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Sakmongkol ak 47

Saturday 13 December 2008

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We can anticipate the effects of this mismatch- some projects will be withdrawn, some spending programs canceled.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?


Saya... 13 December 2008 at 22:18  


I'm not well-versed in economics theory, but I am wary of that payroll tax suggestion. It was suggested that EPF contributions be reduced to encourage spending and I am not sure it is the wisest idea.

Malaysians (especially the regular Alis) already do not have the benefits of well defined and well planned pension plans like the developed nations.

I think they calculate how much you need per month to live on after you retire and invest based on those goals.

Over here, I think you just take out whatever you have and nasiblah, pandai2lah budget.

Has there been any study done on our retirees and the problems they might face making ends meet in their golden years? When the retired mat sallehs are travelling the world in their twilight years, are ours struggling just to make ends meet?

I see the Singapore pension fund has many safety nets in place, like medisave, family protection, home ownership, asset enhancement etc.

Our EPF funds are used as a convenient bailout mechanisms for failures such as valuecap, and for funding government projects.

Aren't they supposed to safeguard the people's interests and investments in secure vehicles with the highest returns?

Najib says the loans are guaranteed by the govt. And who sustains the govt may I ask? Pakai duit titik peluh rakyat, bailout pun dengan duit rakyat.

I don't know, it might be a lack of understanding or ignorance on my part. Or it is because no news/transparency gives rise to so many conjectures and worries?

With regard to defense, our (nation) men and women are already ill-equipped with even the most basic of equipment like night vision googles and etc (which is what one army man told me). Maybe we have a scandal here too in the proportion of the substandard equipment for the police force (which surprisingly has died down) some of which have been highlighted already by the Auditor General. Is this the manner in which we care for the men and women who are entrusted with our safety? Not giving them a fighting chance?

And how will Sukhois and MIGs help us too when we don't even have an AWACS in place? The army has long been requesting for AWACS to monitor our expansive coastlines. and according to reports, since before the 9MP. And we have only one LST, Singapore has 4, and they built their own.

We only have defective helmets for our men and women who will fight for our nation, we have the PV biilion ringgit overrun, we have berpuluh ribu potentially and proven defective ballistic helmets which offer no protection for our forces, and we have.

Excerpt from Malaysian Defense:-

"Anyhow, it is also disheartening to find out that the army Personal Combat Equipment only included camouflaged uniform, ballistic helmet, webbing (which include water pouches, compass case, belt and patrol pack) and combat boots.Based on that list, Malaysian Defence presumes that other essential items for a modern soldier – bullet proof vest, weapon holster, goggles , NBC gear, gloves, socks, undies etc – are not considered as personal combat equipment but as optional gear based on case to case basis.
With the Armed Forces set to emulate the US military concept as reported by the New Sunday Times today, one wonders whether the additional gear would be included in the future. "

And Malaysian Defense further states that:

"In conversations with some people over the last week, it appears that most of arms procurement in the last five years have done nothing to increase our armed forces capabilities. Most of the systems purchased have serious deficiency issues mostly related to integration issues (western and eastern system incompatibility) and lack of spares and support equipment."

I have always felt that we were sitting ducks and needed to beef up our forces and make our presence felt but because defense spending has been severely misappropriated, we might as well cut down on these 'kebocoran' and redirect the funds towards more benefits for the really poor (who are actually categorised according to an unrealistically low level) and the huge number of struggling Malaysians who have an income of 3000 and below.

< RM 1000 = 8.6% of families

RM 1001 – 2000 =29.4% of families

RM 2001 – 3000 =19.8% of families

Source: Figures presented by Senator Amirsham A Aziz, Minister in the Prime Minister’s Department

I can't say what is the best mechanism to redirect the funds though to make sure it reaches those who need it.

(sorry kalau lari topic commenting on the run in the house..)

de minimis 13 December 2008 at 22:54  

bro Sak (& MT)

You have made a series of well-thought out posts. You have, in fact, allowed the rest of us to join your journey of inquiry by positing the pros and cons of no-tax-reduction and yes-to-tax-reduction. It has been a continuing pleasure to read what's on your mind in these matters.

We need to push the envelope of fiscal policy thinking in Malaysia.

You have touched on exactly the issue that is currently playing in my mind - the issue of resource allocation.

MT has a point in that the Armed Forces is short of hardware of the correct type(and, possibly, software also).

I honestly don't see how submarines have a role in M'sia's defence. I haven't read about terrorists having obtained cetaceous capabilities. So, why the need for subs?

As for Sukhois, you have more than debunked the perceived need several posts ago.

With a 2008 budget deficit of 4.8%. With a possible increase of the budget deficit to 5.5% (some predict), the RM64 billion question is - which sector of the economy needs stimulating?

Some of the commentators in your earlier posts have fretted over the tax reduction proposal on the basis that the human tendency of the higher-income groups is to stash the additional cash in savings. But they overlook the fact that corporations, particularly SMEs will have more breathing space to re-invest. This puts money back into circulation in the economy.

Between the track record of the fiscal imprudence of many government agencies and, leaving the taxpayers with additional funds from lower taxes, I prefer the latter.

Let us also not forget the very significant effect of a lower tax regime on foreign companies who will find the idea of setting up Regional HQs in Malaysia even more attractive. Lower income tax coupled with strong incentives from MITI will generate greater volumes of economic activity.

This increased economic activity will not only ameliorate, but, may completely offset the lower income tax collection. Revenue collection will then be based on higher volume of economic activity.

Of course, we need to study the proposal to reduce taxes in greater detail. It would really help if we had the resources to collate sufficient economic data to enable us to develop econometric modelling to test this proposal (just like the Singaporean economic managers do).

I hope some of us will get a chance to get studies like these going in an earnest way (with a little help from grants here and there).

Ir. Hanafi Ali 13 December 2008 at 23:05  

No taxation without representation!

What does our MPs do?

They fight not for our causes as taxpayers.

No more tax until electoral system is revamped!

Anonymous,  13 December 2008 at 23:11  

Excellent, MT.
Time for the rest of 99.99999 % to wake up and ACT (I am very proud to confess that I am one of the Bersih Strg Commitee) before Bukit Antarabangsa comes to our doorstep.

Like AK said "Perhaps about of every Ringgit, maybe only 40 sen reach its intended target. 60% will be siphoned by the many little Napoleons."

Perhaps, our AK with his 47would like to lead an economic mission and much bigger than Bersih.

Saya... 13 December 2008 at 23:13  

We need a REVOLUTION! Hahaha...

Ir. Hanafi Ali 14 December 2008 at 00:45  

Boston Tea Party, anyone?

Only this time we call it Kuantan or Pekan Tea Party.


Saya... 14 December 2008 at 09:50  

PUTRAJAYA: Reduced overtime, shorter working hours, temporary lay-offs or smaller pay packets – these are some of the suggestions made by a high-level government committee to prepare for the expected economic backlash next year.

Here Dato...high level gomen committee suggestions to employers instead of total layoffs...can we suggest drastic pay packet reduction ie cut out totally holidays allowances of ministers, 20 percent reduction in paychecks etc? Sure tak setuju.

Do we have a safety net in place or some form of assistance for laid-off workers here in Malaysia in case the employers themselves go bust? Do we have figures on the scale of potential unemployment? Lets add that to the already 60 percent consisting of dirt poor, poor and already struggling.


Saya... 14 December 2008 at 09:54  

oh, oh,oh....missed this part of the headline news:

"There is some heartening news for Malaysian employees. The committee believes the national economy will be chugging along nicely next year.

Labour Department director-general Datuk Ismail Abdul Rahim said the National Committee on the Monitoring of Retrenchment has been reactivated to compile the latest information on job losses and the performances of companies.

“The committee also discussed the outlook of the national economy. At present, it still looks good."


Betul ka Dato? Engine apa depa nak pakai? Bomoh?

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