Yes to tax reduction

Let’s suppose, that we insist the government increases tax. For reasons we will shortly outline. Bill Clinton who recently visited Malaysia did that during his presidency. He raised taxes but much to the chagrin of the supply-siders, the American economy grew. Indeed that period of his presidency coincided with increase in productivity.

Naturally nobody likes paying taxes. They would rather have money in their own hands. But we also care a lot about the things taxes pay for. All politicians say they're for public education; almost all of them also say they support a strong national defence, health services, maintaining welfare expenses- listen to any ADUN in the state dewans- they will deride anyone questioning criticisms of deficit financing.

A result of the tax-cut proposal is that there will be a fundamental mismatch between the benefits we expect to receive from the government and the revenues government collect. If government revenues fall as a result of tax reductions, some benefits we receive from the government will have to be sacrificed. This is what economists mean when they say tax reductions must be offset with something.

We can anticipate the effects of this mismatch- some projects will be withdrawn, some spending programs canceled. The government can mask its problems for a while, by running huge budget deficits, but it, too, will eventually have to decide whether to cut services or raise taxes.

And we are not talking about minor policy adjustments. If taxes stay low , government as we know it cannot be maintained. In particular, social security in the form of welfare assistance, will have to become far less generous; health care will no longer be available as of right to older Malaysians, especially Malays. Maybe basic medical care to the poor will be regulated. If tax cuts are made permanent, will there will be enough money to pay for these things? The answer will probably be no.

In America, the reason why there is so much emotional outpouring accompanying tax reduction proposals, is that the usual victims of government’s program offloads are normally the poor. And everyone likes to champion the poor. Medical services, education, welfare programs and so forth. Because these are likely to go first when government revenues are reduced, forgoing them, spawn highly charged opposition. Usually from Democrats.

But in Malaysia, things are quite different. I don’t think, our taking positions puts us on the swing of the pendulum as in America. In America, when the government is too big, political and social pressures call for reduced government. When big business is too big and is allowed to do as it pleases like presently, society will call for control of rapacious business. In Malaysia, we have not reached a position where we gravitate according to the swing of the pendulum.

I support tax reduction, either income tax or payroll taxes( EPF, Socso contributions) and because of that, wouldn’t mind being categorised as either- a supply side economist or a follower of starving-the-beast school of thought. The beast here is the government- the bureaucracy, the little Napoleons, the cocky officers who think we owe them a living. I am for reducing taxes so that revenue for the government is reduced and that forces them to downsize. Yes, I support downsizing the government as I know , the laggards and layabouts will go first.

When we reduce taxes, there must be some offsets. Some things got to go. But why should the some things that must go be confined to those services benefiting the poor?. Why cant we give up those mega projects, the prestigious projects such as broadband services, defence spending, maybe cancel the purchase of Sukhois, give up on buying submarines and so forth? We would not quarrel if these are sacrificed instead of essentials for the poor right?