Tuesday, February 17, 2009

Why tax cuts are better than deferment of tax payments

There is a line of thought that tax cuts forming part of the Malaysian economic stimulus package may not be effective when compared to deferment of tax payments.

The thinking is that since Malaysia has a narrow base of taxpayers, any tax cut will not achieve distributive fairness.

The thinking is also that in the current economic climate, any tax savings arising from tax cuts would be saved by the Malaysian taxpayer and, thereby, negate the intended effect of tax cuts as part of an economic stimulus package.

The thinking is, further, that deferment of tax obligations spread, say, over three years, would have a better salutary effect. The thinking is that deferment of tax payments will leave much-needed funds with corporations and, that the effect would be similar to a form of financing to corporations. The additional effect is that the revenue authorities still get to collect tax revenue, only that it is spread over three years.

I respectfully disagree with the line of thought.

The valiant Malaysian taxpayer
It is a fact that Malaysia, being a developing country, has a smaller middle-class compared to developed countries. In fact, the size of the middle-class is probably the best yardstick for whether a country has achieved developed nation status or, not.

The correct perspective for policy-makers should be that this small middle-class taxpayer base in Malaysia has been valiantly supporting the revenue stream to the government coffers during the best of times and, during the worst of times, to borrow the Dickensian phrase.

Now that times are bad, the taxpayers should get their deserved relief.

Irrelevant consideration
The fact that most Malaysian workers do not pay tax and, therefore, would not enjoy any relief provided by the tax cuts is an irrelevant consideration in any decision relating to a policy to cut taxes.

The issue of fairness to all Malaysian workers is irrelevant in the context deliberating on tax cuts.

For Malaysian workers who earn such a meagre income that they are not eligible to pay taxes, their threats are in the form of unemployment and pay cuts. Such threats are also felt by the tax-paying middle-class, by the way.

Anyway, such threats can only be met with social safety net policies like unemployment insurance, re-training programmes and new job placements.

Predilection to save in bad times
Rationality plays a large part with taxpayers who receive tax cuts. The possibility that 40% to 50% of the tax cuts are saved by the taxpayers should not deter policy-makers. The taxpayers are just making sure that there is enough saved for an economic downturn that has an uncertain duration.

Being rational, they will start spending if economic policies are seen to be sound and sensible. By that I mean, that the rational taxpayer will NOT be optimistic and confident if they see that many stimulus packages are based on negotiated tenders instead of open tenders. Or, that stimulus packages are dressed up as rent-seeking arrangements.

Surely that is not emotive behaviour. That is rational behaviour.

Deferment of tax payments is only postponement of a debt
Deferment of tax payments only helps to ease the cashflow. But, it is still a debt liability for corporations and individuals. What if the economic downturn is longer than expected? A debt is a debt. It has to be paid sooner or later. How's that going to engender business confidence? How's that going to engender consumer confidence?

Tax cuts, confidence and optimism
A policy to cut taxes will be well-received. It will be perceived as an acknowledgement by the government for the taxpayers' contribution to the economic development of Malaysia in past years. It will be felt as a form of financial relief.

The tax savings will translate into additional disposable income. Certainly part of that will be saved. It's the Asian mindset. But, more that half of it will be spent.

More importantly, the Malaysian taxpayer will feel genuine relief. That relief will translate into optimism.

Optimism begets some measure of confidence.

And, as we have been told, confidence is what the moribund economy needs.

2 comments:

Suzie Orman said...

The thinking is, further, that deferment of tax obligations spread, say, over three years, would have a better salutary effect. The thinking is that deferment of tax payments will leave much-needed funds with corporations and, that the effect would be similar to a form of financing to corporations. The additional effect is that the revenue authorities still get to collect tax revenue, only that it is spread over three years.

Raison D'etre said...

Shouldn't deferment be a good move vis a vis the general public where corporate tax are concerned?

This way, corporations would have something extra in their books (interest free, if I may say so) and at the same time, the Rakyat is assured that the national coffer would still be filled when the good times comes rolling in.

(When is that ever going to be IS the big question, though.)

The rest of your posting is impecable, as usual.

PS: Can't wait to hear Najib's rent seeking second stimulus. The first is apparently already at 70% disbursed, and pardon me in seeing blank in it impact.