Broader tax base among possible ways to address income inequality

KUALA LUMPUR: Efficient fiscal policies that may include broadening the tax base and enhancing tax administration while ensuring inclusive economic growth are needed to address the income inequality issue in Malaysia, says RHB Investment Bank Bhd (RHB IB).

In a note, the investment bank said addressing income inequality would require a comprehensive approach and the implementation of policies focusing on progressive taxation, social safety nets, equitable access to education as wall as skill development.“The government’s tax revenue as a percentage of gross domestic product has declined over the years, thus, a broader tax base revenue is required to improve the tax base,” it said.

RHB IB said higher spending on crucial sectors such as education and healthcare, a targeted approach in terms of subsidies as well as assistance programmes are needed to reduce income inequality.

To balance fiscal sustainability and the need for social safety nets for the lower income group, the gradual transformation of blanket subsidies to targeted transfers is necessary, it said.

It noted that reducing the income gap between regions and states might take longer as it involved the development of infrastructure such as the upgrading of transport and communication networks in remote areas.

“This is further complicated by the rural-to-urban migration, where youths from rural areas migrate to urban areas in search of better employment opportunities and improved living standards.

“This migration can result in a brain drain from rural areas, further exacerbating the urban-rural disparities in human capital and development,” it pointed out.

To this end, RHB IB said labour market policies such as minimum wages, labour law as well as training and skill development would play an important role, as the policies can either aggravate or mitigate income inequality, depending on the extent of implementation and enforcement.