PETALING JAYA: Given the cyclical nature of the economy, Institute for Democracy and Economic Affairs (Ideas) senior fellow Carmelo Ferlito is proposing that policymakers establish a set of rules which helps prevent the economy from overheating and cushion the impact when the economy inevitably slows down.
In a report titled “A Counter-Cyclical Tax Reform” released today, Ferlito proposed three reforms for Malaysia’s tax system.
First, he said a reformed, more progressive goods and services tax (GST) should replace the existing and controversial sales and service tax (SST).
“From our perspective, the case for a consumption tax mainly lies in the possibility of stimulating saving.
“The presence of a higher amount of saving can, instead, support the demand for loanable funds coming from future-oriented investors. In the specific case of Malaysia, moreover, pro-saving nudging becomes particularly important due to the high level of household debt/GDP ratio, which is among the highest in the world,” he said.
Crucially, he said the reintroduction of GST must be done in a way that addresses the concerns that led to its abolition, including that the burden of the tax falling disproportionately on the middle class.
To address this, Ferlito proposed the introduction of different GST rates for different purchases, including a higher luxury rate of 10% for purchases associated with higher income households.
Secondly, there should be a progressive capital gains tax (CGT) on profits made from the disposal of assets, including company shares.
Ferlito said that when the economy is overheating, CGT will help to reign in speculative investments and when the economy is stagnating, CGT will encourage investors to leave their money in the capital market to support more sustainable development.
Finally, to ensure that Malaysia’s economy remains competitive and the overall burden on the people is not increased, Ferlito proposed a reformed and reduced income tax to balance the increase in indirect taxation proposed with a new GST and CGT.
“We believe that the scheme presented here would present the following advantages: it is not distortionary, and it should not generate negative incentives discouraging economic activity; it nudges in favour of a saving-oriented mentality, intended as the necessary drive for sustainably financed investments; and it would help keep the investment pace away both from overheating and depressing,” he said.
Ferlito added that such reforms have a chance to achieve its targets only if it is accompanied by fiscal discipline and by rationing public expenditures, paired with a growing effort toward accountability.
