The Democratic Action Party released its proposed 2010 federal budget this week.[1] This is definitely a good move as it brings substance to debate. It gives all of us an opportunity to debate on policies rather than engaging on ultimately empty rhetoric that boils blood.
This is not the first budget proposed by the DAP. The consistency on producing such document thus far deserves commendation and future production should be encouraged to develop policy debate in public sphere. PKR and PAS need to work with DAP or emulate DAP on this front.
Now that the pleasantries have been dispensed off, it is time to get down to business.
While I have yet to read fully the proposal, I disagree with a number of issues. One is the tweaking of contributions to the Employees’ Provident Fund (EPF). Two is the creation of entitlement culture.
For the uninitiated, the EPF is a social security fund providing retirement benefits for its members that, basically, includes all employees employed in Malaysia, making EPF a payroll tax. Employees in Malaysia are required to contribute a certain percentage of their wages into the fund. Employers are also required to contribute some kind of percentage into their employees’ account. Employees will be able to withdraw that money after retirement or at any other point of time before retirement for certain purpose that is not worth going into here.
Early in the section (Section 9.1.3 on page 37), the proposal begins by stating how important savings is, how low-income Malaysians have trouble saving and how unequal wealth distribution in Malaysia is. After stating so, it proposes that employers’ contribution to EPF account of low-income and middle-income workers be increased.
The problem with this relates to a typical argument against such benefits and payroll tax. Employers will compensate whatever required payment on top of direct pay to employeees imposed on them by law by reducing total wages and benefits paid to employees. The idea is that there is only a certain amount of total wages and benefits, which includes the contribution, that employers are willing to pay. Increasing the contribution requirement affects only the composition of total pay, not the pay itself, at present time.
For low-income worker, this is particularly worrying because it reduces their take-home pay. This in turn goes back to the problem of intertemporal choice. While savings is important, it is useless to individuals who are desperately in need of consumption today in the following sense: what is the point of having one million dollar of savings if one cannot use it today to avoid death from hunger?
The example is extreme but it aptly captures the time value of money and intertemporal choices. The time value of money remains material even if death is removed from the equation.
Furthermore, there is enough empirical studies to suggest that low income earners spend large proportion of their income compared to those with higher income. This impresses further on the need to strengthen these workers’ take-home pay given a certain total pay, making their savings less of an issue. I stress, not unimportant, but less of an issue compared to take-home pay.
However, different path is laid out several paragraphs later, with respect to EPF contributions.
As part of its FairWage initiative, DAP proposes to decrease workers’ contribution to EPF for those earning from RM900 to (but not inclusive of) RM1,400 and waive entirely for those earning below RM900. This addresses the concern on take-home pay but notice how it starts to contradict DAP’s point on insufficient savings for retirement of low-waged Malaysians.
As part of its FairWage initiative as well, employers’ contribution is proposed to see reduction to make these workers more employable. This is the right idea but again, this proposal suffers the same contradiction as the first FairWage point.
The third component of the FairWage initiative is a set of entitlements that comes partly in cash transfer and partly transfer from government coffers into the account of certain classes of workers. This perhaps plugs the the gap in saving caused by the two FairWage points but it raises a question of unnecessary complexity.
Notwithstanding the contradiction (it seems to me that there was a war between the left and the right in preparing the proposal; what else can explain the inconsistency? Or is it a case of trying to please everybody?), looking at the FairWage initiative as a whole, the bottom line is really about cash transfer from the government to those who the DAP considered as earning low and medium level income. In the proposal, the DAP states that this is practically an earned income tax credit scheme. It is basically a negative income tax regime where those earning below a certain level of income gets money or tax credit instead of paying tax to the government. In a sense, it is already in place in Malaysia, where, if I am not mistaking the number of I saw on my tax form, the government of Malaysia gives Malaysians tax credit worth RM8,000 for living expenses. I think the proposal by DAP only enhances it.
Whatever it is, the whole design seems overly complicated. Ignoring the normative issue which I will touch later, would it not be easier to not tweak the EPF configuration and just do the transfers instead? Instead of tweaking EPF, the government can, or rather, DAP could, tweak the composition of transfers instead to achieve the same goal sought by the reduction, or in general, changes in contributions to EPF by employees and employers.
That is issue one.
Issue two is the normative aspect of the whole proposal and perhaps, more seriously and more holistically. Without writing too many words, it risks creating a culture of entitlement. The FairWage is just one factor that suggests how entitlement mentality predominates the proposal. RM1,500 is proposed to be given to non-working spouse whose partner earn less than RM3,000 (per month, I assume). This simply robs incentive to work. Individuals are rewarded for not working. This may potentially lower local labor participation rate and eventually, lower output for the economy. To note, low labor participation rate is much worse than low employment rate.
Greater suggestion of creation of entitlement culture is the granting of citizenship bonus labeled as Malaysia Reversed Bonus. That is not the only citizenship bonus. Senior Malaysian Bonus another one. These bonuses are mentioned in other sections which I have yet to read thoroughly.
There is one aspect of the proposal that I like that falls within the section. It is a limit to employers’ contribution for those earning beyond a certain level of income. That decreases cost of doing business and even increases take-home pay of workers.
I will comment on the proposed federal budget by DAP further as I go through it slowly.
[1] — [Democratising Malaysia’s Economy: DAP Alternative National Budget 2010. DAP. 2009]
7 replies on “[2097] Of first comment on the proposed federal budget by DAP: culture of entitlement”
actually, on second (third?) thought, EPF is payroll tax. In the US, payment to social security is considered as payroll tax. in the UK, payment to national insurance is considered payroll tax. no reason why it should be different in Malaysia
this should help clarifying the RM8000 tax relief I referred to: http://www.hasil.gov.my/lhdnv3e/individuIndex.jsp?process=21000&menu=3 4
I definitely agree with cash transfer but not as envisioned by DAP. It’s a blanket transfer, it’s too welfare like and it’s hardly an improvement from blanket subsidy in place currently.
I prefer GST/VAT and carbon tax with regressive transfer cash (more to the bottom quarter, less or none to those on the others) with direct consumption subsidy. (I exclude basic education from this because it deserves special attention).
I don’t know about statutory body. We already have the IRB and the infrastructure of doing so is already there. I don’t see why another body should be created.
Hafiz,
I tried looking for that tax credit bit, the closest I could find was tax rebates – RM110-RM170 (the latter, for joint-filling); I’m not sure if this was what you were referring to.
However, based on browsing around, even a business school student like me finds the income tax system in Malaysia insufferably confusing. I mean, it could be worse. But it could be a whole lot better.
Nevertheless, I’m one of those in the camp that cash transfers is a Good Thing (TM) and necessary – I see it as a replacement for most welfare programs (e.g. replace state schools with private schools + vouchers). Efficient and minimal distortion.
And at this point, my preferred means is to set up a Statutory Board with a mandate for transparency and the distribution of of cash transfers based on a predefined criteria (cost of living, cost of education, etc.) Because the level of transfer does not hinge directly on politicians, rent-seeking and stupid politicians wrecking things will be minimized.
The tax to fund all of this would be a VAT/GST – one flat rate for all goods and services. Efficient, little leakages, and the political difficulty in raising the rate (compared with, say, Corporate Income Tax). And to keep it efficient, keep the rate at or below 10%. If that isn’t sufficient, a flat-rate income tax.
As well as a slew of Pigovian taxes – a little carbon tax here, a little congestion charge there – these go a long way :-P.
I definitely feel the same when I first glanced through the document. So many programs yet, it riled against bloated bureaucracy.
And looking at their proposed opex, im not convinced that the drastic cut that be achieved. In this sense, I wished DAP had shared their spreadsheet.
Assuming businesses can’t lower workers take-home pay (it’s difficult to cut nominal wages), raising EPF contributions for lower income workers would have the same impact as a de facto minimum wage, which would be to raise unemployment.
There seems a consistent thread through this budget of increased intervention in the economy, rather than less (e.g. proposal to set up Transport Authorities at multiple levels, Khazanah to administer investment from Petronas earnings).
That’s perhaps understandable given DAP’s leftist leanings, but quite at odds with their claims that the present government is “bloated”. I’m not by any means a free-market idealogue, but I don’t see how adding further layers of bureaucracy is helpful in achieving Malaysia’s aims.
Thanks for spotting the payroll mistake.
On EPF, the thing is DAP is tweaking both the EPF and proposing cash transfer as well as credit transfer into EPF. Really, DAP is concerned with savings of Malaysia and it addresses its concern by mandating lower EPF contribution from both employees and employers and then given cash transfer.
I don’t see why do both when cash/credit transfer is enough to achieve the same goal. The extra steps seem unnecessary. This is purely on the mechanism employed, not whether such cash transfer is desirable or not in the bigger picture.
Anyway, I do concur with you about forced savings (indeed, that’s my point about the typical argument against what I mistakenly called payroll tax). But like I said, looking it from purely technical aspect of the policy, tweaking the EPF while doing the cash/credit transfer seems redundant.
On negative income tax, the same concept is already in use in Malaysia, except that a lot of taxpayers don’t know about it. Like I wrote, RM8,000 (IIRC) of tax credit/relief is already given out. If one earns less than that, one will enjoy a tax return (this hasn’t considered other credits like books, computer, etc). Yet, a lot do not file it. Some other reasons must be the bigger contributing factor to non-filing rather than tax credit. Maybe RM8,000 is too low. Who knows.
Heh at the contradiction in policy. However, FairWage seems awfully similar to Singapore’s WorkFare. The reason why Singapore chose to use its CPF system for the system, instead of a direct cash handout or using the income tax system was simply this: it’s much easier and less costly for CPF to do it.
As EPF is compulsory to all employees, and available to the self-employed, they already have the information necessary to increase the take-home pay of low-income Malaysians. A cash handout means that another layer of bureaucracy is needed. Implementing the negative income tax as a whole will require most Malaysians, who in status quo don’t need to file for tax, to start doing so.
So in terms of cost of implementation, while less elegant than a negative tax income, it is just as effective and the implementation oost is minimized, while it being far more likely to help the very demography they are trying to serve.
Personally, I still prefer the elegant, negative income tax. Malaysia’s taxation system needs to be more flatter, so getting more people to file for taxes (as well as making it easier to do so), for me, is a good thing. Plus, there’s something distinctly illiberal about a forced savings system (EPF isn’t, btw, a payroll tax). It assumes that most Malaysians cannot make rational decisions (nevermind our cultural propensity to save). And even if that’s the case, I’d rather an opt-out rather than a compulsory system.