Raise taxes on super-rich instead of imposing GST

While quite a few developed nations have their highest income tax rate at around 40-50 per cent, Malaysia has been steadily reducing its income tax and corporate tax rates. No wonder we have been posting persistent fiscal deficits.

Aggravating the situation are the following:

• bloated government spending budgets,
• opaque nature of government procurement/tenders at inflated prices
• privatisation of profitable government agencies and revenue generating assets
• sale of public assets at questionable valuations
• the opaque nature of government procurement
• lopsided concession agreements (e.g. IPPs and gas subsidies)
• unjustifiable mega projects
• tax loopholes and tax havens (Do we really need a Labuan tax haven?)
• corruption and leakages and
• illicit and unaccounted outflows of funds

If all these are controlled and checked, there would be absolutely no need for GST, don’t you think?

Now, even the International Monetary Fund, which has promoted neoliberal policies in the past, concedes that income taxes for the super rich should be raised to help narrow fiscal deficits and reduce debt.

According to a report in The Guardian:

First, (the IMF) supports the idea of a financial activities tax, which would be levied on the wages and profits of financial institutions. This would be the equivalent of levying VAT on financial services, which are currently exempt. It is the fund’s alternative to the financial transaction tax.

Second, the IMF thinks it is time to do something about an international tax system that allows companies such as Google and Starbucks to pay little corporate tax. The fund says they can do this because the global tax order is mind-bogglingly complex and outdated. Instead of a race to the bottom where countries compete with each other to offer the lowest rate of corporate tax, it urges co-operation. This is not going to be easy, as the fund freely admits, but it adds: “The chance to review international tax architecture seems to come around about once a century; the fundamental issues should not be ducked.”

Finally, the fund comes out in favour of having a long hard look at whether those on the highest incomes should pay more. In some countries, the US in particular, the IMF research suggests the rich are substantially under-taxed.

But instead of imposing taxes on the super-rich and raising Real Property Gains Tax and checking bank lending to curb land speculation, the Malaysian government wants to impose a new tax on consumption, the Goods and Services Tax, which will shift the burden of taxation to the masses. The billionaires and the cronies will be laughing all the way to the bank.

Is the GST a regressive tax that will disproportionately burden the poor? Well, without exemptions for a range of basic food items, GST will be highly regressive, considering that many in the lower income group are presently below the threshold for income tax. But if food is exempted as the government says it will, GST could still be regressive but perhaps less so. Much also depends on the range of food items exempted, the level of spending of the lower-income group and the effect of the inflationary and profiteering cycle when GST is introduced. While sales tax and other indirect taxes may be removed, the savings are unlikely to be passed on to the consumer. (Remember what happened when the price of petrol was reduced in 2008?) And in future years when the GST rate is gradually raised, the burden on the poor will increase.

And if income and corporate tax rates continue to drop, then surely the gap between the rich and the poor will grow.

Really, at this point, there is no need for the GST when our income tax system lets many of the super-rich off so easily and when so many Malaysians fall below the income threshold of income tax.

As for what you think, in an online poll conducted on this blog on 16 December 2009, 89 per cent of 779 respondents were NOT in favour of the GST. So who is in favour? I suspect it is largely the corporate class and the well-off i.e. those whose surplus of income over expenditure is invested in assets and speculation (no GST there!) rather than consumption.