.

Price controls are difficult to practice and may require too much administration and enforcing.

There can be a simple solution if the government can find a way to operate a large retain chain. Imagine if one of the hypermarkets is government (or NGO) controlled where any profits will be ploughed back into society.

This chain has little profit motive other than continued existence. And being controlled by government or a proper NGO, will be able to control prices and yet be commercially viable.

I think Singapore's National Trade Union Congress(NTUC) operates a NTUC Supermarket that does something along this lines.

And I'll propose the same for other common services including petrol, private medical care, bookshops, banks, etc.

Using this model, the government controls not by imposing a ceiling or floor price, but by practicing the price via its own outlets, and letting the public decide where to shop.

Then we have a freer market, (e.g. Shell Stations can decide to raise or lower their selling price) while the consumer is still protected (by Petronas which offers it at the 'fair' price).

Of course, there is the complication of how do we get the government or an NGO to run a retail chain effectively. But that is a management issue. Not a political one.

icarius-outsight.

Navi 10 December 2008 at 13:38  

Icarius,
I like your thinking. Remeber the time when government owned TNB, Waterworks and Telekoms. Power, water and telecommunication services were cheap then. Privatization has taken a toll and under the guise of development, these privatized companies are making millions at the expense of the nations poor.
I am no economist. I would support a tax cut simply because it would put a little extra money in my pocket. From past experience, I would say such would be a futile act of giving extra to the poor man in the street, as it is known that the business community would suddenly increase the price of every goods on excuses that belies reasons.
A suggestion for government or people owned retail definitely appeals.

Anonymous,  10 December 2008 at 16:13  

If you go to the blog of My Bru Cafe,you can view some photographs of Dato Nazri Aziz's son (in the older post) having a very gala time.And yet every top politician wants to pretend to be pious!Anak sendiri pun tidak boleh jaga.How to be a good leader then?So face it!Don't judge only KJ!Almost all the top politicians have their ugama thing topsy turvy!I said almost!

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