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Economics

[2924] Would a rule-based progressive corporate income tax be better than an arbitary windfall tax?

I would think yes. A long answer follows:

Malaysian glovemakers have reaped quite a fortune from the Covid-19 pandemic. Top Glove’s 2020 financial year net profit soared to nearly RM2 billion from RM400 million the year before (approximately 5 times higher). It is not the only one striking gold. Another large glovemaker Hartalega had its half-year net profit for 2020 rising close to RM800 million compared to slightly below RM200 million in the same period last year (about 4 times higher).

The extraordinary profit has made windfall tax a popular notion among some crowd. Member of Parliament Syed Saddiq Syed Abdul Rahman and his party MUDA are lobbying the government to impose windfall tax on Top Glove and other glovemakers.

Top Glove paid nearly RM400 million worth of tax in the 2020 full financial year. For Hartalega, they paid almost RM200 million out of their half-year revenue. A proper windfall tax could easily double that. That is a lot of JASAs that could be funded.

Windfall tax is arbitary and carries corruption risk

I am not all too comfortable with windfall tax. The problem is its arbitrariness and with arbitariness, corruption risk. At the very least, its arbitrary nature creates room for negotiation between businesses under the microscope and the authority exerting the tax. The bigger the business, the stronger the concern for corruption is.

Rule-based approach addresses corruption risk

Assuming we are merely interested in getting that additional revenue only, I think there is a better way to do so. We can possibly design a rule-based approach mimicking windfall tax. That is progressive corporate income tax.

In search of a mimic

Currently, the Malaysian corporate income tax is flat, with rate imposed at 24%. (Well, it is not that simple. Our corporate income tax is somewhat progressive, but only for SMEs. SMEs pay 17% income tax on the first half a million of net income, and then 24% for any profit above that. Yes, two brackets.)

There are some debates on why corporate income tax is flat and not progressive. I will not be going there and it is a whole other debate to be had.

But strictly from tax collection perspective and for the purpose of finding a mirror policy, I would think progressive corporate income tax would be better than an arbitrary windfall tax. Better in the sense that it mirrors windfall tax collection while minimizing corruption risk.

The challenge is to finding such a mimic is this: how could we generalize the brackets and the tax rates so that it could capture supernormal profit across industries fairly, while not punishing the others?

That is a difficult question to answer because each company or sector has its own typical profit level. For instance, a supernormal profit level as currently enjoyed by glovemakers are terrible figures for giants like Petronas during normal times.

In any case, theoretically, a progressive corporate income tax mimicking windfall tax would have a J-curve (or even an L-curve): mostly flat rates for most income brackets, but rises dramatically for supernormal bracket.

Hybrid?

Alternatively, we could add an if-then function to the corporate income tax code: if your yearly net profit is above a certain level and it grows by more than 400% (or some superprofit benchmark) compared to the previous year, then you would face a tax rate higher than 24%. This would be a hybrid between progressive corporate income tax and a windfall tax, and it would still be rule-based.

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Economics Science & technology Society

[2917] Urban life will not go away with WFH and digital technology

Last week, I participated in a discussion panel on urban poverty and urbanization. Over the course of the session, a fellow discussant highlighted the potential of working-from-home phenomenon in reducing the need for urban centers.

I am unsure if I could agree with the suggestion.

First off, such decentralization is possible. It is not out of this world. The COVID-19 pandemic has prompted discussions on living away from cities. We could work from everywhere now. Some have even thought perhaps it is time to go rural altogether. There is a logic behind it.

Beyond the panel, there is a rethinking about high-density area. As it goes, maybe we should spread it out a little to make our society more resilient against future outbreaks. WFH is one of the ways that could be achieved. We can work remotely, and therefore we do not need a place in the city. Ditch the city, the slogan might sound.

If pandemic is the only thing to worry about, sure. Decentralizing the population into many smaller low-density towns would be the way forward.

But cities are not just about working culture, and pandemic is not the only thing that concerns us.

If I remember my lesson back in university, there is such a thing as agglomeration. If enough companies—and indeed people—gathered together, they would enjoy some kind of economies of scale in more than one way.

In terms of services, the more people there are in a place, the cheaper it is to deliver those services. This is relevant to both public and private services. Think of mass transit, or better city trains. Super-expensive to build and operate. Having it in Kuala Lumpur might make sense with its 2 million-4 million people depending on the definition used to define the city along with its satellites. Less so in smaller cities such as Kuantan that does not even hit one million population mark. Malacca Town with its low population city has a monorail, but we all know it is a bad, expensive joke.

And it is not just mass transit. Think about utilities. Think of roads or better in these days of interconnectivity, fiber optics network. It is cheaper to lay the cable for city use, like in Kuching, than in the interior of Sarawak. Indeed, communication tower is generally the preferred cheaper method of expanding internet services into rural areas.

There are plenty of examples across many sectors. Cost consideration alone make cities capable of providing services rural areas struggle to provide.

Large population is also a theme central to growth theory. As one growth theory puts it, beyond capital accumulation and technological progress, population growth is really the ultimate driver of growth. With population, comes new ideas. Edmund Phelps long ago wrote the following that pretty much summarizes mainstream growth theory:

One can hardly imagine, I think, how poor we would be today were it not for the rapid population growth of the past to which we owe the enormous number of technological advances enjoyed today… If I could re-do the history of the world, halving population size each year from the beginning of time on some random basis, I would not do it for fear of losing Mozart in the process. [Edmund Phelps. Population Increase. Canadian Journal of Economics. August 1968. Page 511-512]

To put it simply, technological progress itself is a function of population growth.

Good stuff tend to be created when people congregate in a place. New observation, innovation, idea exchange and all that happen more often among large population located in a dense area than in a sparsely populated space. The residents of large cities also make sophisticated demands arising from urban life. Without these demands, nobody would think of the solution and no progress would be made.

There might be an optimal population size. But for Malaysian cities, I think we could make it denser. I prefer denser cities not just because of the factors mentioned above and more, but also because the toll sprawls exert on the environment. Big cities tend to share resources better.

Finally, it is true that the pandemic lockdown has proven that we have the technology to work from home.

But it also proves we do not enjoy being stuck at home.

We do not just live within the space of our four walls. It is the culture, the connections and the values that matter as well. We yearn society. I yearn the city.

Many options available in the cities are available on the internet not because online services are taking over those services previously provided physically. Rather, the internet accommodates the provision of those services. It does not make cities irrelevant. Ultimately, those very services are made possible by cities.