The current tax system unfair to the middle class and lower income groups. Do you agree?

Syafiqah:

Malaysian tax system

            Tax history for more than 2,500 years has been focusing on two significant issues, namely who pays and what is taxed. For most of human history, taxes were paid by the poor like peasants, slave and conquered people. Ruler collected the money to pay the cost needed for building public artefact such as monument and temples and some of the money are used to finance warfare.

            What are the tax system in Malaysia? Under budget 2015, tax payers with family and income of RM 4000 per months are not entitled for tax liability. The prime minister during recent budget presentation has reiterated its commitment to cut income tax between 1% to 3% for the 2015 year of assessment, meaning some 300,000 individual taxpayers will no longer pay income tax for the 2015 year of assessment, meaning some 300,000 individual taxpayers will no longer pay income tax (E-Cukai.com,2014).

Effective Year of Assessment 2016 (meaning from 1 January 2015 onwards), the tax rate for individual residents of Malaysia shall be reduced by 1% to 3% as follows:-

On the 1^st April 2015, Government has implemented the Good and Services Tax (GST). GST is a tax scheme where the tax is imposed at each phase of the manufacturing process so that each phase brings revenue to the government. 

GST is introduced at the beginning of the manufacturing process   and is counted in each phase of product or service production and marketing until it reaches the consumer, who pays the tax. GST is collected after the final consumer prices are imposed. Even though GST is imposed at each level of the supply chain, the tax element does not become part of the cost of the product because GST paid on the business inputs is claimable. So, the entire burden of the tax will be borne by the consumer. GST is a regressive tax, because it taxes on consumption and in terms of the same consumption, people with lower income spend a larger part of their income rather than those with higher income. It seems to burden the low-income households because they have larger marginal propensity to consume and most of their income will be spent on food and necessities (Ismail, 2015).

Hoe Choon:

Low and Middle income group in Malaysia

What does it mean to be low income and middle income in Malaysia? The low income people in Malaysia can be classified as people with salary not more than RM 1500 per months whereas the middle income in Malaysia can be classified for the people who gain salary for about RM 3000 and above but below RM 10000 (Chi, 2014).

They are the low income category living in government flats, riding motorcycle and having to spend hours at workplace in order to earn extra overtime to maintain life at poverty level. The middle income are normally graduates and their level of salaries starts with their type of jobs and where they work. A starting pay would about 2000 and at the incremental rate of 6% it takes years to build up to the average salary of 4500 and they are committed with study loan of on the average of 60000 and can hardly save, what more buying a link house which now cost about 500000, They have probably to have to rent a house for the rest of their life and drive 5-6 years old car (Mohamed and Nicholas, 2014).

Vanessa:

How is the impact?

The impacts that GST will bring to the consumption patterns of middle class and lower income group are mostly negative. The Government or the society should support these group of household about the issues of how GST could affect low-Ismail, International Journal of Environment, Society and Space and income households. Low-income households are not excluded from paying GST and taxes because taxes are collected at the time of purchase, which are already included in the products. However, the solutions that the Government came out with is that they support low-income households by implementing tax on wealth. This tax has been implemented for a long time in Islamic society where they called it as zakat. Wealth tax (zakat) is only applied on rich people who has surplus wealth.

UOB Global Economic & Market Research recent study has compared the impact of GST in Singapore, Japan, Thailand, and Australia. The study has found out that GST has a short-term impact on the consumer price index (CPI) because GST increases the CPI and inflation rates revert to long-term averages in the years after GST implementation. The study also stated that private consumption spending could be dampened after the implementation of the GST. However, wealth tax (zakat) expenditure has the ability to increase the aggregate consumption since the marginal propensity to consume of high-income households is lower than that of low-income households. Zakat distribution has a positive impact on private consumption in Malaysia where the 1% distribution of zakat will increase the private consumption by 0.36%. This results shows that zakat distribution is capable of affecting consumption spending especially by low-income households.

Will GST bring burden on end-user consumers of products? Yes, especially negative impacts towards middle class and low income group compared to higher income earners because GST is a regressive tax. GST promotes inflation which reduces the purchasing power of consumers, and raises barriers to upward social mobility for the lower income households. In one hand, inflation that keeps on increasing might cause higher interest rates and dampen private investment as well as bring negative impact on overall economic growth. On the other hand, implementation of zakat has bring a positive effect on middle class and lower income households’ aggregate demand and spending pattern. The reason is zakat is able to transfer wealth from the rich to the poor (low-income households). If the poor has higher marginal propensity to consume than the rich, then the aggregate demand will rise. This is because the poor will use money more efficiently as they will use it to buy necessity goods only, so it will bring greater production of essential goods. The zakat users will benefit from this too as they are able to increase their saving in order to avoid the depletion of wealth. The increase in saving will ultimately be matched by an increase in investment. The level of output therefore rises in equilibrium. Therefore, zakat is preferable to be implemented because it will be able to supports the low-income households and can boost the economy.

Shyu Chai:

Conclusion & Suggestions

As discussed in earlier part, GST leads to burden for them. Hence, in our perspective, we do agree with the staement: Malaysia current tax system seems as unfair policy for those who are lower income earners. However, there are several studies had carry out improvement and feedback towards the GST critism. 

Firstly, study by (Nor Asmat, 2015) suggested that that zakat is desirable to be implemented because it supports the low-income households and boost the nation domestic growth as well. The common aim of zakat is to redistribute wealth of the society among the poor. The wealthier person with money surplus will pays more in terms of zakat. And zakat will goes to the poor group as a tool of financial resources. By this way, zakat positively affected aggregate demand and purchasing power of low-income households. The money given to the poor will be used to purchase more basic necessities. Eventually, it will end up with greater production of essential goods by small and medium scale enterprises. Indirectly, zakat capable to boost up the growth of those small industries and created more labor force opportunities for the poorer groups.

(Business Cycle, 2014) stated “GST can be implemented in a manner that prevents inequality”, For instance, government reduced the personal income tax rate and launched BR1M program which distributing RM300 annually to lower income households in order to help them cope with the introduction of the GST. Not only of these, government should consider the best practices of Singapore in terms of helping the poor with the execution of the GST. Singapore implemented redistribution of society which is achieved via state education and health services, where GST was absorbed to subsidize patients in hospital and medicine sector. “Automatic Employment Benefits” implemented for topping up the wages of older, lower-income workers and targeted measures. GST credits and GS vouchers are used to relieve the tax burden on lower-income groups. It is the best way to stem unfair criticisms towards this tax system and keep the public happy.

References

Business Cycle (2014). A well-implemented GST can help the poor - Business Circle. [Online]. 2014. Business Circle. Available from: http://www.businesscircle.com.my/a-well-implemented-gst-can-help-the-poor/. [Accessed: 3 May 2016].

Chi, M. (2014). What does it mean to be middle class in Malaysia?. [online] Malay Mail Online. Available at: http://m.themalaymailonline.com/malaysia/article/what-does-it-mean-to-be-middle-class-in-malaysia [Accessed 3 May 2016].

E-Cukai.com. (2014). 2016 LHDN Income Tax Rate. [online] Available at: http://e-cukai.com/2016-lhdn-income-tax-rate/ [Accessed 3 May 2016].

Ismail, N. (2015). COMPARISON BETWEEN THE EFFECT OF GOODS AND SERVICES TAX AND WEALTH TAX ON LOW INCOME HOUSEHOLDS: A THEORETICAL STUDY. [online] International Journal of Environment, Society and Space. Available at: http://malaysiangeographers.org/ijess/wp-content/uploads/2015/12/4-Ismail-COMPARISON-BETWEEN-THE-EFFECT-OF-GOODS-AND-SERVICES-TAX-AND-WEALTH-TAX-ON-LOW-INCOME-HOUSEHOLDS-A-THEORETICAL-STUDY-IJESS-2015-32-32-39.pdf [Accessed 3 May 2016].

Mohamed, R. and Nicholas, j. (2014). How will you classify salaries in Malaysia as middle class, upper middle class, and higher class with respect to financial stability?. [online] Quora. Available at: https://www.quora.com/How-will-you-classify-salaries-in-Malaysia-as-middle-class-upper-middle-class-and-higher-class-with-respect-to-financial-stability [Accessed 3 May 2016].

Nor Asmat, I. (2015). COMPARISON BETWEEN THE EFFECT OF GOODS AND SERVICES TAX AND WEALTH TAX ON LOW INCOME HOUSEHOLDS: A THEORETICAL STUDY. International Journal of Environment, Society and Space. [Online]. Available from: http://malaysiangeographers.org/ijess/wp-content/uploads/2015/12/4-Ismail-COMPARISON-BETWEEN-THE-EFFECT-OF-GOODS-AND-SERVICES-TAX-AND-WEALTH-TAX-ON-LOW-INCOME-HOUSEHOLDS-A-THEORETICAL-STUDY-IJESS-2015-32-32-39.pdf. [Accessed: 3 May 2016].