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Monday May 20, 2013

Is BR1M a negative income tax?

People queing up to collect their BR1M vouchers. Under BR1M, an applicant would
be required to file, not quite a tax return, but a simplified claim form to the tax authorities. People queing up to collect their BR1M vouchers. Under BR1M, an applicant would be required to file, not quite a tax return, but a simplified claim form to the tax authorities.

WHEN I made the comment that we appear to have introduced a negative income tax, my friend's face showed that he thought I was being frivolous. Well, maybe a tiny bit but otherwise, quite serious. I had been reading a series of published lectures on biopolitics by the French philosopher, Michel Foucault and stumbled on a reference to negative income tax.

Foucault quoted Lionel Stoleru, who had been technical advisor to Giscard d'Estaing, the French Finance Minister in 1974. Stoleru had advocated the negative income tax and had explained it in the following terms:

“The theory of the negative tax on income is simple: it involves defining a threshold of poverty as far as annual incomes are concerned, in terms of the size of family (a single person or a household with children), and paying an allowance to families falling below the poverty line, enabling them to make good the gap. In other words, it is a system of minimum income guaranteed by the community.”

This rather terse outline seems to sit well with the way the BR1M (Bantuan Rakyat 1Malaysia) programme works. The programme appears to have taken on a life of its own as political parties across the divide have all pledged to continue with it, with the promise by the incumbent administration to enhance pay-outs to RM1,200 and RM600 for a household and a single person respectively.

The French version of the negative income tax attracted considerable debate among the left in the 1970s and again during the socialist government of Lionel Jospin in 2000-2001.

The tax carries with it a number of interesting policy features. Foucault explained one of them in the following manner:

“Consequently, below a given level of income we will pay an additional amount, even if this means giving up the idea that society as a whole owes services like health and education to each of its members, and even if also, and this is no doubt the most important element it means reintroducing an imbalance between those receiving aid and those who are not.”

This seems to indicate that the need to help those at a vital minimum level of subsistence can be considered more pressing than the other hallmarks of social policy such as universal healthcare and education.

How is the negative tax different from other social initiatives designed to help the under-privileged of the community?

The fundamental difference is that the negative tax is not concerned with the causes of poverty, but with its effects. Stoleru said: “Acceptance of the negative tax is therefore acceptance of a universalist conception of poverty based upon the necessity of coming to the assistance of those who are poor without seeking to know where the fault lies”.

This certainly gives the negative tax its altruistic credentials and is perhaps why the BR1M programme has so quickly taken on its political populism.

As with all compensatory benefits, the question that inevitably arises is whether the negative tax will create a disincentive for work. Its proponents suggest that the subsidy should be pitched at a level, which is not high enough to demotivate the recipient from seeking work.

There will be those, as Foucault recognises, who will be content not to rise above the poverty threshold and continue to benefit from the tax. This surely must be seen to be its inherent weakness.

The negative income tax is not a French but an American idea. Milton Friedman, the Nobel economics laureate, had suggested that it be incorporated into the US tax system.

A person whose annual income is below the prescribed threshold will be required to file a tax return like anybody else. If his income is below the threshold, then the negative tax is the difference between this and the threshold amount multiplied by the tax rate, which he suggested should be fixed at 50%. The tax filer will receive a cheque for the negative tax amount.

Under BR1M, an applicant would be required to file, not quite a tax return, but a simplified claim form to the Malaysian tax authorities. This then seems to mirror the process of a formalised negative income tax system where the tax authorities have a primary role in its implementation.

Despite many attempts to introduce the negative income tax in the United States, the closest it came to passing through its Congress was when Nixon was president. The Earned Income Tax Credit in the US tax legislation adopts the idea of negative tax.

BR1M clearly has its detractors many of whom will say that the money given away could be better spent on alternative social projects. Such critics have unwittingly entered into the classic debate on whether we should help those at the absolute poverty level at the expense of those at the relative poverty level.

This question should be considered in the context of Malaysia's income inequality. Income inequality is measured by the Gini coefficients, which runs from 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income and everyone else has none).

Malaysia's Gini coefficient based on the 2009 World report was 0.462. This compares with between 0.24 and 0.25 for the Scandinavian countries of Denmark, Norway and Sweden. China has recently released its Gini number for 2012 at 0.474.

Malaysia's relatively high level of income inequality suggests that there remains a sizable segment of the less poor, whose income levels, while above the BR1M threshold, should remain a concern for policy makers.

So long as this is not lost sight of, the current measure to provide assistance to those at the lowest income level should be lauded. While BR1M has all the hallmarks of a negative income tax, there is no reason why its rules should not remain simple thus avoiding the complexity of a full-fledged tax system. ● Kang Beng Hoe is an executive director of Taxand Malaysia Sdn Bhd, a member firm of TAXAND, the first global organisation of independent tax firms. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views. Beng Hoe can be contacted at kbh@taxand.com.my

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