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Eight tax reform measures to raise more funds for social wellbeing

The current lopsided political and taxation system is unsustainable in the long term

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By Raveen Jeyakumar

The political and taxation system in Malaysia and in most other nations favours the wealthy, foreign investors and multinational companies.

Most in this class only care about generating wealth for themselves and their shareholders, and are unconcerned about the socioeconomic conditions of the ordinary people and their welfare.

They do not feel any sense of responsibility to contribute part of their wealth through taxation to improve the socioeconomic conditions for the people. Instead, they focus on ways to pay as little tax as possible – or to avoid paying them altogether – to maximise their profits.

Many governments, including Malaysia, vie with each other to impose the lowest level of taxation and keep legislation lax. They do this to attract more investments and trade from the wealthy class.

The low level of taxation largely explains why governments do not have enough financial resources to improve the people’s quality of life. It also widens the socioeconomic inequality gap between the wealthiest class and ordinary people.

Such a lopsided political and taxation system is unsustainable in the long term. As the inequality gap widens, social unrest among the ordinary people will simmer once they realise that a biased political system is the primary cause of their socioeconomic problems. This would then threaten the government’s stability.

So, to enhance the people’s wellbeing, to boost public support for the government and to improve political stability, the Malaysian government has to reform the nation’s taxation system to raise the people’s quality of life.

It needs to implement several key measures. This has to be done collectively with other Asean nations to reduce the likelihood of the wealthy withdrawing their investments and fleeing the country to avoid paying higher taxes and complying with stricter legislation.

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One, all Asean countries need to collectively and gradually change the tax structure for capital gains, both realised and unrealised, by introducing a ‘notional equity interest’ tax on the designated assets of the wealthy.

Under the traditional taxation method, a capital gains tax is imposed on the profit earned upon the sale of an asset that has increased in value – that is, a capital gains tax on the realised or actual surplus. The usual practice is, the tax is only incurred if the asset is sold within a certain period (say, five years).

Where the valuation for certain assets is more difficult, the notional equity interest method could be used. Under this method, the government is entitled to an annual notional stake (say 1%) of the shareholdings or other designated assets owned by the wealthy. Upon the disposal of these shares or assets, the total earned by the government over the period is then paid as a tax. Alternatively, annual tax prepayments may be made with a final adjustment upon disposal.

This eliminates the difficulty of valuing complex assets in order to tax them. It also removes the incentive for the wealthiest to delay selling (realising) their assets – ie after the taxable period – to avoid paying capital gains tax on the asset sales.

If the wealthy defer the notional equity interest tax instead of prepaying it annually but then reinvest the extra liquidity in their business or in property, the government would also get a portion of that reinvested money through another notional equity interest.

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The level of this form of taxation will grow based on the rate of return generated by those designated assets.

Two, all Asean countries should collectively and gradually increase the corporate tax rates on high-income companies in their respective countries.

Three, all Asean nations need to collectively and gradually increase the income tax on the wealthy (the top 20%) in their respective countries.

Four, all Asean countries should collectively and gradually impose an inheritance tax on the wealthy in their respective countries.

When a wealthy individual dies and all his possessions (property, financial assets, bank accounts, tangible assets, etc) are transferred to another person, the inheritance tax will be charged towards the net value of all those transferred possessions. This tax has to be paid by those who inherit these assets.

Five, all Asean countries should collectively and gradually impose a property tax on the wealthy in their respective countries.

Six, all Asean countries should create a public registry for the beneficial (true) owners of companies and trusts in their respective countries.

This action will improve transparency and help to solve the problem of the ownership of assets being concealed by the wealthy through the use of companies and trusts in tax havens. It will reduce tax evasion by the wealthy.

Seven, Asean nations should collectively introduce laws in their respective countries to ban anonymous shell companies.

This will prevent the wealthy from hiding their assets in these companies so that they can avoid paying taxes on those undeclared assets.

Eight, all Asean countries need to collectively and gradually implement a debt monetisation strategy by starting with a small amount of debt.

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This strategy involves selling government securities to the country’s own central bank at a very low interest rate, such as 0.1%. Effectively, this means the government borrows from its own central bank.

This strategy will provide the government with the funds it needs without incurring an enormous debt servicing burden.

With the extra financial resources generated from implementing these eight measures, the government can spend more on programmes to raise the quality of life of the people, especially the low-income group.

Asean member states need to collectively reform their respective tax systems to improve the people’s wellbeing, to boost public support for the government and to achieve long-term political stability.

Raveen Jeyakumar, a 29-year-old in Ipoh with an interest in social and environmental issues, is an Aliran volunteer

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.

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