Sunday, January 03, 2010

Economics @ Home © Volume 2 Issue 1

Taxes and Expenditure - Part 1

To almost any wage-earning individual, the word "tax" is like a huge taboo. Any implementation of new taxes would certainly result in public discontent, which is probably an understatement considering the absurdities that are going on in Malaysia. Before we delve into that, let's just try not to curse aloud and approach this topic with constructive optimism.

This article will examine some of the possibilities resulting from a GST, in hopes of keeping your minds open, or to open them, if they are not already open, with its impending implementation in in Malaysia in the near future.

As always, before we begin any discussion, let us first lay down our foundation as to where we stand today. With one of the highest (if not the highest) income tax rates in the region at 27% for the highest tax bracket (annual income exceeding RM100,000), the tax burden on individuals sure seems heavy in Malaysia. Compare this with the tax rate in Singapore, which is at 20% for the highest tax bracket (annual income exceeding SGD320,000). Comparing dollar for dollar, the tax rate for Singaporeans earning SGD80,000 to SGD160,000 is 14%, almost half that of Malaysians. Stop swearing!

So we wonder why the only foreign talent we can attract are "professional" housekeepers from Indonesia and "professional" petrol station attendants from Bangladesh. It is clear that our current tax environment is not ready to attract highly skilled and talented workers from abroad. What's worse, the tax environment is not even conducive for keeping homegrown talents who simply have to walk across the Causeway (it is possible) to enjoy greater tax savings. That is not even accounting for the higher wages and living standards that Singapore offers.

That is one of the most detrimental effects of our high tax rate at the moment. Before we go on cursing the government about the absurdly high tax rates, let us first think about why are taxes necessary. The most common argument would be to use tax revenue for public goods such as street lighting, road paving, and also compensating government employees. The government also subsidizes schools, housing projects and other infrastructure development that would otherwise be "inefficient" if left to the market because the market does not take into account positive externalities. So says conventional economic theory.

If you have lived in Malaysia for a sufficiently long period of time, you will know that nothing in Malaysia is subject to conventional theory. First of all, there is nothing efficient about the allocation of tax revenue in Malaysia. According to a report by the Auditor-General in October 2009, billions of dollars worth of projects were not satisfactorily implemented and I am fairly certain that many of these projects were abandoned while the contractors escape with full pockets.

Let me just go through a few examples of absurd expenditures:

Kolej Kemahiran Tinggi Mara Balik Pulau in Penang paid RM84,640 for two laptops or RM42,320 per laptop and spent RM2.08mil on computer software that was not used, among other things.

I have never in my whole life seen a laptop that costs more than RM20,000 before, let alone RM40,000. What does a RM42,000 laptop even look like? You could probably build a mainframe with that amount of money.

Here are some more examples:

Weaknesses revealed in the report included the Finance Ministry’s public infrastructure maintenance programme, basic infrastructure programme and parliamentary constituency rural development projects involving RM4.59bil for 92,687 projects from 2005 to November 2008 that were still not satisfactorily implemented.

The report highlighted that the Agriculture and Agro-based Industry Ministry’s Tanjung Manis integrated deep-sea fishing port in Mukah, Sarawak, built at a cost of RM313.62mil, did not achieve its “main objective” because of project delay, unsatisfactory work quality and non-completion or non-construction of certain basic facilities.

The report said a total RM68.38mil had been spent on the programme as at Dec 31, 2008, but 156 completed centres were still not registered in the name of the Federal Land Commissioner. The programme has been ongoing since the Eighth Malaysia Plan (2001 to 2005).

Weaknesses were also noted in the Science, Technology and Innovation Ministry’s human capital development programme where targets of schemes were not fully achieved, payments were made to unqualified recipients as well as inefficient monitoring and evaluation of the programme. The programme cost the Government RM153.73mil from 2006 to 2008.

If you didn't know any better, you would think that these reports are bad enough. Let's not forget the mother of all leakages, the RM12.1 bln PKFZ scandal.

So with all these leakages or rather, euphemistically put, inefficiencies in spending, should Malaysians not be cursing about the implementation of more taxes? Nonetheless, addressing these issues require a long and arduous process to stem out corrupt bureaucrats. The question is, can we wait until we are able to minimize these leakages before we implement the GST?

We will delve deeper into this in Part 2 in the next issue.

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