GST is the wrong cure for our economic woes

I am stunned that both current Prime Minister Dato’ Sri Ismail Sabri Yaakob and convicted former Prime Minister Dato’ Sri Najib Razak are bringing back the idea of introducing the goods and services tax (GST) for Malaysia.

The regressive tax proposal has been pushed by neo-liberal economists and Treasury officials as early as the 1990s.

When oil and commodity prices slumped drastically from October 2014 for an extended period into 2016, Najib followed some ill-advised neo-liberal ideas to cut budgetary outlays in 2015 and 2016 at a time when the economy was badly hit and introduced the GST on 1 April 2015.

Such was the economic cocktail that helped Najib’s defeat in 2018. The new Pakatan Harapan government shelved the GST permanently.

If GST was the silver bullet for the next economic boom, there would have been boom years between 2015 and 2018 when the tax was in place. If GST was the solution to raise government revenue, it would have shown the result between 2015 and 2018, yet there was no such evidence.

Wrong cure for the wrong problem

The promoters of GST have argued that Malaysia’s tax base is too small and there are too few Malaysians – only around 16.5% – subject to individual income tax. Therefore, by implementing GST, the promoters are hoping to expand the tax base, as everyone needs to pay it whenever they consume.

But why are so few Malaysians paying income tax? Admittedly, there is some tax evasion. But, the tax authorities have enough tools to deal with it. The bigger problem here is, Malaysians are simply too poor to pay income tax. Their income just does not qualify them to pay income tax.

To corroborate this, one just has to go back to the thinking behind the introduction of BR1M in 2012. Under political pressure from Pakatan Rakyat, Najib and his then deputy Tan Sri Muhyiddin Yassin pushed for this band-aid idea to give 60% households a bit of money once a year to help tide them over. The 1Malaysia People’s Aid or BR1M is a recognition that 60% of Malaysian households are not doing well economically.

Juxtaposing these two facts – that only 16.5% Malaysians pay income tax and 60% households are deemed poor – it should be evident to everyone that GST, which taxes consumption at a flat rate, is the wrong cure for the wrong problem.

GST is regressive and a tax that kills the golden goose of consumption. The poor and low- and middle-income families pay more GST as a proportion of their income than their richer counterparts.

What the Najib administration essentially did was to pay out BR1M to 60% low-income households using the right hand, and then using the left hand to collect back a larger proportion of their income from this particular group. That was the GST.

GST and similar consumption taxes in general have been proven to trigger a sharp drop in consumption after the introduction, at least temporarily. Pushing the GST amidst high global inflation is madness, to say the least.

What should the government do?

There is no magic formula or a quick fix. The government should restructure the economic model so that in a decade’s time at least 60% of Malaysian households would earn enough to pay direct income tax.

It means we will have to create jobs that pay better. We will have to develop new sectors that create those jobs. We will need to reduce the portion of unskilled labour and go for the automation and technological upgrade route so that with less labour but more skilled workers, each worker is paid much higher for their work.

It’s about creating a middle-class society with decent jobs and decent pay.

In the long run, there are so many more alternatives to GST and consumption taxes in general. For instance, create a new, higher marginal tax rate for the top 1% to 2% of earners, so that they are on a significantly higher marginal rate compared to the middle class. Today, the marginal rate on earnings above RM100,000 per year is 21%, whereas for earnings above RM1,000,000 per year, it’s 28%. For comparison, on earnings above RM50,000 per year, the rate is 8%. This shows that the middle-class bears a disproportionate share of the tax burden.

There are also many foreign investors in Malaysia getting huge tax holidays for many years, often at a disadvantage to domestic small and middle industries. Some of them no longer deserve those tax holidays as they are no longer “pioneers”.

The Finance Minister can tell these foreign firms that to continue to enjoy tax holidays, there needs to be a new “contract”: these firms invest heavily now to upgrade technologically and increase productivity, to reduce reliance on unskilled foreign workers and to create jobs for Malaysians, and to pay Malaysians better. If not, their tax holidays would be gradually wound down.

Ultimately, when corporations are making a profit while Malaysians are doing very well in their jobs, as well as when the country has a 60% middle class society that qualifies to pay income tax, it is a virtuous cycle for all Malaysians.

The fundamental challenge facing this nation is the vicious cycle of low pay, low skill, low technology adoption and low productivity.

As a reminder to our Prime Minister today, I would like to share this anecdote. I remember whispering to the then Penang Chief Minister Lim Guan Eng while he was conducting dialogue with investors in Seoul, South Korea, on 4 June 2008 that the government of Prime Minister Abdullah Badawi announced a 40% petrol hike. We looked at each other, shocked and stunned.

RON95 price increased from RM1.92 to RM2.70 and diesel from RM1.58 to RM2.58.

Abdullah Badawi’s faltering premiership, caused by Barisan Nasional’s loss of two-thirds majority and five state governments at the general election on 8 March 2008, effectively evaporated into thin air.

Who advised Abdullah to do what he did? The chief advocate in the Cabinet was Abdullah’s deputy Najib Razak. Who benefited from the collapse of the Abdullah premiership after the fuel hike decision? Najib Razak. Who succeeded Abdullah as Prime Minister on 3 April 2009? Najib Razak. Now, who is screaming: bring back the GST? Najib Razak.

My advice for Ismail Sabri is that he should do a background check on those who fed him the idea of reintroducing GST, especially when it is a year or so before a general election has to be called.

Lest we forget, the GST is the tax that punishes the poor, kills consumption at all levels, and doesn’t increase government revenue, and doesn’t benefit the overall economy.

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