Tag: GST

Categories
Economics

[2764] Will there be a spending spree before the GST?

I think the general consensus is that there will be a spending spree before the GST, which will be implemented on April 1. The idea is that a lot of consumers would expect price hikes of various degrees on or after April Fools’ Day. So, people would rush on to capitalize on current cheaper prices. This is much like how each time the government slashed petrol subsidies and hiked petrol prices previously, private vehicles would line up at the gas stations as consumers try to save the tiniest bits that they could.

I used to agree with that idea despite holding that the effects of GST would not be the same across all goods. A hike sounds likely for new homes but for some others, it does sound like a price reduction. In fact, I am unsure about a lot of stuff.

But in the end, it is expectations that affect current behavior and not actual future prices. The expectations might be wrong, but it will be wrong on the day consumers see the actual price, not before. So until then, expectations would still drive the spending spree. But of course, I am forming an expectation about people’s expectations, which can be problematic.

I am unsure about that spending spree now because I saw a piece of data from a survey at my workplace. I cannot reveal it because it is proprietary data. I would probably get into trouble for this (haha) but the result is quite different from my earlier expectation. I think all I can say is that more respondents expected to spend less instead of more before the GST!

The implications can be big. If you believe the consensus story, growth would be relatively strong in the first quarter and weak for the rest of the year. They spend first and spend less later.

Now, the survey result sounds like a straight up Ricardian equivalence, or at least close to it where consumers save to fund their near future spending (Ricardian is actually more than this but the saving story is similar). So, if the survey is right, there will be no spike in spending this quarter. Maybe even a slump.

Categories
Economics

[2759] Dirty float is good, but actual floating is better

The government is getting a lot of flak for its decision to adopt the dirty float mechanism in determining petrol and diesel prices. Pakatan Rakyat, Rafizi Ramli especially, is attacking the government by highlighting the fact that the government is not passing the full saving from the falling crude oil prices to the consumers and pointing out that consumers are effectively being taxed for consuming petrol and diesel.

Politically, I am enjoying the show because Barisan Nasional politicians and their supporters are so fond of asking others to be thankful to the BN-led government for providing subsidies. Now that the government is actually taxing fuel consumption, the politicians and their supporters are trapped by their own rhetoric and suffocating logic. There are people like Tan Keng Liang who is trying to defend the government but his messages are incoherent and uninformed. So, he is not doing the government much favor and I dare say he is hurting the government instead.

But beyond the politics, I prefer that we tax both petrol and diesel and then completely float it. That would leave retailers to set the prices, and hopefully compete with one another rather than having the government sets the prices from above. So, in some ways, I do approve of Rafizi’s action because I see his campaign ending up pressuring the government towards a better floating system, regardless whether that is his intention.

But I think it must be said that the current dirty float system is better than the old one. It is still inefficient, but it is more efficient than before. There has been significant policy progress in the past year or two and I think we have to be fair to the government for having the political will to do so.

On to the dirty float system itself, while the current mechanism has its weaknesses, it also has its strengths. In fact, its weaknesses are its strengths depending on the direction of the price change, from consumer perspective. Its lagged nature does provides some kind of stability to consumers.

I will not describe the current system in full, but in summary, it uses the average market prices from the last period as the reference retail price for the current month. The information that the system uses is lagged by a month.

I have drawn a chart to illustrate this:

Dirty float

From the consumer perspective, in time of falling crude oil prices (I label as actual market prices), the dirty float is not ideal. This is because saving from the current difference between market and retail prices goes to the government. The government would pass some saving to the consumers eventually but as you can see, the saving passed is only a fraction of total saving the consumers would have gained under a pure floating mechanism. The area colored red is actually the taxes paid by consumers.

But in time of rising prices, consumers would prefer to have this lagged pricing exactly because the situation is reversed. Consumers will also pay less, essentially enjoying a subsidy, as represented by the blue area. Of course, right now, this scenario is a hypothetical. When prices rise, you can bet the rhetoric will be different and wanting this kind of system instead.

But this also highlights that the dirty float mechanism does not really do away with the subsidy regime despite all the hoo-ha that Malaysia has finally abolished petrol and diesel subsidies. The truth is that the government has changed its system from that which always subsidizes consumption to that which would subsidize it only when prices are rising (and taxing it when prices are falling).

I would like to see the abolition of subsidy. That means a complete floating system where retail prices correlate almost completely with market prices, with a slight tax on it. That imposition of tax should be considered alongside the cash transfer policy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — I have additional thoughts on the matter.

Apart from free-floating the prices to keep retail prices closely following the market prices with the view of passing the saving to the consumers, another way of improving the dirty float mechanism is to shorten the lag period.

Right now, the retail prices are dependent on the average prices of the previous month. What we could do is that make it dependent on average prices of the last two weeks, or the last week. The shorter lag would ensure the effective tax and subsidy be smaller than what it is right now. Here is another chart to show what I mean:

20141217DirtyFloatMalaysiaShorterLag

Here, I have added a new dirty float retail price with a shorter lag, superimposed on the first chart. You can see the amount taxed or subsidized is smaller compared to the original case. For clarity, area A+B is the total tax enjoyed by the government with the original month-long lag. With shorter lag, the total tax is just the area B.

It is also worth noting that if market prices are completely random, the total tax and subsidy would cancel out each other.

I also want to take this chance to clarify my ideal policy, i.e. free float with a slight tax on it. I figure the next chart will deliver my message crystal clear:

Free float taxed

I am showing a fixed tax version. There are other ways to do this, like through ad valorem, which is how the GST would do.

Categories
Politics & government

[2506] Is that a water pistol in your pocket?

The anti-Lynas camp organized a public forum at the Malaysian Parliament some time ago last year. There was a panel of several men and women highlighting the cost of allowing Lynas to operate its rare earth metals refinery plant in Pahang.

An expert took his turn to speak. He patiently explained the inverse-square law in the context of public health. The danger of harmful radioactive substance to a person correlates inversely to the distance between the two.

The shorter the distance, the more detrimental it is to the person’s health. It is not a linear relationship where a unit of distance closer means a unit increase of harm. Rather, the danger increases exponentially with each unit of distance shaved.

He went on to explain that the Lynas plant would be processing fine radioactive substance. If handled carelessly or by some unfortunate accident, the substance would be exposed to the air and permeated to the surrounding areas.

If inhaled, the distance between the radioactive material and human body would effectively be zero. Under the inverse-square law, the danger would be infinite. Radiation poisoning would be inevitable.

The person may be an expert in his field, but he spoke without the eloquence of a seasoned orator. There were short pauses as he thought through his next point slowly. As much as his thoughtfulness demanded respect, those pauses were distracting and even annoying. He lost the audience, if the mostly boring jargon-laced scientific presentation had not yet.

The next two speakers had sharper presentation styles and spoke in plain Malaysian English. The presentation slides were more colorful than the expert’s. One had a video running. They immediately took hold of the crowd, demanding attention with their exuberant confidence.

Yet, their field of expertise was unclear. The only obvious thing was that their speeches were a series of emotional appeals, and a series of exaggerations. One of them asserted that radioactive material from Lynas plant could pollute all palm oil produced in Malaysia, hence making it dangerous for consumption.

He talked as if the whole palm oil industry would be in danger of collapse. Others outside of the hall in the public sphere have equated the risks of running the plant to the meltdowns of Chernobyl and Fukushima.

They exaggerated either willfully or out of ignorance to garner support for their cause. Maybe out of desperation too because they care about the issue and they need support. They are the advocates. They may have succeeded judging by the reaction of the audience but not all were moved by the exaggeration. But most of the audience already had their minds made up before the presentations. The two were preaching to the choir.

For the unmoved minority with their minds yet to be made, the exaggeration discredited the speakers.

To be fair, the debates surrounding Lynas are full of exaggerations. Both the opposition and the proponents have exaggerated the benefits and the cost of the project.

The Lynas debate is obviously not the only one that suffers from exaggeration. The debate on the goods and services tax is another. As the exaggeration goes, inflation would go up through the roof and everybody’s tax bill would balloon.

The fact that the GST would only cause transient inflation was uninteresting to the anti-GST side. The fact that the GST can mimic the existing tax system without increasing a person’s total tax burden was discounted by the anti-GST camp.

On the proponent side, they exaggerated that Malaysia would go the Greek way if the GST was not implemented. The truth is that while it helps, the introduction of the GST is neither the only way nor the crucial piece to balance public finance up.

We know the Greek argument is exaggerated when the sides that use it are undisturbed by handouts given by the government that directly contribute to the current state of government finance. Even they are unworried.

When a side runs out of bullets, exaggeration is the water pistol masquerading as a real gun. An exaggerator armed with a water pistol may fool some people sometimes. But when it is time to pull the trigger, the exaggerator better prepare for a backlash or two.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on February 27 2012.

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.

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

[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

[2164] Of a progressive GST?

There is a report by Bernama yesterday which states that a tax official claimed GST will not be inflationary due to lower GST rate compared to the rates of soon to be abolished sales and services tax. It is theoretically possible and I am leaning in that direction. One statement, however, troubles me:

KUALA LUMPUR, Feb 10 (Bernama) — The implementation of the Goods and Services Tax (GST) based on current estimates, will not lead to price increases due to the offset from the abolishment of the sales and services tax (SST), the Chairman of the Tax Review Panel in the Ministry of Finance, Datuk Kamariah Hussain, said Wednesday.

She said logically, with GST, consumers would pay 4.0 per cent tax compared with the current service tax of 5.0 per cent and sales tax of 10 per cent.

“GST is progressive rather than regressive, with tax incidence at the 4.0 per cent GST rate being lower than the current SST,” she said at the Affin Investment Bank forum on GST here Wednesday. [GST Will Not Lead To Price Increases, Says Tax Official. Bernama. February 10 2010]

Is GST progressive tax?

This is the first time I have heard somebody arguing that GST is a progressive tax.

To the best of my knowledge, GST is not a progressive tax. Why?

First, GST is a flat tax. There is only one rate. Therefore, it is not progressive in terms of rate structure. It is flat.

Second, a flat tax is regressive by the very nature that those earning relatively lower income will see greater fraction of their income taxed compared to those of higher income (it can be made less regressive by introducing exemption to staple food and other ingredients like sugar and salt). This makes it not progressive in terms of welfare.

So, in what way is GST progressive?

The only way I can think of that makes GST progressive strictly in terms of welfare, is by making way too many exemptions on goods typically consumed by the middle class and lower. In other words, practically, taxing only luxury items. Is that the case here?

There is no explanation in the article.