DM Analytics senior researcher Zouhair Rosli said that rather than re-introduce the goods and services tax (GST), the government should make the super rich pay higher taxes.
“For instance, we could introduce the wealth tax (a tax based on a person’s net worth) on the uber-rich,” he told FMT Business.
He pointed out that the cumulative wealth of the 50 richest Malaysians grew to over RM360 billion last year.
“That is almost on par with our 2023 national budget. Just 10% of that money would be enough to fund the health ministry’s year-long budget,” he pointed out.
In a revised budget tabled in February, Prime Minister Anwar Ibrahim announced that the government would allocate RM388.1 billion for operating and development expenditures.
“We are reluctant to make the rich and the big corporations pay more, for fear of capital and investment flight. But in reality, we are not taxing them enough,” Zouhair said.
The 20% of Malaysians in the top income bracket, also known as the T20, accounted for 85% of all taxes collected in 2022.
On the other hand, they will benefit the least from all the money they pay. For instance, they will soon be excluded from the subsidy system, leaving them to pay more for electricity and fuel.
But Zouhair feels that the top earners in Malaysia are still under-taxed.
“The well-to-do (group is) taxed too much? Not true. There was no increase in their tax rate (in the 2023 budget). In contrast, the ‘poorer’ (saw an) increase in their tax rate,” he added.
Why the rich pay more
CIMB Bank Bhd economist Nadia Jalil explained that under the progressive tax system in Malaysia, the amount paid in taxes rises with increases in income. “In other words, the more you earn, the higher your effective tax rate is,” she said.
This is the same system used in most countries.
According to Washington, DC-based think tank Tax Foundation, the 25% of Americans in the top pay bracket accounted for 88.4% of all federal taxes paid in 2020. In the UK, the top 10% of earners paid 60.3% of all income tax in the 2022/2023 assessment year.
Unlike those earning RM35,000 to RM1 million a year, those in the top-tier salary packets did not see their tax rates rise under Budget 2023.
Treasury secretary-general Johan Merican said this was because their current rate of 30% was already “high enough”.
In contrast to Johan’s assessment, the tax rate for the rich in the Organisation for Economic Co-operation and Development (OECD) countries was an average of 42% in 2021.
This, Zouhair said, only showed how suppressed the wage levels are in Malaysia.
He believes the T20 classification is meaningless.
“While the super-rich are lumped into this category, it also includes households with incomes of RM11,000 and living in the Klang Valley. If it is a couple, it means RM5,500 per person. Do you honestly think such a household is rich?” he questioned.
According to EPF, a couple with two children living in the Klang Valley needs to earn at least RM6,890 a month to lead a meaningful and sustainable life.
This is almost the median monthly income of the 59th percentile of Malaysian households (RM6,909) – indicating that 58% of Malaysian households, on average, earn less than that.
GST the only solution?
While Malaysia’s tax to gross domestic product ratio of 11.4% is still narrower compared with many OECD and Asia-Pacific economies, Nadia does not believe that reintroducing the GST is the only way out.
In the OECD, the average ratio in 2020 was 19.1% and in the Asia-Pacific, it was 33.5% in the same year.
“While it has been acknowledged that the GST, like any value-added tax, is a broadening measure, other options should also be explored,” she said.
One way out is to restructure and enhance the income tax system to improve collection. Either way, the government has to act soon.