February 15th, 2017 by Hafiz Noor Shams
One of the better things Malaysia experienced on the policy front is the abolition of fuel subsidy and the introduction of targeted/conditional cash transfer as a replacement.
While the mean-tested nature of the transfer has been less the ideal (due to loose conditions) and appears uncorrelated to what the subsidy would have been (its discretionary nature means the transfer policy is increasingly digressing from its original purpose), the policy is still better than the very costly and inefficient subsidy regime Malaysia had. I have advocated the shift from subsidy to cash transfer for a very long time now, and I still support it.
But cash transfer should not be the end of progress. Perhaps the next step is to push the conditional cash transfer towards a more rule-based approach. In that spirit, I think the next step is the introduction of negative income tax system to replace the cash transfer system that we have now.
A negative income tax system works like this: it pays a registered taxpayer money if the person earns below a certain income level determined by the government. One easy benchmark would be the minimum wage level (in doing so, it could make minimum wage policy obsolete). The size of the payment could be a portion of the difference between the determined level and the person’s income.
In short, if you earn below that benchmark, the government pays you some money. If you earn above it, you pay tax. A brief introduction to the policy is available at the Library of Economics and Liberty.
The current cash transfer program Malaysia has, BR1M, has some resemblance to the negative income tax. Those earning below a certain income threshold get the cash transfer. Negative income tax does the same thing, but more.
It goes further by institutionalizing the cash transfer arrangement and eliminates the latter’s discretionary nature, which is susceptible to corruption in its widest sense. It guarantees the payment will be paid out every year based on transparent formula. There will be no grand announcement about the payments by ministers, party members, leeches and definitely no more mock-checks and unnecessary conflict of interest/suspicious handover ceremonies.
The institutionalization also brings about one thing: a real basic income for all Malaysians. It is also an automatic stabilizer for the economy, which means in case of economic troubles, the urge for discretionary fiscal stimulus can be reduced. That also means less corruption on the procurement side.
Payments itself can be done just like how tax returns are done every year. If cashflow is of concerned, the payments can be broken up in stages just like how BR1M is being paid this year.
I do not think the jump will be that big, unlike the previous shift from fuel subsidy to cash transfer. But I do think in terms of benefits, it might be bigger the cash transfer as it could make redundant other welfare policies while streamlining administration cost of supplying or enforcing these other policies.
 — The NIT would thus be a mirror image of the regular tax system. Instead of tax liabilities varying positively with income according to a tax rate schedule, benefits would vary inversely with income according to a negative tax rate (or benefit-reduction) schedule. If, for example, the threshold for positive tax liability for a family of four was, say, $10,000, a family with only $8,000 of annual income would, given a negative tax rate of 25 percent, receive a check from the Treasury worth $500 (25 percent of the $2,000 difference between its $8,000 income and the $10,000 threshold). A family with zero income would receive $2,500. [Jodie T. Allen. Negative Income Tax. Library of Economics and Liberty. Accessed February 15 2017]