Recently, there was a column complaining about taxes on the middle class, claiming the middle class is being overtaxed.
The origin of the complaint is easily understood because a slew of measures have announced by the government and those new taxes include departure levy and the imposition of sales and service tax on some digital services. These are generally taxes on not-so-basic goods and in more than some instances, they are arguably luxury goods.
The new taxes are part of the government plan to diversify its revenue and widen its revenue base. These are highly targeted taxes, and it hits specific groups instead of the wider population, which fits the philosophy of the government that is anti-broad base taxes like the GST.
I am not here to debate the philosophy and I take that as a constraint to policymaking. Instead, I am here attempting to explain whether the middle class is overtaxed.
The short answer in this day of too long, didn’t read culture, I would argue, is no.
Here comes the longer answer to a difficult question.
THE STARTING POINT: GOVERNMENT REVENUE AND INTERNATIONAL COMPARISON
It is a difficult question requiring some homework to be done. After thinking about it, I think the best starting point for the discussion is total taxes collected by the government from individual taxpayers. We know this number as it is accessible online from both the Treasury’s and the central bank’s database.
The actual total 2018 revenue figure is not available yet but we know the government has estimated it to be RM236 billion. For 2017, the government collected RM220 billion.
This may look large but in context, it is a very low figure. At about 16% of GDP, it is well below the average for a class of countries that includes Malaysia. Data from the IMF shows that “emerging market and middle-income economies” on average have their government revenue at 27% of GDP. Here for the extra boom: Malaysian government revenue is so low that it is closer to the levels seen among low-income countries that averaged at 15%. In advanced economies, the revenue level is about 36% of GDP.
The low revenue-GDP ratio, and by implication the low tax burden, should give you an idea of how low the tax burden is in Malaysia relative to other countries. It is already a libertarian wet dream.
It is importantly to realize that not all of government revenue is collected from individuals. Based on official 2017 figures, I estimate at most 48% were collected from individuals in the form of income tax, consumption tax along with various duties, licenses and fees. This is an upper estimate because it is difficult to know who paid those duties, licenses and fees exactly without delving deeper into the data; it is highly likely a significant portion is paid by companies instead of individuals. This means, total taxes collected from individuals for Malaysia is about 8% of GDP.
This number gives insight to the question of tax burden because government revenue derived from individual taxpayers is the tax burden of the taxpayers. And when government revenue from these sources is low, it suggests the tax burden on individuals is low.
The rest of the revenue comes from companies and other sources like asset sales.
Now here comes the tough part. We need to know who pays the 48%. This is a difficult endeavor to carry out without intense research because there are at least three types of taxes here: income tax, consumption tax and various duties. The nature of the three taxes is quite different from each other, hitting different segments of individual taxpayers.
What we know is that income tax makes up only about a 27% of the estimated revenue derived from individuals. Consumption tax makes up 42% and the rest belongs to a various other duties and fees.
The income tax hits only the non-poor. This is easy to determine.
The threshold to pay income tax is so high that only about 2-6 million people pay it out of a population of 32 million, and out of a labor force of 16 million with generally low unemployment rate. Again, this is a very low number and I have written why that is so back in 2017.
And since a person would only be taxed if his or her income is RM2,500 per month or more, (more accurately, RM30,000 or above annually), we know from the 2016 Household Income Survey published by the Department of Statistics that about 23% of individuals in the Malaysian labor force do not need to pay income tax. And with all the exemptions given by the government, this number can easily cover all of those in the bottom 40% income earners and slightly more. This is a theoretical number because not all income earners are registered taxpayers. They are people who should pay tax among the top 60% income earners who do not register as taxpayers.
Nevertheless, we can conclude that a huge chunk of the income taxpayers belong to the middle class (discussion on what is middle class can be complicated but for convenience, let us take it as the next 40% income earners).
Now, is it fair?
The income tax rates in Malaysia are progressive. That means the more you make, the higher your tax rate would be. It might not be as progressive as some people would like but the truth is, the tax rates in Malaysia starts from a very low base and it rises very gradually to cover the whole middle class. So low in fact that it is difficult to say if anybody is overtaxed on this front.
CONSUMPTION TAX AND OTHER TAXES
Consumption tax sweeps a wider segment of the population. The best proof is the that fact the GST generated RM44 billion for the government in 2017 and that was slightly double the RM29 billion individual income tax revenue.
But this government abolished the GST and introduced the SST in 2018. In 2019, the consumption tax is expected to collect only RM22 billion. And not all of the RM22 billon hits the consumers directly because SST is really two separate taxes: sales tax and service tax. For sales tax, it is really more of a production tax than a consumption tax: that means consumers do not bear the full burden of the tax. It is only the service tax that the consumers have to pay in full. Based on previous experience, service tax revenue formed about 40% of total SST, which further shows that the individual consumers do not pay the full RM22 billion.
In short, tax burden on the population as a whole has fallen, including the middle class after the GST-SST shift. To say otherwise is downright false.
Other taxes are quite small and transactions that attracted those taxes or duties happen at a very low frequency.
But the question is, would the new tax mitigate the reduced tax burden and in fact increase the tax burden on the middle class?
No because the government has estimated that these new taxes would generate a revenue of about RM5 billion annually. That is considerably less than the RM22 billion drop arising from the GST-SST shift (that is the 2019 SST collection subtracted from the 2017 GST RM44 billion; the drop should be bigger because the GST collection in 2019 should be bigger).
There are plenty of new separate taxes and that creates a negative perception as if the tax burden is increasing on the middle class. But when all of that combined, total new tax collection would not be enough to negate the reduction in tax burden from the GST-SST change. The numbers show it and here is how it would look like in graphics:
As you can see, there is still a net reduction in tax burden after accounting the GST-SST change and the new taxes.
But, still, what about the middle class? How does the so-called middle class benefit?
GOVERNMENT SPENDING ON THE MIDDLE CLASS
But discussion on merely who pays taxes is not wholesome.
We have to talk about spending as well. At the very 10,000 feet view, the best number to suggest that the government is transferring money to the population or not is the fiscal balance. A surplus would mean on the net, the government takes in money from the population. A deficit means the government gives money away. And the Malaysian government has been experiencing fiscal deficit since the late 1990s.
But what about the middle class? The bottom 40% gets cash transfer and free income-replacement insurance but what about us the middle class?
Apart the subsidized petrol, subsidy for urban highway tolls in terms of compensation from the government to private concessionaires, the subsidized train rides, the subsidized residential electricity use, the subsidized water, subsidized healthcare, subsidized contraceptives, subsidized education, subsided this and subsidized that in the cities with its much better amenities, what else do the middle class get?
Of course, nothing.
I will leave you with a sketch from Monty Python’s Life of Brian.
 — I recently cycled 40 minutes in 33-degree weather just to save RM6 on parking when I went to a government clinic to collect my medication. I was a little peeved when the nurse told me that I could only collect two months’ worth instead of the usual three. She gave some excuse about records not tallying if patients are given three months’ supply. I suspect that government health facilities are yet again running low on medical supplies. But coming to the clinic once every two months and paying just RM1 for two packs of oral contraceptives still beats buying them at a pharmacy, where a pack can cost RM27.
So it annoyed me to read that, despite my efforts to save money, the Pakatan Harapan (PH) government is implementing three new taxes that disproportionately hit the middle class – a digital tax, a departure levy, and a tax on sugar-sweetened beverages. [Boo Su-Lyn. The overtaxed middle class. Malay Mail. April 12 2019]
 — Note: The IMF puts Malaysia’s revenue/GDP ratio at 20% in 2019 but this does not quite tally with Malaysian data [IMF Data Mapper. Fiscal Monitor. IMF. Accessed April 12 2019]