Tag: GST

Categories
Economics

[2857] Bruce Gale is wrong on GST, income tax and tax avoidance

Bruce Gale wrote a piece in the Straits Times defending Najib’s economic policy recently.

While I do agree with on points like subsidy removal, I have several issues with the article. The one I take the most exception is his claim that the goods and services tax (GST) was needed because Malaysians were avoiding income tax, and went on to cite a figure, which context he did not quite understand, as a proof.

In his own words, the “GST, this was necessary in order to force the middle class to share the tax burden. Tax avoidance in Malaysia is a serious problem. Only one in 10 people actually pays income tax. This is significantly lower than in many other middle-income countries, and far lower than in the high-income economies Malaysia says it wants to emulate.”[1]

I do not oppose the GST and in fact I think it is a necessary tax reform. Malaysia needed to diversify its sources of government revenue and the recent collapse of energy prices proved that. But Gale is wrong when he linked tax avoidance with the fact that only one in 10 people paid income tax.

He is wrong because a majority of Malaysians do not pay income tax due to a different factor altogether.

First, his statistics are possibly outdated. The one in 10 persons figure was true at some point but by 2015, the figure was closer to two in ten. The head of the Internal Revenue Board was reported in June 2017 stating “18% of the population paid taxes” in 2015.[2]  I tried to find the actual figure from a primary source instead of through newspaper reports. But even the annual report of the Internal Revenue Board does not share the total number of individual income taxpayers. It is a difficult number to pin down.

Second and more importantly, the reason behind the low ratio is not tax avoidance. Rather, it is due to the high income taxability threshold relative to the Malaysian median income. Malaysians do not make enough to qualify into the lowest income tax bracket.

The 2014 Household Income and Basic Amenities Survey published by the Department of Statistics shows the median household income in 2014 was MYR4,585 per month. With an average two breadwinners in a household, that would translate into a median of MYR2,293 per person. That means half of all Malaysian income earners earned less than MYR2,293 per month.

Couple that with the fact Malaysians would only be eligible to pay income tax in that year once they made at least MYR2,500 per month.

We can be more exact than that. Based on the same survey, I estimate about 55% of Malaysian income earners were no eligible to pay income tax in 2014. It is an estimate because the survey expressed its results on household basis and I would have to convert various figures into individual terms. I can show you the estimated individual income distribution by brackets (groups in red were not eligible to pay income tax that year):

The large share of those who did not qualify to pay income tax in 2014 could probably be seen better in the following cumulative function chart:

And this is before the typical tax breaks provided by the government: all Malaysians get an automatic MYR8,000 annual relief, or MYR667 monthly. This alone meant about 60%-65% of total Malaysian income earners did not have to pay income tax in 2014. That tax break has since been raised to MYR9,000. There were other typical breaks — books, medicine and even the Islamic tithe — granted by the Malaysian government that raised the number of those who did not have to pay that year to very possibly close to 80% if not higher.

Tax avoidance is a problem in Malaysia. But it is not the top reason why only one in ten (or the updated 2015 figure, two in ten) pay income tax. Other factors pale in comparison to eligibility concerns.

And even if they did not pay income tax, the same majority already paid sales and services tax prior to the introduction of the GST. To say the majority avoided tax when only a minority did so is not only wrong, it is insulting to every honest working Malaysians.

And do you know who do not pay tax? Those benefiting from donation.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

[1] — Bruce Gale. Najibnomics has been good for Malaysia’s economy. The Straits Times. September 1 2017

[2] — Sabin said that based on 2015 figures, 18% of the population paid taxes in Malaysia. He said the threshold of taxability was generally quite high, therefore a significant number of the population falls outside the tax bracket. [Jagdev Singh Sidhu. Higher revenue for IRB. The Star. June 5 2017]

Categories
Economics

[2825] How has the GST affected the consumption GDP?

The GDP growth for the second quarter decelerated further to 4.0% YoY from 1Q16’s 4.2% YoY. But the most interesting GDP component ever since the GST was implemented in April 2015 is private consumption.

And there was a huge jump in that part of the equation. The 2Q16 private consumption expanded 6.3% YoY from 5.3% YoY in the previous quarter. It suggests things are normalizing.

Is growth normalizing?

I did a bootstrap model comparing actual growth with what it would have been without GST. It does show some kind of normalization.

The modelling is very naive with just a bit of seasonality sprinkled in it. The blue line is the actual YoY GDP growth while red is the counterfactual if there was no GST imposed:

GST vs non-GST GDP

But it is important to say it is not so straightforward to claim consumption growth is normalizing. The fact is 2Q15-1Q16 growth are incomparable to the 2Q16 rate. The latter period is the first time the GST effect has been controlled on the year-on-year basis since the tax was implemented while the earlier ones are polluted by base effect. Perhaps, it is better to compare 2Q16 rate with those before 2015 to get a feeling how the GST has impacted economic growth as a whole.

But we have only one point so far. Maybe it is wise to be patience and wait for more data point to be available.

Difference-in-difference

Nevertheless, the nature of 2Q16 makes YoY difference-in-difference analysis across time possible for the first time. Diff-in-diff is done to compare how a certain thing (in this case, YoY GDP growth) behave in two different situations with respect to one factor, while controlling for everything else. Controlling for everything else is tough, but in our case, we are interested the impact of the GST on GDP growth only.

More specifically, what we want to know is whether consumption GDP growth is weaker with GST than without, post-2Q15-1Q16 transition period. Or to put it simply, is the GST-drag on consumption GDP growth a one-off thing?

In the spirit of stylized facts, we want to determine whether it is Case 1 (which is bad):

Output loss, rate permanently changed

Or Case 2 (which is okay):

20160813 output loss rate normalized

Case 1 offers a much bigger output loss than Case 2. There is a Case 3 where output loss happened only during a few periods, but I do not think it is realistic since the GST is an ongoing concern.

YoY chart above suggests we are closer to Case 1.

Quarterly growth suggests case 2

But keeping in mind the issues about base effect for YoY method, maybe quarter-on-quarter calculation would be of a better help.

And QoQ suggests Case 2 is in play. There is a persistent negative effect on growth rates. From the Department of Statistics seasonally adjusted data, 2Q consumption grew only 0.7% QoQ. In 2011-2014, growth that quarter averaged close to 2% QoQ but in 2Q16, it was only 0.6%:

GST vs non-GST GDP QOQ

Indeed, QoQ growth rates since 2Q15 has been weak compared to previous years. QoQ in an way does suggest some kind of a growth slowdown.

How much output loss we suffered?

The easier question is whether the GST has adversely affected the GDP levels. It is easier because base effect is pretty much irrelevant to levels. The answer is, it has.

In the first chart, you can see the GST roughly took 1 to 2 percentage points off quarterly consumption GDP growth. That is equivalent to MYR47 billion output loss in real terms (2010 prices) in the 1Q15-2Q16 period. This includes the abnormal spending increase in 1Q15.

MYR47 billion sounds large. So is Najib’s billion ringgit donation. But to put the number is the proper context, the total size of real consumption GDP during that period was MYR843 billion. So, that is about 6% output loss in that period.

But I have not done the same diff-in-diff for other GDP components. I would speculate the overall impact is bigger than MYR47 billion. But it is hard to imagine it in my head since the expected impact is all over the place.

But I am certain the overall economy lost some economic output. That is probably Captain Obvious speaking.

Implications

If Case 1 is true, then the government has less room to mess around with its GST revenue and start encouraging investment to raise the GDP potential so that the loss is recovered as soon as possible.

Categories
Economics

[2791] Frontloanding theory confirmed for 2Q15 GDP

Apart from the slowdown in consumption, I was wrong. The Malaysian GDP grew 4.9% from a year ago, considerably higher than what I thought it would be at 4.1%-4.2% YoY. Still, economic growth is decelerating quite drastically.

Malaysian GDP growth

Trade surplus did not improve as exports contracted worse than imports, and not the other way round as I wrote previously. Service trade and price factors have something to do with it since trade values published monthly had suggested otherwise. I had naively taken the number without taking into account export and import prices.

Meanwhile, investment growth crashed, becoming much weaker than what I expected. The Pengerang project has not created much dent yet.

But the two big things that caused me to miss the actual growth figure are inventories and government spending. I should have raised my inventory projection when the industrial figures come out respectably okay but the pessimistic me refused to do so. And I had expected with all the rage for deficit targeting, government expenditure would have taken a big hit (yes, I know the GDP government spending does not correspond exactly to actual federal government spending and there are other states’ government spending to account for). It grew in annual terms instead.

The thing that was really hard to get it wrong was consumption. The GST collected its toll. It was a stark slowdown, growing only 6.7% YoY after the 1Q15 8.8% YoY spike. Domestic demand growth decelerated to 4.6% YoY from 7.9% YoY in the same period.

A lot of people had expected a dip after the spike and they were right. The frontloading theory is right.

That has led me thinking about how much did consumers stock up on their foodstuff and other typical consumer non-durable goods. None of us has a warehouse to store a whole year worth of supplies.

This is a hard and important question. Whatever the answer is, it is the key to knowing when will spending normalization take place. When it happens, I think it is reasonable to expect a massive spike in consumption, at least on quarter-on-quarter basis.

If I had to guess, the normalization would probably start this quarter. We could see complete normalization by the end of the year.

Still, preempting the typical data for 3Q15, this quarter would likely be weak too and I feel we would only start getting better in 4Q15. The GST impact itself should be gone completely by 2Q16, if only because of mathematical artifact.

Categories
Economics

[2789] What happened to second quarter consumption imports?

There is something quite weird going on in the imports data.

In the last quarter, we all know we had GST for the first time. It replaced an older consumption tax. After all have been said and done, the effective rate was higher than it was under the old regime. That means higher tax. You could also see it in the inflation figure that hit 2.4% YoY in May from almost 0.9%% in March when retail petrol prices took a dive.

There were concrete proofs of frontloaded purchases happening from the 2015 first quarter GDP statistics. From the 2014 fourth quarter even. Consumers did buy everything to avoid paying the new consumption tax. It happened on a scale grander than the ridiculous lines formed at the petrol station each time a price hike was announced. The GDP consumption component rose 8.8% from a year ago in 2Q15 at a time when credit growth was very weak. Bank loans used to increase more than 10% YoY each month. Now, it is about 9% YoY. All those lending requirement tightening are working.

201508GDPCvsLoanGrowthMalaysia

There is not much correlation from the chart above but the theory is, weak credit growth should affect spending growth negatively. Less money for everybody. The GDP consumption spike is jarring in that aspect, lending credence to the frontloading theory.

If the theory is right, we should see considerable weakness in private consumption growth in the second quarter. And there are quite widespread anecdotes of weaker consumer activities all around. Some statistics like car sales are extremely weak, providing more concrete proof to rely on.

On the surface, merchandise imports data suggests the same thing. In terms of value, it fell 5.2% YoY in the second quarter. In term of volume stripping off the price effect of depressed commodity prices like crude oil, gas, palm oil and rubber, it fell about 4.8% YoY in the same quarter.

So far, so good for the frontloaded purchase theory.

But there is a wrinkle.

Malaysia is a huge trading nation and it is an integral part of the global supply chain. We import not just end goods but also intermediate goods used for the production of other goods. Some are reexported.

Deep down beyond the import headlines, we can see some of these at work. The cause of import contraction however does not seem to be weak consumption growth. In fact, imports of consumption goods have been growing strongly despite the GST in the second quarter (and also despite the weakening ringgit).

201508consumptionImportsJune2015Malaysia

I cannot drill down the category too deeply. So, I do not know the exact reason behind the increase in consumption goods. I have heard explanation that goes like this: the imported stuff were really luxury goods and demand for it had not really let up, suggesting a tale of two classes in Malaysia. But I do not know for sure.

The second quarter GDP numbers will be out next week. Perhaps that would provide some answer to the puzzle.

Categories
Economics

[2765] If pre-GST spending was that high, how low would it be post-GST?

The Malaysian GDP figures released yesterday suggest there was indeed a pre-GST spending spree.

Private consumption growth was phenomenal especially if you consider the fact that previous quarterly growth figures have been slowly dropping gradually over the past year from 8% year-on-year to all the way down to mid-6% in the third quarter of 2014. The latest consumption figure grew 7.8% year-on-year, which is crazy. It is so red hot that if the overall situation had not been so gloomy, Bank Negara would surely have panicked and raised its rates by another 25 basis points. This is quite a surprise even if you had believed the pre-GST spending spree hypothesis.

As a result, 2014 growth was at 6%, which is higher than most (well, all) economists watching Malaysia had projected.

But the central bank would not hike rate because the feeling is that the jump is temporary. I think it would last into this quarter before growth takes on a drowsy mode. The GST should depress consumption growth from April onwards. This is the danger. If consumption could jump so high pre-GST, how low would it get post-GST?

That is a scary thought.

This also gives more proof that consumers do expect prices to increase post-GST. I should add ceteris paribus, I guess, because the low retail fuel prices could make the net effect somewhat a wash. As for the recent electricity tariff cut, do not bother. I did a simulation and it hardly changed my headline projection.

Regardless of expectations, I am unsure there would be an actual net price hike. Last year, somebody told me the authorities expected (ranging from the Department of Statistics to the Treasury) inflation would hit 6% with GST, after months of official drive by the mainstream press that inflation would rise. Then it fell to about 4%. (You could understand why most banks are projecting about 4% inflation previously. They took the government’s guidance to heart) Now? I was informed the government expected it to be about 2%, mostly because of fuel prices. My own projection is about 3.3% YoY monthly average where I assume the GST will hit the economy in full force without any exception-zero rated stuff, but I keep several projections in the spirit of scenario analysis with the lowest at about 1.5% YoY where I pretend GST is the spoon in The Matrix.

My confidence in my models is  at an all time low and I have resigned to the fact that we will only know it in June or July when the Department of Statistics will release the April-May inflation figures. The crazy demand fluctuation, the retail fuel flotation and the GST make projections go everywhere.