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IDEAS proposes fresh approach to Shared Prosperity for Budget 2020

Kuala Lumpur, 19 September 2019 –Today, IDEAS has published a set of policy proposals to help make the vision of Shared Prosperity a reality. In response to growing concerns about income and wealth inequality, IDEAS advocates for new policies which will align workers’ pay and company profits to ensure that prosperity can be shared whilst still maintaining robust economic growth.

In a Position Paper titled Making Shared Prosperity a Reality in Budget 2020, IDEAS put forward the following proposals:

  • A Living Wage Tax Credit. Under this proposal, employers will be incentivised – but not required – to increase wages beyond the Minimum Wage, up to a new Living Wage. Employers would be able to deduct 50% of the cost of a pay rise for every employee earning between RM1,100 and RM1,500 and 25% of the cost of the pay rise for every employee earning between RM1,500 and RM2,500.  Under this proposal, employees will benefit from higher wages but business will retain the flexibility to respond to market conditions. The cost of increasing incomes for the lowest paid would be shared between employers and the taxpayers. IDEAS recommends that the scheme be introduced for a period of 5 years. IDEAS suggests this policy can be paid for through a rationalisation of investment incentives, which are currently being reviewed by the government.
  • Employee Equity Scheme. Under this proposal, employers will  be incentivised to allocate shares to their employees, in order to promote broader distribution of wealth and to provide lower income households with new sources of income and savings. The proposal would enable employers to allocate up to RM10,000 of shares annual to each employee, tax free – currently the allocation of shares counts as gross income. Additionally, employees can choose to purchase up to RM5,000 of shares, which employers can choose to match – again, tax free. The tax free status of these shares will be conditional on employees not selling the shares for at least 5 years, to incentivise saving. Companies which achieve 10% or higher equity holding by employees will benefit from a 1% reduction in their corporate tax rate. IDEAS again suggests this policy can be paid for through a rationalisation of investment incentives, which are currently being reviewed by the government.
  • Capital Gains Tax. IDEAS recognises that the government’s fiscal space is highly constrained at the tax base remains narrow. The abolition of GST has narrowed the tax base in Malaysia while the SST is insufficient to replace the lost revenue. Therefore, in the longer term, IDEAS proposes the Government should introduce a Capital Gains Tax (CGT), which is a tax on the profits made on the disposal of assets, including shares. IDEAS proposes an initial rate of 5% with a tax-free allowance of RM50,000 and exemptions on shares held in Amanah Saham Berhad. The details will need to be subject to further consideration and IDEAS recommends the Government should launch a consultation on the introduction of this new tax in Budget 2020.
  • Government Divestment Strategy. IDEAS acknowledges that the introduction of tax on capital gains will have implications for investment and there are also questions over the future sources of economic growth in Malaysia. IDEAS therefore proposes the Government initiates a Divestment Strategy to create space for new investment and stimulate local business development. The Government’s shareholding among Publicly Listed Companies remains over 40% of total market capitalisation with majority stakes in over 70 companies. This high Government presence creates concerns over competition and the lack of liquidity in Malaysia’s capital markets. IDEAS proposes the Government commit to a gradual divestment of its holdings to 10% of total market cap by 2030 with no majority shareholdings. The proceeds of this divestment should be reinvested in new markets to generate returns for the Malaysian people. Divested shares can be channelled to employees through the Employee Equity Schemes. IDEAS urges the Government should initiate a review of GLCs in Budget 2020 to form the basis of this Divestment Strategy,

Commenting on the proposals, IDEAS Research Director Laurence Todd said “We believe that these proposals could contribute to a bold new economic strategy for Malaysia – with higher pay, more equity for employees and new opportunities for investors. Of course we recognise there are clear trade-offs involved. The Government will have to accept a reduced role in the economy, and some business and individuals will have to accept new taxation on their Capital Gains – but we believe the net impact would be positive for Malaysia’s economy. We hope the Government will consider these proposals as it prepares to table Budget 2020 next month.”

These proposals were presented at a public forum today, hosted by IDEAS. Speaking at the event were YB Nik Nazmi MP Setiawangsa, Prof. Dr Jomo Kwame Sundaram, Research Advisor at Khazanah Research Institute and Dr Jeyakumar Devaraj, from Parti Sosialis Malaysia. YB Nik Nazmi welcomed the effort by IDEAS to present concrete proposals and said he would raise during these issues during the Budget Debates in Parliament. He commented that intra-ethnic inequality, particularly among Bumiputera needs to be urgently addressed. He also commented that the government should paly the role of regulating the market, and not running business directly. Prof Jomo called on the government to introduce counter-cyclical fiscal stimulus policy in the forthcoming Budget , in preparation for the global downturn. Prof Jomo called for more spending on healthcare and education. Dr Jeyakumar argued that the low wages in Malaysia do not reflect low productivity as is often claimed and called on ASEAN countries to work together to avoid a race to the bottom in tax rates and wages.

More information of the proposals put forward by IDEAS can be found here.

Presentation from Laurence Todd can be downloaded here.

2019-09-19T20:45:12+00:00 19th September 2019|Media Statements|Comments Off on IDEAS proposes fresh approach to Shared Prosperity for Budget 2020