The Institute for Democracy and Economic Affairs (IDEAS) says lowering personal and corporate tax rates to 15% could boost Malaysia’s competitiveness.
Citing a study commissioned by IDEAS and carried out by Dan Mitchell, a US-based expert on fiscal policy, the think tank’s CEO Wan Saiful Wan Jan said better tax policies would boost economic growth and attract capital from abroad.
“At the moment, Malaysia is in the middle. We cannot compare with zero-tax havens like the Cayman Islands or Monaco, and our taxes are not yet as low as our neighbours Hong Kong and Singapore.
“However, we think that Malaysia is in a competitive position and has the potential to vastly improve if we reduce the rates of our personal income and corporate taxes,” he said in a statement today.
The study, titled “Malaysia’s tax system: Friend or Foe?” will be submitted to the government as part of IDEAS’ contribution to preparing the 2018 national budget.
Wan Saiful said according to the study, Malaysia was doing better than other countries, including trade partners such as China and India.
“When the government introduced the goods and services tax (GST), they did the right thing by mitigating it with a reduction in income tax and personal taxes. Now we need to go further by making our tax structures even more competitive.”
He pointed to the US, saying successful tax reforms in the 1980s showed how lowering personal income taxes result in higher tax revenue collection.
“In this case, President Ronald Reagan’s decision to reduce the top personal tax rate from 70% to 28% resulted in a dramatic increase of revenue from US$19 billion in income taxes to more than US$99 billion in 1988.
“Clearly, lowering tax rates can have a positive impact on revenue if calculated properly.”
Acknowledging that “not all taxes are equally bad”, Wan Saiful said the most important thing was to tax “sensibly”.
“The Laffer Curve shows that if the tax rates are too high or too low, the government will lose out because they will lose revenue.”
Wan Saiful gave the example of the cigarette excise tax, which was increased in a bid to reduce smoking. However, the move failed as smokers simply switched from legal to illegal products.
This resulted in illegal cigarettes overtaking Malaysia’s cigarette industry at 52.3% of the market, he said.
“At the same time, the government lost money because none of the illegal cigarettes are taxed. That is why tax rates matter, and it must not be too high.”