Monday September 26, 2011
Comment by Kang Beng Hoe
WHEN Jean Baptist Colberg, the Finance Minister in the reign of Louise XIV remarked “The art of taxation consist in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing,” he could hardly have been more prescient.
His modern day contemporaries are indeed finding that the practice of the art is infinitely more challenging than it was to him then.
What we find today is an unprecedented display of fiscal malaise spread across the western world's erstwhile “advanced” economies all grappling with large deficits, steep debts, wide unemployment and struggling businesses.
Some are tottering; the whole eurozone, as the Economist puts it, is in “intensive care.”
In the midst of all these, policy makers of all political hues are unable to agree on whether to cut spending, reign in borrowings or raise taxes. None are obvious choices but all are difficult and unpleasant ones.
Raising taxes on unlikely constituents appears to be among the few remaining options being considered.
Thus President Obama's quest to raise taxes by curtailing existing tax breaks, is strictly not plucking new feathers but it has not precluded considerable “hissing” from his opposition Republican lawmakers. His recent proposal to impose the “Buffet Tax,” after Warren Buffet suggested it on those earning US$1mil or more is a prime example of specific constituent, targeting, on those able to pay without undue hissing.
In the United Kingdom, David Cameron continues to be criticised for retaining the 50% rate for top earners; the voices of dissent include those of his senior colleagues from his own party.
Tobin Tax
More worrying for Cameron is the proposal by France and Germany to introduce a tax on financial transactions. This “Tobin Tax,” to be voted on in 2012, if passed will hit all banks in the European Union (EU) with the greatest burden falling on London, the leading global financial centre. Will banks there move out since they would be unable to compete with those in say Hong Kong or Tokyo? That would be the major concern.
Italy has been criticised by the EU Commission for not coming out with new taxes to reduce its deficit; its proposal to put more efforts into combating tax avoidance and evasion is not considered appropriate.
Against this backdrop, what options are available to our Finance Minister as he ponders his budget strategy to be revealed soon?
While the Malaysian economy is not in the same dire state as those mentioned, the Government's commitment to further reducing its deficit position means that finding ways to raise taxes remains a relevant policy objective. However raising taxes is not without its constraints; can those called upon to pay bear the burden without hardship? Will businesses continue to operate profitably and grow? These are legitimate concerns of the Government.
Prepaid saga
We have just seen an instance of this exemplified by the recent saga involving service tax on pre-paid cards. Here the Government has urged the telcos to defer passing the tax to consumers even though the move will result in an additional RM250mil going into the tax coffers. This is because by bearing the tax, the telcos had treated the 6% tax as their operating cost and since the corporate tax rate is 25%, the tax effect of this cost is a quarter of 6%. The service tax paid on the pre-paid cards amounts to a billion ringgit.
It is not difficult to surmise that indirect tax increases are unlikely to be on the cards if the plight of the consuming public is a concern. The exception could be the sin taxes (levies on tobacco and alcoholic products); but here industry sources will point to the fact that higher taxes would exacerbate smuggling and criminal activities. Then again with the Goods and Services Tax (GST) pending, increasing indirect taxes would be moving in the wrong direction.
In the area of corporate tax, the expectation is for the rate to be lowered to remain competitive. But this can only happen when GST comes on stream. We collect more from corporate taxes and considerably less from taxes on individuals. This is in contrast with the developed economies where tax collected from individuals far exceeds that of companies.
Will our Finance Minister do what Obama tried to do by scaling back tax breaks or incentives? This is certainly an option but one which is not open ended. In other words, the attempt to claw back tax revenue should not be at the expense of dampening business activities or investments.
Here is where the problem lies. Perversely, the most amount of tax will come from incentives which are popular and widely used. The reinvestment allowance incentive is a case in point. Any move to withdraw this must take into account the potential loss of further investments and their multiplier effect.
One tax, which seems to be an aberration in its current state, is the Real Property Gains Tax. It started life not as a revenue generating tax but as a measure to curb speculation. It is doing neither and it may be timely to call on its tax-generating function once more.
● The writer is executive director of TAXAND MALAYSIA Sdn Bhd, a member firm of TAXAND, the first global organisation of independent tax firms.
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