Categories
Economics

[2568] Will government revenue fall with tax relief associated with private pension fund?

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.[1] According to a report by the New Straits Times, 2.5 million individuals were expected to file their 2011 taxes.[2] 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.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — KUALA LUMPUR: AROUND 2.5 million Malaysians are expected to submit their taxes through e-Filing system this year. Inland Revenue Board public relations officer Masrun Maslim said this was an increase of 28.87 per cent compared with last year. [More taxpayers opting for e-Filing. New Straits Times. March 17 2012]

[2] — See the May 2012 Monthly Statistical Bulletin at Bank Negara Malaysia. Extracted on July 19 2012.

By Hafiz Noor Shams

For more about me, please read this.

2 replies on “[2568] Will government revenue fall with tax relief associated with private pension fund?”

Hafiz, if I’m not mistaken the RM3000 would be a tax relief and not a tax rebate (as is the case for zakat). Under those circumstances, the RM3000 reduces your taxable income, and not taxes owed to the government directly.

Adding the assumptions that all taxpayers avail themselves of this relief and that the relief doesn’t change the incidence of tax (i.e. it doesn’t move you out of your effective tax band), that puts the upper bound on revenue loss at RM1.125 billion.

In practice, I suspect the revenue loss number will be much smaller. For high income earners for example (>RM100,000), the effective benefit would be about RM780 per year, or RM65 per month. For those below the RM100,000 annual income threshold, the approximate benefit would be RM450 per year, and just RM37.50 per month. Nice incentives, but not exactly enough for people to start queuing up for these schemes.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.