Crude oil prices have been falling lately and certain quarters are calling for the reduction of fuel prices in Malaysia. That call includes implicit demand for increase in subsidy. Anwar Ibrahim is one of them.
I oppose any subsidy increase that distorts the market. In fact, to combat externalities caused by fossil fuel consumption, I advocate the imposition of tax to internalize the externalities. Unfortunately, taxation is politically unpalatable. As an alternative to subsidy increase or taxation, I propose a policy better than subsidy increase as well as pragmatic at the same time; a third way — a proportionate decrease in taxes.
That means any saving made by the government through the reduction of subsidy as well as the fall in crude oil prices should be fully used to fund tax cut across the board.
The term saving here needs to be defined. Saving means the amount would need to be paid by the government for subsidy if crude oil prices had not fallen from the price level when the latest subsidy regime was announced.
Why is this policy better than the call to increase subsidy?
This policy is less distortionary. Not only it does not increase distortion caused by subsidy, it also reduces distortion caused by taxation through tax reduction. Apart from economic consideration, tax reduction might have favorable impact comparable to the political effect of subsidy increase effect — it would please the mob, for better or for worse.
10 replies on “[1060] Of tax reduction, not subsidy increase please!”
The problem is that Federal G’vment looks @ issues individually. Taxation with regards to cost of living is never done. Most Malaysian below making RM40,000 should be tax exempt.Gov’mnet must have a proper tax management for individual, corporations & goods & services.
VAT introduction must be hastened in graduated manner according to category of goods & services. VAT can be adjusted according to business cycle. Every business must have VAT assigned number & stated in the receipt & must be linked to the Inland Revenue Commision.
Most western countries, HK, Aus & S’pore have an efficient VAT system.
[…] The least free market argument against subsidy, at least within the current Malaysian context, is the distribution of subsidy. If subsidy is a must, then I think some liberals will be happy to see an improvement in the subsidy delivery system. Typical economic tools which are superior to blanket subsidy ranges from cash transfer to tradable coupons to tax cuts. […]
[…] are other superior policies than the one that calls of an increase in subsidy. A few of them are tax reduction, tradable coupons and targeted […]
[…] to admit though that I am one of those fatalists and actually support a hike. In fact, I advocate taxation along with floating prices arrangement but that is another issue […]
Hahahahaha… since when did Malaysia become a welfare state? Or for that matter Islamist or Socialist?
And yes, isn’t it weird to be taxed to fund a subsidy that in theory will benefit us? Is it a dollar for dollar equation?
And who then pays for the mechanism of tax and subsidy? The best way is to reduce indirect taxes and subsidies and let the people pay a consumption tax.
The more you use, the more you pay. That’s fair! No?
And who is going to fund that subsidy, may I ask?
Weird is it not for us to be taxed to fund a subsidy that is supposedly to benefit us?
Subsidies reduce cost of living. This is needed in a welfare state, both Islamist and Socialist.
Anwar Ibrahim is correct to call for increase in subsidies as this can reduce the cost of living of Malaysians.
[Admin – Suspected as Gary w bush, or gul, or 218.111.39.55 that has impersonated other bloggers]
I agree (in fact, like I wrote, I support taxation on gas instead). The tax-reduction no-subsidy-increase regime is suggested simply for the sake of compromise. It is unfortunate how economic reasoning has to give way to politics sometimes.
True. And any reduction in other taxes will go across the board too for those who pay taxes, that is.
After all, I reckon those own the vehicles or pay for fuel are already paying taxes in other areas.
Rather, I would go as far as to say we should decrease further the subsidy on fossil fuels.
After all, the by-product is pollution that degrades the environment apart from our health.