Tag: taxes

Categories
Economics

[2570] Abolition of import duties on foreign cars will not increase congestion because there is substitution effect

I advocate the abolition, or at least a significant reduction of import duties (and other excessive taxes) on cars as well as the abolition of the approved permits system that blow up the prices of foreign-manufactured cars to an outrageous level. This should come at no surprise because I am a libertarian. I do generally support freer trade. Make no mistake, the policy on cars is a protectionist policy.

There is a concern that if duties on imported cars are slashed down significantly or abolished entirely, this will exacerbate traffic congestion in Malaysian cities. At first, this sounds like a very big and legitimate concern. It is not.

If one understands that the duties are imposed on foreign marques and that there is such a thing as  substitution effect, one will understand that the concern on worsening traffic congestion is misplaced. I suspect it is almost always raised by those without enough formal education in microeconomics.

Do understand that imposition of high duties are on foreign cars. This is the nuance. Too many talk as if it is applied across the board, including on Proton and Perodua marques. The peril of generalization is that you lose the nuance.

The duties make domestically-produced cars cheaper than foreign cars and this should be a no-brainer.

It is no coincident that a majority of cars on Malaysian roads are Protons and Peroduas. Malaysians buy Protons and Peroduas because those cars are cheap. There are not too many of those who can buy more expensive cars. If I recall correctly, the number of Protons and Peroduas and other locally-produced cars dwarf the number of foreign-manufactured cars in this country. I do not have the statistics at home but I do have it at the office. I will share it tomorrow and correct my assertion if it is proven to be incorrect.

If foreign cars are suddenly competitively priced after the abolition of various pre-exisiting duties imposed, new buyers will be tempted to purchase those foreign cars, which are many ways of higher quality than Proton at least. Perodua probably can stand up within its market niche.

Now, if the duties persist, these new purchasers would probably buy Protons and Peroduas.

Notice that there will be purchases of car anyway.

To put it in clearer terms, if the status quo remains, people will buy local cars. If it does not much to the benefits of Malaysian consumers, they will buy higher quality foreign cars. For those whom would have bought foreign cars anyway, it does not matter as far as traffic congestion is concerned. They would still buy their cars. It is not about discriminated duties that Malaysia has that I along with others like-minded persons want abolished.

So, the concern for traffic will exist as long as Malaysians purchase cars and it really does not matter whether the duties are abolished. The trend for greater quantity of cars on the road is really a secular one. It has to do with affluence growth and population growth more than anything, and the availability of a reliable public transport system within this context.

Those who argue that the traffic condition will worsen if those duties are removed just do not understand that those cars are substitute goods.

This does not mean the abolition of import duties do not matter. It matters in terms of welfare. It matters in terms of competition. It matters in a lot of other more important ways. But not in terms of congestion.

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.

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[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.

Categories
Economics

[2200] Of proposed tax cut on savings interest in Australia

Holding all else constant, I do not like tax. I do not think, too many people actually like paying tax.

I only rationalize the need for paying tax by holding on to classical rationale for the need of the state: that there is externality. The state is there to protect individual liberty which, generally, cannot be guaranteed in anarchic environment. I say generally because I am still reading Nozick’s Anarchy, State and Utopia and he has some idea how that maybe false. Yes, I am still reading it. But I am digressing.

Like I have mentioned earlier, I do not like tax. And some taxes are worse than others. One of the worst that can exist is tax on savings in one form or another. In Australia, much to my dismay, savings is taxed. More precisely, they tax interest gained on savings.

Tax on savings has its purposes. For one, it encourages spending to promote economic activities. Or allegedly. Islamic economics for one has this goal imbued in it due to its objection to the concept of time value of money, a concept which necessarily brings in the concept of interest. Without interest, there are less reasons to save for tomorrow and more reasons to spend it all today. Tax on interest earned on savings does that albeit to a lesser degree.

Whether that purpose is good or bad is a normative question that cannot be answered with the end set. And I know my end and I frown at the end of taxation savings. In promoting the economy, it penalizes prudent spenders and it penalizes effort to smooth out consumption by savers.

I say allegedly because savings can be turned into loans and that encourage economic activities. There are ways to promote economic activities without penalizing savers. Indeed, that is how the banking sector helps grease the economy. Fractional banking is a magnificent social technology that takes care of that.

In Australia now, there is a big discussion regarding tax reform. Called the Henry tax review, the report was released just days ago. It aims to reform the Australian tax system. One way it seeks to support those reforms is by proposing a large tax on miners. That is dominating the headlines. There appears to be a war between the big miners and the Rudd government right now.

Meanwhile, many other details slip away from public attention. One of the details is the proposed cut on interest earned on savings.[1]

I like that particular proposed tax cut. Hell, I always like tax cut. I hate giving away money that I earned just like that.

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[1] — The review proposes a 40 per cent discount on all income from savings, as well as on all residential rental income and losses, and capital gains.

These recommendations were widely flagged prior to yesterday’s announcement, with critics saying the current system doesn’t give enough incentives for workers to put money in savings accounts. [The Henry tax review – what it means for you. Chelsea Mes. News. April 15 2010]

Categories
Economics

[2176] Of Lim Guan Eng probably does not know that everybody pays SST

Opponents of the introduction of goods and services tax (GST) in Malaysia have raised a number of points.

Some of the points are valid even if they are disagreeable. Sometimes, the disagreement is ideological and difference is due to premises originating from separate irreconcilable positions. Those points are fine because at least they are logical and honest.

Some, like opposition to GST based on regressiveness, are plainly illogical and wrong however. Some are pure bullshit of gargantuan magnitude, i.e. if the tax rate is 4% and there are four points within a value chain, the total tax rate paid by the end consumer is 16%. One made by Lim Guan Eng at an anti-GST forum some weeks ago is disingenuously irrelevant.

Mr. Lim stated that under GST, everybody will be taxed.[0] It is true that everybody, in a sense that any anybody who consumes a particular taxed good regardless of income levels, will be taxed. But this line of argument presumes that everybody has not already been taxed.

Unfortunately for Mr. Lim, consumers in Malaysia have already been taxed through a consumption tax that is theoretically as flat and as regressive as GST. That tax is the sales and services tax (SST).

Because of the untrue presumption, his argument is irrelevant.

Why is the argument irrelevant?

To evaluate the worth of his argument, a comparison between GST and status quo scenarios has to be made.

Why?

Remember, the proposal is to replace SST with GST. The desirability of one option has to be defined in terms of the desirability of the other and vice versa. In other words, ask the question, “why one option is better than the other?” Absolute statement does not help in decision-making. Relative statement does.

Further, for Mr. Lim’s — and increasingly what is becoming one of Pakatan Rakyat’s as well as others parrot the argument without thinking — argument to be relevant, the status quo must consist of a scenario where not everybody is being taxed. There is no such status quo: the status quo has SST in place.

What is the point of arguing as Mr. Lim has done so when everybody has already been taxed — in fact, taxed at a higher rate? Remember, the current GST  is planned to be introduced at 4% while the current SST rate ranges from 5% to 10% and there are goods taxed at even 20%.[1]

Both SST which is currently in place, and GST, will affect everybody. If one opposes GST on the basis of how GST affects everybody, then the person has to oppose SST too. Therefore, that person should be indifferent between having GST and SST. One simply cannot make sense if one bases one’s opposition on how GST will affect everybody.

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[0] — Penang Chief Minister Lim Guan Eng said with the old sales and services tax system, only some 1.5 million of the total of 12 million workers are taxed but its replacement with the GST will mean everyone, including poor workers, will be affected. [Pakatan bets on GST to muscle BN out. The Malaysian Insider. February 29 2010]

[1] — See Sales Tax. Accessed December 3 2009.

Categories
Economics

[2122] Of the proper question is, is GST more burdensome than sales and service taxes?

The Malaysian government plans to introduce goods and services tax replacing the current sales tax as well as service tax in 2011. I generally prefer consumption tax to income tax because one, it somewhat accounts for externality related to consumption (making it a close cousin to my favorite tax, carbon tax) and two, it is a flat tax. Libertarians typically love flat tax. And probably, three, it is a middle finger to Keynesians and socialists out there.

My position with respect to GST in Malaysia is essentially one of agnosticism at the moment as I try to grasp its merit and demerit, despite my disposition to consumption tax (If there is an abolition of income tax alongside the introduction of GST, I would probably rush to the defense of GST immediately). I am therefore open to argument from both sides.

I do have problem rationalizing opposition to GST based on the argument that GST is regressive however. To the best of my knowledge, sales tax and service tax are flat taxes. That makes them regressive. They are consumption tax too (practically indistinguishable really) because they too can be passed to consumers (though a study of tax incidence suggests passing the tax to consumer is slightly more complicated due to dependency on elasticities).

Given that both types — GST and the current taxes GST is proposed to replace; for the sake of convenience I am lumping sales tax and service tax as ‘the other taxes’ — are regressive, the appropriate question to mount a proper opposition to GST is how more burdensome GST is compared the other taxes to the lower income groups, not whether GST is regressive or not by itself. In order words, what are the marginal effect?

I do not know the answer. Obviously a study has to be done to answer that but my first impression would be that it is less burdensome — less burdensome by meaning of less taxation — because the rate of GST proposed is much lower than the average rates of sales tax and service tax, at least for 2011.

The proposed GST rate is 4%.[1]

According to Malaysian Industrial Development Authority, services tax in Malaysia is 5% while sales tax is typically charged at 10% although there are goods charged as low as 5% to as high as 25%.[2][3][4] There are exemptions where no tax is charged but leave that aside for now.

Clearly, ignoring the anomaly of exemptions, GST is theoretically less burdensome than the other taxes of interest at the proposed and current rates.

Therefore, I am having problem with the basis of opposition to GST as expressed by several politicians from Pakatan Rakyat and possibly Khairy Jamaluddin. The latter spoke earlier in the Parliament, raising his concern about the regressive nature of GST.[5] Like I said, the proper concern should be how much more burdensome is GST against the other taxes, not that GST is regressive.

For Tony Pua’s assertion that the government should postpone the implementation of GST until average citizens earn higher income[6], which I assume GDP per capita is a convenient proxy for that, this is not convincing.

Assuming that rate of GST is the same as the average of rates for the other taxes — ignoring the effect of changing quantity demanded and quantity supplied as well as elasticities that eventually lead to change of tax revenue; those changes would probably bring down aggregate demand given the efficiency of GST but no matter because that is an entirely different issue — tax collection for both should be the same theoretically.

Theoretically because the other taxes are susceptible to tax evasion. Tax evasion is less of a problem to GST because value-adding activities are recorded more diligently across value-chains. That makes it more efficient in terms of tax collection. This advantage that GST has against the other taxes should enhance the appeal of GST, not less, if one is interested in having better taxation system. The opportunity for tax evasion is not a good point to base one’s opposition to GST, again, if one is interested in having better taxation system.

Note however, again, the proposed rate of GST is lower than the current average rates of the other taxes. Any net gain from the switch to GST is likely due to efficiency of GST rather than increase in theoretical taxes.

Nevertheless, Pakatan Rakyat or rather DAP does sound good criticism that weeding out corruption and addressing mismanagement of country’s resources would probably enhance the government’s bottom line compared to expected increase of tax collection of RM1 billion due to GST.[7]

Yet, I think Rajan Rishyakaran makes a good point when he writes, “the need for the GST goes beyond plugging budgetary holes — it serves the need to flatten the tax base.”[8]

I would add further that the function of GST is to diversify sources of revenue for the government rather than raising revenue. Unless all Malaysians suddenly convert to minarchism, which I do not mind of course, given the well-known fact that Malaysia has narrow taxpayer base,[9] diversifying the source and indeed widening the base is a good idea.

It is a good idea because, like the Pulitzer Prize winner Thomas Friedman puts it in his article entitled The First Law of Petropolitics, if he is right, government dependency on tax as revenue encourages accountability. That can further develop democratic culture in Malaysia. Dependency on oil revenue does not do that.[10] Add to that the fact that oil is a finite resources, diversification is a a way forward.

If the rate of GST gets higher than the average of the other taxes, then opposition to it is very proper. That however is an opposition to the rate, not GST per se.

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p/s — I realized that I have not defined the meaning of regressive. Consumption tax like GST is a flat tax. By regressive, it does not refer to actual rate increases the lower one’s income is where progressive means the opposite. Rather, it refers to the fact that those with lower disposal income will spend greater fraction of their income on basic items. Since flat tax increases that fraction on the, if I may use the term, poor, it is arguably regressive. The difference between the two ‘regressive’, should be differentiated, even if the effect maybe the same.

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[1] — KUALA LUMPUR: The government plans to impose goods and services tax (GST) at 4%, said Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah.

”We are replacing the current sales and services tax, which is currently at 5% to 10%,” he told reporters at the Culture, Ideas and Values Workshop organised by Foundation For the Future at Country Heights Resorts in Kajang. [Govt may impose GST at 4%, says Husni. The Star. November 26 2009]

[2] — See Service Tax. Accessed December 3 2009.

[3] — See Sales Tax. Accessed December 3 2009.

[4] — See Taxation. Accessed December 3 2009.

[5] — The first parliamentarian to raise concern about the introduction of GST is Khairy Jamaludin. When he spoke on this matter, there was hardly any response to it. As usual the mainstream newspapers shied away from this heavy stuff. [Further thoughts on VAT/GST. Mohd Ariff Sabri Abdul Aziz. December 2 2009]

[6] — Today, out of a population of 27 million, there are in effect only 1.8 million tax-payers who pays any income tax, or only 6.7% of the population. Even if we were to take into account only the 12 million working population, it is only 15% of them who have pay any taxes. The 85% who don’t pay are those who actually don’t qualify to pay any taxes because their income is too low. However, with the implementation of GST, every single one of them whether they are earning RM500 a month or RM1,500 a month or even RM2,500 a month, who don’t current pay any taxes, will be forced to bear the heavy burden of the GST.

Therefore, it is only fair that the income levels of the average Malaysian is raised to a level where the overwhelming majority of working Malaysians are already taxable before the switch is made to a GST or indirect taxation system. [GST: First blood. Tony Pua. December 1 2009]

[7] — IPOH, Nov 29 — DAP has urged the Federal Government to reconsider the proposed 4 per cent Goods and Services Tax (GST), claiming it would do nothing to narrow the nation’s current deficit budget and would only further burden the poor and the middle class.

Party secretary-general Lim Guan Eng said that the Government should, instead, concentrate on fighting corruption and realising savings of at least RM28bil annually instead of a mere RM1bil in additional revenue from GST. [DAP: No sense gaining RM1b from GST to lose RM28b to graft. Clara Clooi. The Malaysian Insider. November 29 2009]

[8] — Tony Pua did point out several other ways to raise revenue (auctioning import quotas, for example) and save money. Nevertheless, the need for the GST goes beyond plugging budgetary holes — it serves the need to flatten the tax base. [GST for high-income economies. Only.. Rajan Rishyakaran. December 1 2009]

[9] — International agencies such as the International Monetary Fund (IMF) and World Bank have long pointed to Malaysia’s narrow tax base as being unviable in the longer term, given that only a tenth (or an estimated one million-odd workers) pay income tax and the nation’s overdependence on oil earnings, which contribute more than 40 per cent of federal revenue. [Najib plumps for GST to fill revenue hole. Business Times via The Malaysian Insider. November 25 2009]

[10] — [The First Law of Petropolitics. Thomas Friedman. Foreign Policy. May 2006]