The importance of an equitable tax regime

PAYING taxes is an important civic duty. It is on par with knowing how to sing the national anthem and recognising the national flag.

Taxes are important to a country as it is the revenue generator for the government to build up the economy and provide public goods for the people.

Public goods are the likes of infrastructures, utilities, transportations, healthcare, education, welfare and others which the private sector ordinarily would not want to get involved unless there are profits to be made. This is the traditional sense of the economy.

The government is the allocator of resources for a country. In other words, they are the decision maker on how to move the pool of tax collection from the people.

In doing so, they will need to take into account various considerations and interests of stakeholders. It is one of the most important ways to stay in power besides relying on a charismatic leader. Inefficient allocation of resources is the fastest way to sow discontent among the public and risk disenchanting the voter bank.

This is why the national budget is important. Most would think the budget is just another Parliamentary formality or an opportunity for politicians to inflate their sense of self-importance.

Some are only concern with the “goodies” which the government may shower upon them. However, I beg to differ. It is necessary to pay attention to the national budget because it sets the tone for the country’s policy direction and gives a sense of how taxes derived from hardworking citizens are being channeled.

A progressive national budget would help lay the foundation for the nation’s economic development. A regressive one would centre on pleasing various stakeholders.

For many of the past years, our country’s budget was heavily tilted towards operational expenses rather than development expenditure (see Table).

With less than 25% focused on development, how do one expect the country’s economy to grow? To put it into perspective, if a company’s priority is serving the same pool of clients with similar products and there are limited allocation towards research and development, the company would not grow.

If the company cannot grow, earnings will not improve. This in turn will render the share price to remain lacklustre or even trend downwards. By looking at the economy from a macro level, one would understand why our country’s economic performance have been less than spectacular.

Through the evolution of society, the traditional sense of economy may no longer hold true. Advancement of science and technology as well as the increase in education level, help the people recognise that a government may not be the most efficient allocator of resources. These inefficiency gaps allow private sector and startups to disrupt the paradigm. A good example would be taxis. If the transportation infrastructure is holistic from end to end, there would be no room for ride hailing service provider to even exist.

Taxis are so entrenched in the traditional economy where licenses are granted by relevant government authorities. They in turn take a chunk of the income from taxi drivers or concessionaire holders.

This model is disrupted because the system itself is open to abuse and deprive taxi drivers of their fair share.

> turn to page 9This is also probably why Grab Holdings Inc (Grab) started out as MyTeksi back in the day. Time, however gradual, will catch up and change is inevitable.

I believe most people world-wide would gladly pay their taxes to the government without any discontent if their needs were met. In essence, it is about seeing the government putting the people’s taxes to reasonably good use rather than ending up as leakages and wastages.

With the national budget only a few weeks away, I would like to consider proposing some alternative ideas to those in power. There has been a lot of banter about introducing new taxes to shore up the depleted coffers of our country. Many politicians called for expanding the tax base with new measures including windfall tax, capital gains tax or reintroducing GST. Relying solely on sales and services tax or the ordinary corporate and personal income tax is no longer sufficient.

Personally, I am against any form of taxes that punishes hard work and success. So it is a relief to see the government not imposing windfall tax on companies that performed extraordinarily during uncertain times. Unless of course, the government has provided substantial subsidy in the past or it is a concessionaire which relied on the government for lucrative returns such as independent power plants, then by all means, the government should call in the chips. Otherwise, the private sector, which toil and succeed by sheer grit and entrepreneurial spirit, should be given the freedom to operate within a pre-determined tax structure and the ambit of the law. That is the best way for an economy to operate efficiently without being hindered by interventionist policies.

Taxes are progressive in nature because it is the most acceptable form to the masses. In a way, it is somewhat the most equitable form of tax structure. The more you earn, the more you pay. However, the loopholes that allows the rich to get away from their legal obligations causes frustration for the people. Warren Buffet in 2013 most notably said that his secretary pays more taxes than him. With the sentiment for wealth tax sweeping developed nations around the world, some are calling for the same to be imposed in Malaysia. In my humble view, populist measures should not take precedence in a developing country simply because the economy structure requires more growth in order to expand the pool of resources. The bar of developed nations cannot be imposed in the same breath as developing economies.

Instead of going “Robin Hood” on the top 10%, an equitable arrangement can be considered where these 10% can choose to allocate their additional taxes towards an approved list of causes which they believe in. While fairness does not always mean equality, this would be very much tenable.

Furthermore, politicians should avoid pitting one group against another or launch a social class warfare to achieve their agenda. Ultimately, no one wins and it will be at the expense of someone who have just as much right as the next person by virtue of being a citizen of the country. If the government cannot be the most efficient allocator of resources, they still can play the role of determining the list of desirables and undesirables.

My own wish list would be for preferential tax breaks to low income selfless professions such as nurses, journalists and teachers created. Their contribution to society is undisputed but they often rank among the lowest paid occupation. To balance this, authorities can consider imposing higher tax rates for unfavorable industries such as those which cause pollution or environmental harm. This would serve as a deterrent by increasing their cost of business. I call this idea the “social good tax incentive”

In the 2004 apocalyptic movie ”The Day After Tomorrow” starring Jake Gyllenhaal, there was a scene that left an indelible impression on me. The people seeking refuge in New York Public Library tried to use books to start a fire to keep warm. While they were arguing which books should be burnt, the librarian insisted that a book by renowned German philosopher Friedrich Nietzsche, should be preserved. To settle the bickering, a quick witted friend proposed to burn an entire section of the tax law books. This scene strikes a realisation - taxes are absolutely meaningless in the face of extinction. That said, as we are still living, let’s work towards a more equitable and purposeful tax regime for the benefit of the people.

Ng Zhu Hann is the author of Once Upon A Time In Bursa. He is a lawyer and former chief strategist of a Fortune 500 corporation. The views expressed here are the writer’s own.

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