Staying competitive, but for whom?

ON 16 June 2009, the government tabled an amendment to the Inland Revenue Board Act 1995 — a minor amendment that enables the board to meet once every two months, instead of once a month as in the original legislation.

However, as is the practice in the Malaysian Parliament, when any amendment is opened for debate, parliamentarians have the liberty of bringing up issues that aren’t directly related to the amendments being tabled. It was in this context that a Parti Keadilan Rakyat (PKR) Member of Parliament (MP) argued strongly that both personal income tax and corporate tax needed to be revised downwards.

His main concern was that Malaysia’s rates for both these categories of taxes affected our competitiveness in attracting foreign direct investments (FDIs) and high-earning individuals. He quoted the rates in Singapore, which are markedly lower, and urged the government to speedily revise our tax regimes downwards.

Burdening the poor

Parti Sosialis Malaysia has major difficulties accepting this line of argument. It is not that we are so rabidly anti-business that we want to “punish” corporations with high taxes. Not at all.

(© Steve Woods / sxc.hu)

The issue is that the government needs revenue to run the country and to provide essential services to the rakyat. A major source of government revenue is corporate tax which contributes about 25% to total government revenue. Personal income tax contributes another 15% or so. That means a total of 40% of government revenue comes directly from the wealthier sections of society.

If this tax on the richer strata of society is reduced, then one of the following will have to happen.

One is that the government runs a larger deficit, but that is not sustainable, even in the medium term.

The second possibility is that the government cuts back on some of the basic services it is now providing such as healthcare, education and road maintenance. It can do this by either introducing new user-payment schemes, or by the outright privatisation of some aspects of these services. Privatisation, as we know, is already happening.

The third possibility is that the government pushes ahead with the Goods and Services Tax (GST).

The poor use a higher portion of their income to pay GST
(© Woodsy / sxc.hu)

The GST, which is also called VAT (Value Added Tax), taxes consumption and not earnings. Pensioners, people on welfare, Socso payment recipients and the unemployed will also have to shoulder a part of the tax burden when the GST is introduced.

Also, it is a fact that the poor consume almost all their income, while rich people are able to either save their income or invest part of it. This means that the portion of income from the poor that goes to paying GST would be higher than that of the rich.

For these two reasons, the GST is considered a regressive tax — a form of taxation that tends to redistribute the national income in favour of the rich and of corporations.

Staying competitive

But what then of the concern of my PKR colleague that Malaysia might lose out in the competition for foreign investors? Addressing this question leads us to two larger issues.

Firstly, what should the primary goal be of a country’s economic activity? Isn’t the main goal the provision of a decent standard of living for all the rakyat, especially those who are disadvantaged?

Surely the economy’s primary goal cannot be about making investors happy by increasing their profit margins. The reduction of corporate taxes would certainly be welcomed by corporations. So, too would the government’s policy of keeping wages low and unions weak.

But I think most Malaysians would agree that it should be “people before profits”. We should bear in mind that about 50% of Malaysian families have a household income of less than RM2,000 a month. The national economy’s priority should be about ensuring a decent level of living for everyone, especially such households.

The second issue is about the meaning of the term “independence”. We were granted formal political independence in August 1957 — after the British had seen to it that the more radical Malaysians were safely in jail or else isolated in the jungle.

Now, after 52 years of this “independence”, we find that we are still beholden to large international corporate interests if we want to grow our economy. This is one of the main reasons for our low wage policy, for our over-liberal stance vis-à-vis importation of migrant workers, and also for the slow but steady decrease in our corporate as well as personal income tax rates.

Freedom and independence are subjective terms (public domain/wikipedia) 

So, are we really free to decide how we wish to use our country’s wealth? Before 1957, the British colonialists ruled directly and siphoned a large portion of the country’s wealth back to their metropolitan centres. Today, the trade and investment regimes fostered by the World Trade Organisation and trade liberalisation agreements have a similar effect. The only difference being that a significant minority of Malaysians now get a better share of the cake.

Is it possible to “merakyatkan” the economy as my friends in PKR would like to do, without first challenging the stranglehold that the largest corporations have over the economies of the developing world?

These are huge issues that cannot be dealt with conclusively here. They obviously need much more debate and discussion. However, the first step would consist of recognising that a serious problem does exist. In the current balance of power, corporate interests control the international trade and investment organisations. They routinely play off developing countries against each other. Hence, the urgency to remain “competitive” even if it is at the expense of the government providing a decent standard of living for a majority of the population.

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Dr Michael Jeyakumar Devaraj is a physician by training and a founding member of PSM. He is currently Member of Parliament for Sungai Siput.