GST: killing the golden goose

– Liew Chin Tong
MP for Kluang
The Malaysian Insider
October 25, 2013

The proposed goods and services tax (GST) will tax those who can’t afford to be taxed, i.e. 60% of Malaysians who are eligible for BR1M. These are the people who will soon be taxed by the regressive tax, together with the rest of us who live and stay in this country.

I would like to drop the Orwellian double speak so prevalently employed by many GST apologists who are trying to mask the real issue. I will share my views plainly here.

Flawed arguments

Some argue that the government has to be cruel to be kind. Hence, BN would have us believe that the fuel hike subsidy rationalisation is needed to balance the government’s expenditure and ensure its good financial standing.

In theory, this sounds legit. However, look closer and you will find many flaws in the argument. For one, this argument does not take into account the adverse effects on the man on the street. It also demonstrates an incomplete understanding of how the economy grows or declines.

What is the real reason for the Barisan Nasional government to implement the GST? This tax has hung like a sword of Damocles over our heads since Tun Abdullah Ahmad Badawi’s era in 2005.

GST apologists’ main argument is that it is the most effective form of taxation. What does “most effective” mean? Simply put, it means that the government can obtain more tax revenue from our pockets.

Another pro-GST argument is that since 140 odd countries have implemented it, Malaysia should follow suit . However, you do not find BN supporters rushing to follow in the footsteps of other countries’ democratisation processes. For example, most countries in the world set the voting age at around 18, so why do we not adopt the “follow the majority” argument in this instance?

GST widens inequality

In the past decade, particularly after the 2008 global financial crisis, the global economy has become acutely concerned about income inequality – the gap between the haves and the have nots.

Scholars and thinkers the world over have acknowledged the negative effect that GST has on the income gap.

Assume my income is RM10,000 and I spend RM1,000 and I’m charged a 5% GST or RM50 for the goods and services I consume. RM1,000 is just 1/10 of my supposed RM10,000 income. Imagine a person earns RM1,000 per month and spend all his income to consume goods and services and pays a similar 5% GST. RM50 to a person who earns RM10,000 and to a person who earns RM1,000 carries an absolutely different meaning. The lower income person will suffer more.

The BN apologists also argue that GST is fair, since it taxes everyone in a country where the majority do not pay tax. A belated consolation to the minority taxpaying group who have been contributing to the national coffers, if you will.

However, 60% of Malaysians are eligible for the BR1M financial aid, meaning to say 60% of Malaysian families earn less than RM3,000 a month. They are already struggling to make ends meet. They do not pay taxes because they are below the tax-paying threshold.

Of course there are those who evade paying tax, I believe that we have adequate laws to deal with this, if the enforcement is done properly.

The middle income group will suffer too

Some advocates for GST said, the daily necessities of the poor are not subject to GST. I would like to ask them, who are the poor? If 60% of Malaysians need BR1M money, that means 60% of the country’s families are struggling. If what the 60% need are exempted from GST, might as well we keep to the old system as there is no GST system that exempts 60% of people and still remains worthwhile to run.

How do we differentiate between daily necessities for poor people and for normal people? Are we not degrading the quality of life of those trapped in the middle income group through their consumption of GST-exempted products meant for the poor?

One other argument is that by introducing GST, we can reduce sales tax and eventually, income tax.

While we recognise that Malaysia’s tax system does no favours to the middle income bracket who earn between RM5,000 and RM10,000, the cure is not the introduction of GST. This unfortunate fact of high tax for middle income bracket should be rectified by tax adjustments to reduce the burden of the middle income families, shifting the focus to the super-rich.

Malaysia’s GST is not like in the UK, Australia and other developed nations where top income tax rate were 50% and above before the introduction of the GST. For them, tax cuts were the natural course of action after the introduction of GST.

There is little room to manoeuvre for a tax cut with the Malaysian income tax rate which is not that high by comparison.

Killing the golden goose

BN ministers have said that the GST is a necessary evil to balance the accounts and to reduce deficit and debts. To most of us, such a statement means that the only “balance” it seems to bring is to allow the powers-that-be to continue to squander the nation’s wealth – business as usual.

The crux of the matter is this: killing the golden goose. Here’s what I mean by “golden goose”- our economy is no longer as export-reliant as it once heavily was. While previously, our biggest trading partner was the US, in the past three years the growth of our economy has heavily depended on domestic consumption.

Apart from the government’s expenditure, domestic consumption comprises the money spent by ordinary citizens, mostly via debt. Hence, the rakyat who spend money are the “golden geese”.

Malaysia’s household debt is the second highest in all of Asia. Should the bubble burst, we will have many casualties.

I would like to reiterate that arguably, GST by nature is designed to tax those who cannot afford to be taxed in the first place. The 60% of citizens who are eligible for BR1M aid will now be taxed by GST, shrinking the domestic consumer market – i.e. the disposable income that could have been spent buying goods is now taken away by tax.

In this scenario, imposing GST at this stage will be akin to killing the golden goose. It would not be far fetched to imagine the worst case scenario of GST not as the feared monster of inflation, but the falling demand that precedes a recession.