Kuala Lumpur, 9  May 2017 – Lowering personal and corporate tax rates to 15 percent could boost Malaysia’s regional competitiveness , according to a study commissioned by the Institute for Democracy and Economic Affairs (IDEAS).  The study will be submitted to the government as part of IDEAS’ contribution to preparing the national budget for 2018.

The study was conducted by Dr Dan Mitchell, an expert on fiscal policy based in the United States.  His study found that better tax policies in Malaysia would boost  economic growth as well as attract capital from abroad.

Commenting on the study , IDEAS Chief Executive Wan Saiful Wan Jan said, “At the moment Malaysia is in the middle. We cannot compare with zero-tax havens like Cayman Islands or Monaco, and our taxes are not yet as low as our neighbours Hong Kong and Singapore. However, we think that Malaysia is in a competitive position and has the potential to vastly improve if we reduce the rates of our personal income and corporate taxes.  The study titled “Malaysia’s tax system: Friend or Foe?” shows that we are doing better than even some OECD countries and some of our trade partners like China and India.  When the government introduced t he Goods and Services Tax (GST) they did the right thing by mitigating it with a reduction in income tax and personal taxes.  Now we need to go further by making our tax structures even more competitive.”

“Of course not all taxes are equally bad. If a tax policy is well developed and has a pro-market leaning, it will not impede economic growth. The types of taxes also matter. Personal income, corporate income and capital taxes are a high cost way of collecting revenue because they punish productivity, savings and investment. Less harmful taxes are in the forms of consumption based taxes like the GST or excise and property taxes. The most important thing nevertheless is to tax sensibly,” explained Wan Saiful.

“The Laffer Curve shows that if the tax rates are too high or too low, the government will lose out because they will lose revenue. A good example of this is in cigarette excise taxes in Malaysia.   While increases in the excise tax  was meant to reduce smoking, it failed because smokers just  switched from legal to illegal products.  This  has resulted in illegal cigarettes overtaking the cigarette industry in Malaysia at 52.3 percent of the market, and at the same time the government lost money because none of the illegal cigarettes are taxed.  That is why tax rates matter, and it must not be too high,” said Wan Saiful.

“On the other hand, successful tax reforms in the United States in the 1980s show how lowering personal income taxes results  in higher revenue collection from taxes. In this case, President Ronald Reagan’s decision to reduce the top personal tax rate from 70 percent to 28 percent resulted in a dramatic increase of revenue from $19 billion in income taxes to more than $99 billion in 1988.  Clearly lowering tax rates can have a positive impact on revenue, if calculated properly” added Wan Saiful.

 

READ THE PAPER HERE >>

Leave a comment