[2606] Dear The Edge, direct tax collection did not “soar”

Among all the local newspapers in Malaysia, I reserve my utmost respect for The Edge. Unlike other papers, it has critical analyses and is less susceptible to explicit political bias. The Star and the New Straits Times (the NST especially) are political hacks. Others like the The Sun which can be objective more than once are just not in the big league yet. As for the Malay dailies, well, I will hold my tongue lest I digress from what I intend to write here.

Notwithstanding my respect for The Edge, I am disappointed after reading its front page yesterday. In big bolded letters, the headline “Rise and rise of IRB”^[1] painted the picture of soaring direct tax revenue but failed to give the proper context behind the massive increase. The headline is misleading because really, there was no soaring growth.

As mentioned in the article, direct tax revenue is expected to increase by nearly 60% in 2013 compared to 2010. To be exact, approximately 54%. That is the highlight and there is no context except the point about improved tax collection efficiency. I disagree with the point on improved efficiency and I will come back to that later.

I need to state why the highlight of “almost 60%” increase is the source of my disappointment.

Here is the proper context for the massive increase. In 2009, there was a recession and that hurt tax collection in general. In fact, in 2009 and 2010, collection was depressed. Collection only improved in 2011 as the economy fully recovered from a very global recession. You can see it from the following graph:

Note what happened in 2009 from the graph.

The following may show just how impressive the so-called almost 60% increase is:

Upon recovery, it is only expected that collection improved and such improvement should not be breaking news. It is a reversion to mean with respect to growth. It would be breaking news if there was no reversion to mean, i.e. revenue continued to be depressed.

And here is how the reversion to mean as far as growth is concerned is really unimpressive. Average growth of direct tax collection was only a mundane rate of slightly less than 7%. The rate is calculated from the last peak before the 2009 recession. Maybe, I am a little bit verbose. The last peak happened in 2008.

Why did I calculate it from the peak (and not from the trough)?

The trend before the recession appears to represent the business as usual trajectory. If there was no recession and the economy more or less continued to grow as it did prior to the recession, then that would represent the business as usual case (calculating from the trough as the article did is, to put it politely, wrong for the purpose of the article. Calculating from the trough will paint an excessively bright picture that is worthless in ascertaining reality. Most of the times, we want to know whether we are back on track, not how well we have grown from the depth of the recession. Point: You can have the economy growing by 100% from the trough and you can still be worse than the local peak before the recession. That particular growth does not overcome the total loss in output). Hold on that thought on business as usual as I address the article’s assertion of improved tax collection efficiency.

Remember the average 7% growth? That is based on the expected direct tax revenue in 2013 compared to 2008 base.

If there was improved efficiency, previous average growth should be lower than 8%. Improved efficiency must suggest better collection and somehow, better growth. Unfortunately for the hypothesis, past average growth was higher than 8%. Between year 2008 and year 2000, direct tax revenue grew at the average of 12%.

But would the 2000-2008 period not be arbitrary a pick?

Maybe and so, let us calculate the average growth from 1970 to 2008. The average growth rate was 13%. I took 1970 as the beginning because that is the earliest data I could get from BNM Monthly Statistical Bulletin and so, I hope that will dismiss any accusation of arbitrariness on my part.

So, it appears that the normal long run growth (a.k.a. business as usual) is something between 12% and 13%.

And what was the average growth since 2008? 7%. Yes, I am repeating myself.

If improved efficiency could be translated into improved average growth, then clearly there was no improvement and in fact, there was an efficiency loss in direct tax collection (I do not like the term efficiency as used here but I will let it slide).

But I am not making that argument about efficiency here. All I want to suggest as far as tax collection efficiency is concerned, efficiency is a non-issue. It is an insignificant issue. A short and simple analysis should have revealed that and clearly, The Edge team failed to do the necessary analysis.

Now, because the current average growth since 2008 is below the long run average, one must expect tax collection growth to be strong if reversion to mean (in terms of growth) is a reasonable assumption, and it is. It is happening after all.

Finally, the article sounded as if direct tax revenue had soared by 60% but the 2013 numbers are projected numbers. I do not doubt it will ”soar” when used in the wrong context. I just think it is important to not represent expectation as things that have happened. This is something that The Edge is not alone being guilty of misrepresentation.

^[1] — KUALA LUMPUR: The mainstray of the federal government’s revenue over the last three years is from direct tax collection — mainly from individuals and companies — which has increased by almost 60%. Based on estimates of the federal government for 2013, the total revenue is RM208.65 billion, of which RM121.95 billion comes from direct taxes, a testament of the Inland Revenue Board’s (IRB) efficiency. [Rise and rise of IRB. Sharon Tan. The Edge. October 1 2012]