Bruce Gale wrote a piece in the Straits Times defending Najib’s economic policy recently.

While I do agree with on points like subsidy removal, I have several issues with the article. The one I take the most exception is his claim that the goods and services tax (GST) was needed because Malaysians were avoiding income tax, and went on to cite a figure, which context he did not quite understand, as a proof.

In his own words, the “GST, this was necessary in order to force the middle class to share the tax burden. Tax avoidance in Malaysia is a serious problem. Only one in 10 people actually pays income tax. This is significantly lower than in many other middle-income countries, and far lower than in the high-income economies Malaysia says it wants to emulate.”[1]

I do not oppose the GST and in fact I think it is a necessary tax reform. Malaysia needed to diversify its sources of government revenue and the recent collapse of energy prices proved that. But Gale is wrong when he linked tax avoidance with the fact that only one in 10 people paid income tax.

He is wrong because a majority of Malaysians do not pay income tax due to a different factor altogether.

First, his statistics are possibly outdated. The one in 10 persons figure was true at some point but by 2015, the figure was closer to two in ten. The head of the Internal Revenue Board was reported in June 2017 stating “18% of the population paid taxes” in 2015.[2]  I tried to find the actual figure from a primary source instead of through newspaper reports. But even the annual report of the Internal Revenue Board does not share the total number of individual income taxpayers. It is a difficult number to pin down.

Second and more importantly, the reason behind the low ratio is not tax avoidance. Rather, it is due to the high income taxability threshold relative to the Malaysian median income. Malaysians do not make enough to qualify into the lowest income tax bracket.

The 2014 Household Income and Basic Amenities Survey published by the Department of Statistics shows the median household income in 2014 was MYR4,585 per month. With an average two breadwinners in a household, that would translate into a median of MYR2,293 per person. That means half of all Malaysian income earners earned less than MYR2,293 per month.

Couple that with the fact Malaysians would only be eligible to pay income tax in that year once they made at least MYR2,500 per month.

We can be more exact than that. Based on the same survey, I estimate about 55% of Malaysian income earners were no eligible to pay income tax in 2014. It is an estimate because the survey expressed its results on household basis and I would have to convert various figures into individual terms. I can show you the estimated individual income distribution by brackets (groups in red were not eligible to pay income tax that year):

The large share of those who did not qualify to pay income tax in 2014 could probably be seen better in the following cumulative function chart:

And this is before the typical tax breaks provided by the government: all Malaysians get an automatic MYR8,000 annual relief, or MYR667 monthly. This alone meant about 60%-65% of total Malaysian income earners did not have to pay income tax in 2014. That tax break has since been raised to MYR9,000. There were other typical breaks — books, medicine and even the Islamic tithe — granted by the Malaysian government that raised the number of those who did not have to pay that year to very possibly close to 80% if not higher.

Tax avoidance is a problem in Malaysia. But it is not the top reason why only one in ten (or the updated 2015 figure, two in ten) pay income tax. Other factors pale in comparison to eligibility concerns.

And even if they did not pay income tax, the same majority already paid sales and services tax prior to the introduction of the GST. To say the majority avoided tax when only a minority did so is not only wrong, it is insulting to every honest working Malaysians.

And do you know who do not pay tax? Those benefiting from donation.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

[1] — Bruce Gale. Najibnomics has been good for Malaysia’s economy. The Straits Times. September 1 2017

[2] — Sabin said that based on 2015 figures, 18% of the population paid taxes in Malaysia. He said the threshold of taxability was generally quite high, therefore a significant number of the population falls outside the tax bracket. [Jagdev Singh Sidhu. Higher revenue for IRB. The Star. June 5 2017]

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