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Sakmongkol ak 47

Friday 12 December 2008

I support Tax Reductions.(1)

I promised a fellow blogger, de minimis, that I will be writing why I support tax cuts. That despite my 3 part postings that support direct spending by the government. That however is purely from a theoretical viewpoint.

My support for tax cuts is derived from the following factors:-

Responses from my blog posts about effects of direct government spending and tax reduction appear to confirm these nagging suspicions:-

1. First, there are lingering doubts whether the government is serious about transparency and above board dealings. Narrative evidence and general perception, see that the government is just posturing on its declaration to be honest, above board and transparent in its dealings. Because of that, direct government spending via various departments, all the pejabat tanah dan daerahs, through state development offices and other GLCs will never reach the rakyat. Perhaps about of every Ringgit, maybe only 40 sen reach its intended target. 60% will be siphoned by the many little Napoleons. Thus direct government spending is nothing but an opportunity for corrupt officers to make hay while the sun shines.

2. Second, there is general distrust in the government. When this is prevalent, people will vote to have money into their own hands and elect in turn to spend according to their decision.

Therefore the standard textbook explanation of tax cuts being the better stimulant for our economy, becomes particularly true for Malaysian and Malaysians. Tax cuts improve the economy by giving the people more spending power and higher consumer confidence which leads to them spending more of all of their income which leads to more jobs, more business investment in more efficient technologies, and ultimately higher GDP growth.

Less taxes (as a percentage of earnings) going to the government coffers and more staying in the pockets of average taxpayers always has a positive effect on the overall economy and allows a vibrant free democracy to thrive and grow. We want more democracy so that we can kick out those hangers on and leeches that sap the economic resources of this country. I think the people have had enough of being at the receiving end of the machinations of politicians and officious and cocky government officers.

Remember that money the government uses to spend is not their money. It is the people's money that they take from us through various taxes. Lower taxes on the manufacturing, service and business sectors allows them to spend more money on their business and create more jobs. More revenue through taxes as a result of this increased commerce allows the government to maintain or even increase spending on precious social programs and health care. The resulting increased revenue allows a responsible government to borrow less money or even reduce government debt, relieving pressure on currency supply and interest rates, resulting in lower interest rates, which is good for everyone. Lower tax rates are a classic case of 'less is more' and any good government should always be searching for ways to reduce taxes and spending. It's your money.


Icarius 12 December 2008 at 19:12  

Hi Sir,

I am perhaps one of those that knows nothing about economics and yet insist on putting forth my views and hope that the experts are not too knowledgeable to consider the ignorant man-on-the-street.

Tax reductions may have a tendency to promote growth. And growth is needed when we want to .. erm.. grow. And in order to grow, there must be demand. I think you have mentioned all these points in your posting.

Tax reductions however, gives more money to those already with money. And these above average income earners and corporations may or may not spend the money, because, as you have rightly mentioned, people are cutting back, and companies are cutting back. More money to them would mean more money in their cash reserve, and probably not investments.

It is probably those that are not in the taxable group and those on the lower tax payers that needs a boost.

At the same time, I agree with with the idea that we will prefer to have the money in our hands. Not only that we can 'control' it, but that if we spend it, it will probably be translated directly into demand at the consumer level.

Infra and such are good growth promoters when demand is present because it facilitates the delivery of supply to meet demand. (hope I am not changing the proper economics meaning of such words, and apologies if I did). If the traffic is light, a bigger highway may not help.

Without demand, infra development will merely be spending that will mostly go to a few Malaysian business people and a large number of foreign construction workers.

Perhaps there is a more direct way to "distribute" money to the masses, and preferably to those that need it most?

Could the government for example, send a check for RM200(or whatever the amount) to every school-going child?

This will probably get some money into the people who need it most. Of course, this is a silly suggestion, but maybe someone can develop this silliness into something pragmatic? (Idea stolen from the way they gave RM625 to car owners).

On the part regarding demand, my blissfully ignorant view is that perhaps we are in a state of over-production, and this state has to be corrected.

What I mean is that I already have a car. I am not going to buy another car, no matter how many proton and mercedes is going to make. Anyway, if I do buy, I'll have to sell my current car first, which means I need to find a buyer. And most people already own cars, so they are not buying.

Will be more than happy to learn if someone would further explain so that I can have a better layman's perspective on this.



de minimis 12 December 2008 at 20:29  

bro Sak

One salutary effect of tax reductions is a signal that the government wants to downsize.

It also signals that the government wants to get back to its "core business" i.e. governing,regulating and policing to ensure that all citizens and residents have a safe and orderly environment to live their lives.

The role of government in fiscal policy should be to direct the allocation of the country's economic resources towards activities that will ensure optimum welfare for all citizens.

If governments are too actively involved in investing in economic sectors, directly in the form of statutory bodies entering joint ventures or, indirectly, in the form of MOF Inc GLCs - the government becomes distracted from its core business of governing. In fact, it has a clear conflict of interest. This may explain why there are so many "leakages" in the economy.

This directly affects the issue of whether there will ever be a political will to implement tax reductions.

Ariff Sabri 12 December 2008 at 20:39  

i will try to find some answers on the questions you posed.

de minimis,
bro...what you have said are hopefully covered somewhat in my part 2. already completed but i have refrained from posting yet. too much can be off putting you know.

Saya... 12 December 2008 at 22:04  

The only way to a vibrant democracy would be a more participative democracy. Ours is more representative no? Correct me if I am wrong.

I posted some links on the US and European citizens' initiatives that allow for direct participation and ability to somewhat control our destiny.

from the wikipedia (for summary's sake):

Participatory democracy strives to create opportunities for all members of a political group to make meaningful contributions to decision-making, and seeks to broaden the range of people who have access to such opportunities. Because so much information must be gathered for the overall decision-making process to succeed, technology may provide important forces leading to the type of empowerment needed for participatory models, especially those technological tools that enable community narratives and correspond to the accretion of knowledge. Though the limitation of participatory democracy to only be effective in small groups is also an area of study. No one has yet discovered how to link such a style to the national decision making process or how to make this effective on a large scale.[1] Translation of such small but effective participation groups into small world networks is an area currently being studied.[2]

Saya... 12 December 2008 at 22:06  

(menyibuk lah suri rumah nih! heh heh... geramlah Dato...depa ni tak berubah2! we must find a way to make some change, otherwise kita macam ni je la sampai bila2!)

Saya... 12 December 2008 at 23:03  

I'm not a proponent of total western-style democracy though, but I feel some examples are worth exploring.

Specific concepts of consultation (shura), consensus (ijma), interpretation (ijtihad) are not foreign to western democracy. The major difference is that "political" Islam rejects popular sovereignty and subscribes to the sovereignty of God.

Ariff Sabri 12 December 2008 at 23:10  

m'sian tigress,

you are beginning to sound like a very serious intellectual type. takut cannot cope up pulak. of late you have been posting some heavy staff. must alert walla

Ariff Sabri 12 December 2008 at 23:15  

takut we cannot cope up with you--maksud nya.

Saya... 12 December 2008 at 23:18  

Aiyo, where got intellectual?

All information freely available meh!

mamasita 12 December 2008 at 23:26  

Hai MT,you ni makin lama makin pandai comment.I don't understand much sebab I 'kurang membaca' but I am so proud you tahu macam2 sis,walaupun sekadar surirumah tangga!Wallah!

Mekyam and you boleh form a club lah!
Rugilah Husam tak tanya buah fikiran you!Belum kenal kepala otak you yang terror ni oi!Kan A Tabib? Shall we drive her to KB to meet up her idol?haha

Saya... 12 December 2008 at 23:31  


Some of my comments include quotes or extracts from experts whose names i mentioned, so you may have gotten confused. I separated them with quote marks je. Tak tau macam mana nak bold atau italicise in this comment form to show the difference clearly.

Saya... 12 December 2008 at 23:31  

mamasita! me up! tapi bini dia nak letak mana? kah kah kah...

mekyam 13 December 2008 at 02:24  

sak, icarius (and de minimis),

perhaps the way to go, instead of tax cut/reduction way, is the stimulus payment way a la what the US did. [check out "Economic Stimulus Act of 2008" at Wikipedia]

the rebates should go only to low- and middle-income taxpayers. this means the money will not only go directly into the hands of those who need it most but also those who will spend it right away, thus plonking it right back into the economy.

A Tabib 13 December 2008 at 05:07  

Thanks, AK, for the series of very meaty posts. I've been keeping quiet because I've been chewing them - very slowly I must say, but so far, so good.

You're doing us non-economists who are trying to get our heads around a very complex subject a great service with the posts. Malaysians need to understand the disaster that's about to hit us so that we can respond to it better.

I've some questions but I'll wait until you've finished. I don't want to put you in a spot but it'll be good if we can have a Q and A at the end of the Tax series.

A Tabib 13 December 2008 at 05:08  
This comment has been removed by the author.
A Tabib 13 December 2008 at 05:43  

Mamasita Moi? MT punya pasal I'll drive Husam down to KL, banjir or no banjir...tapi kalau wife dia nak ikut macam mana? haha

A Tabib 13 December 2008 at 06:24  

Beg pardon, AK, but this busybody is feeling chatty this morning.

Tigress you said,

Tak tau macam mana nak bold atau italicise in this comment form to show the difference clearly.

Perhaps Tim Berners-Lee's friend, Dave Raggett's Markup Guide can help. The page looks intimidating but it's not all that hard. Raggett's tutorial makes sure of that.

Saya... 13 December 2008 at 07:44  

Thanks Doc...wah early bird ah?

Navi 15 December 2008 at 12:17  


A breathe of fresh air; that's your perspective on the economic remedy, which you are so apt. Your clarity in the weakness of the government in not acting against the leaks in the plumbing of our financial management, and the ability of the little Napoleons to continuously enrich themselves at the expense of the poor, the billion dollar projects implemented without study or care to provide millions in commissions to individuals or groups in the ruling union of parties provides the answers.
Stop the leaks, the pilfering and the vultures and the government might be able to save close to 40% on the expense account which could be used for the welfare state that we clamour for. Tax cuts will be acceptable then.

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