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.