Written by Syazwan Zainal, Assistant Manager at the Democracy and Governance unit in IDEAS
1MDB, National Feedlot Corporation, Yayasan Akalbudi. These are just some of the infamous corruption cases that have mired Malaysian politics in recent years.
It is undeniable that politics is expensive. Politicians need money to pay for their staff and researchers and even to donate to their constituents when disasters strike. Voters have an expectation that their elected officials will donate at least a small sum for funerals, weddings, accidents, or any other socially significant local event. We have met politicians who quietly complain that voters even expect the YBs to ‘belanja’ voters if they coincidentally meet at a restaurant.
Where do politicians get their money from? Many politicians get their money from legitimate donations and businesses. But what happens if politicians rely on money from interest groups, rich tycoons, or big businesses? We see this happening in the US, where lobby groups such as the National Rifle Association (NRA) and the American-Israel Public Affairs Committee (AIPAC) have a huge influence over policies passed by Congress because of their financial prowess, which leads to situations where even when majority of Americans want to change a certain law, Congress is reluctant to do anything. In Malaysia, many high-profile corruption and bribery cases involve politicians.
One way to dilute the influence of big money is to encourage everyday people to donate. Hence, some countries provide tax incentives for political donations to encourage greater public participation in the financing of political parties and improve transparency.
Research shows that tax incentives are a useful tool to encourage the broader public to donate to political parties and candidates. A survey done in Ohio, for example, found that eight per cent of donors indicated that the tax incentive influenced their decision to donate to political parties. It also incentivises political parties to actively seek donations and engage with the public and vice versa. As a result, tax incentives could be used to increase political participation. Parties also need to maintain constant connections or relationships with voters if they want donations from the public. As more small donors contribute, political parties have different sources of income other than relying primarily on large donors. This allows for financial support to political parties throughout the year and between election periods, as well as diluting the influence of big money.
Having tax incentives also helps to increase transparency. In order for the public to gain the benefit from tax incentives, they need to file it to the tax authorities which nurtures transparency. Having tax incentives to encourage donations to political parties can be a catalyst for the public to feel a sense of ownership toward political parties and the policies that they advocate for. This direct and almost continuous relationship between political parties and the public can be used to push for more transparency and accountability for the political parties. What are the lessons that Malaysia can learn from other countries’ tax incentive regimes?
Countries that we studied use two regimes of tax incentives: tax deductions and tax credits. Tax deductions are the amount that a taxpayer can deduct from their taxable income to lower the amount of taxes that they owe. Thailand, Australia and Germany use this type of tax incentive. On the other hand, tax credit refers to the amount of money that taxpayers can subtract directly from the taxes that they owe. Canada uses this system. Tax incentives in the form of tax deductions or tax credits are not new from a Malaysian income tax perspective. Hence, no major amendments to the Income Tax Act will be required other than including political donations as an approved donation.
Secondly, the rates of incentives differ from country to country, but there is a limit to the amount that can be reduced from the total tax burden. In Germany, political donations made by individuals can be deducted at a rate of 50% of the donation amount, up to EUR 1,650 while in Australia, the limit is AUD1,500. In both cases, tax incentives seek to encourage small donations, rather than big donations.
Third, a tax incentive regime seeks to encourage individual donors rather than corporations. In Germany, Canada, and Australia, only individual donors can enjoy tax incentives for their political donations; corporations do not enjoy the benefits. This is because either only individuals are allowed to make political donations, such as in Canada, or the benefits of tax incentives are restricted to them (in three other countries). Only in Thailand, corporate donors can enjoy tax incentives.
Malaysia could consider tax incentives as a part of the political financing reforms that it is currently undertaking, which should include public funding of political parties and transparency requirements for political donations. This is outlined by the Political Financing Bill proposed by the All-Party Parliamentary Group (APPG) on Political Financing, in which IDEAS serves as the Secretariat. With tax incentives, the effort to reduce corruption through regulating political donations can be further strengthened.