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Tuesday, March 4, 2014

GST can boost economic defence

Publication: NST
Date of publication: Mar 4, 2014
Section heading: Main Section
Page number: 014
Byline / Author: By Steven Wong

FROM the way that debate on the Goods and Services Tax (GST) has evolved in this country, it would seem that its advocates are all pro-establishment, affluent and anti-poor. No credit is given for simply good sense.

Okay, let's take the mere fact that the majority of countries have a form of consumption tax is neither here nor there. As my mother used to say, if all my friends jumped off a cliff, it did not mean that I had to.

Let's also say that the fact that these countries have per capita incomes that are lower and higher than Malaysia's also proves nothing. Consumption taxes are not the privilege or curse of rich countries but assume this is another story.

Now ignore the fact that both liberal and conservative governments have levied consumption-based taxes. In Australia, the GST was proposed by the Labor Party but imposed by the conservative Liberal-National Party coalition.

As an interesting aside, the then leader of the Liberal Party, John Howard, had pledged to "never, ever" introduce the GST, something that he quickly proceeded to do when he became prime minister five years later.

Then turn a blind eye - or better yet two - to the fact that the GST is a far better tax system than the current Sales and Service Tax (SST), which is not transparent and prone to all sorts of abuses. This is not mere opinion; it is logical fact.

Proceed to skirt around the fact that irrespective of whether the tax is regressive or not, the poor receive tax breaks and income transfers and end up paying little if anything on a net basis.

Finally, make light of the fact that foreign tourists can contribute an inordinate amount to the government coffers. Foreign workers would also have to pay if it were not for the fact that most of the goods that they buy have been zero-rated.

If one studiously disregards all these arguments, then, yes, GST would not be necessary. Just drain what's left of our oil and gas reserves, live for the moment and be happy. Let the future take care of itself.

Seriously, about the only thing that we can safely say is that the GST has been, is and will continue to be a political football. Malaysia has taken more than a quarter of a century of foot shuffling to arrive at this point.

Look, no one likes taxes and so it is only natural that political parties use the GST to score points against the governments-of-the-day. Once the tables are turned, however, it is unheard of incoming governments abolishing the GST.

Perhaps Malaysia might want to score a first and be an international trendsetter in this regard?

But there is a darker possibility. There always is in the world of economics. What if, just on the most fleeting prospect, there were to be another global financial crisis and economic downturn?

By definition, one cannot predict black swan events. But what if heavily US dollar-indebted emerging economies were to trigger another round of problems for the international community?

Thanks to its populist policies, Argentina does not appear to be in a good place. Neither are Turkey or Brazil for that matter. All three currencies have already taken a hit, as have the other two economies of the so-called "Fragile Five".

A repeat of the 2008 global financial crisis may be highly unlikely, given the specific configuration of events then, but even in a moderate slump, governments will have to take action to ward off any negative effects.

Unless they want to make it the "Fragile Six", countries like Malaysia will have to cut expenditure. The harder government revenues are hit, the more are the cuts needed to restore balance.

The GST operates on a larger base and is, therefore, a more stable tax structure. It provides us with more options than plunging oil taxes and royalties and sliding corporate and personal income taxes.

Quibbling about whether the GST is regressive or not is almost comedic in the light of much larger welfare-reducing expenditure cuts. Like it or not, the poor and even the middle class will bear the brunt of our narrow tax structure.

Still, resistance can be expected. What the Malaysian government needs to do in order not to compound matters is to show the rakyat that it is a careful steward of each and every ringgit of revenue that it raises.

It needs to spend legitimately and wisely and be held accountable if this is not so. Until and unless this credibility gap is closed, the GST will run the risk of being kicked around to kingdom come.

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