July 19th, 2012 by Hafiz Noor Shams
The Prime Minister finally launched a private pension fund. I am supportive of the idea of private and voluntary pension fund, but I am not going to discuss that here.
What I find interesting rather is that contributors to the private fund are entitled to RM3,000 tax relief in a year. This raises one question: will that lower potential tax revenue for the government significantly in the future?
Consider a person that pays income tax of exactly RM3,000 in a year. Rather than pay that tax, it would be rational for him to put in RM3,000 in the private fund. The money remains his and he may even get extra returns from that. For the government, that is RM3,000 worth of potential revenue loss.
Now, the estimated 2011 income tax revenue derived from individuals was RM20.2 billion according to the Monthly Statistical Bulletin for May published by the Bank Negara. According to a report by the New Straits Times, 2.5 million individuals were expected to file their 2011 taxes. That means on average, a taxpayer paid approximately RM3,628 worth of income tax.
Of course, not everybody paid RM3,628 worth of income tax. According to the 10th Malaysia Plan, about 44% of house household earned less than RM2,5o0. Individuals within these household do not pay income tax. About 76% of household earn less than RM5,000. Households earning less than RM5,000 but more than or equal to RM2,500 may or may not pay income tax depending on who among them work. In short, the distribution of payment from taxpayers are skewed.
It is hard to link the household data to the 2.5 million expected tax filers. First, not all filers pay tax. Second, the household data assume each household has four persons in it. I would assume 2 working adults in the household. But that does not have to be the case in reality and this will affect calculation for income tax paid by the 76% household.
But, if we were to take the average blindly, if we all were rational and optimized our finances, if we were still in 2011 and if the private fund tax relief were in place in 2011, that would suggest that the government would have lost RM7.5 billion worth of income tax revenue. In 2011, the federal government suffered a fiscal deficit of RM42.5 billion, or 4.8% of nominal GDP. Without the RM7.5 billion, the deficit-to-GDP ratio would have been 5.7%.
One could take comfort that 5.7% deficit would be the maximum damage and the actual damage would be lower than that. But would still be higher than the actual 2011 deficit of 4.8% and that is the point.