Press Statement – 31 October 2013, Penang
by Penang Institute
Dr. Lim Kim Hwa, Fellow, Penang Institute
Miss Ooi Pei Qi, Research Analyst, Penang Institute
Middle income households will pay up to an extra RM 1,123 in tax per year from 2015 – how to mitigate this?
Our recent study on the Goods and Services Tax (GST) concluded that despite setting basic food and essential services as zero rated or exempt, GST is a regressive tax and will hit the low and medium income households more than the highest income households.
In the 2014 Budget, the government also announced income tax rate cuts, widening of income tax band and BR1M. These measures will be implemented at the same time as GST in 2015. Figure 1 summarises the cash impact across different income classes, with higher income groups on the right. We show that: 1) income tax payers will benefit from tax savings (dotted bars); 2) low income households will benefit from BR1M (grey solid bars); and 3) everyone pays GST (bars with horizontal lines).
Figure 1: Annual GST payments, BR1M and income tax savings across different household income
Middle income will still be worse off after the Budget’s measures
Combining these measures, Figure 2 shows that: 1) low income households are better off by RM 202 to RM 488 – primarily from BR1M; 2) highest income households who earn on average about RM 370,000 per annum will benefit with extra cash of RM 3,127 per year – mainly from savings in income tax; but 3) middle income households will suffer negative cash outflow of up to RM 1,123 per year – due to GST payments exceeding income tax savings. These middle income households have current annual income between RM 30,000 to RM 150,000.
Figure 2: Net effect from BR1M plus tax savings minus GST payment – Budget
How to mitigate this negative effect on the middle income households?
We show that the income tax structure in the 2015 can be improved by penalising the middle income households less. Our proposed rates are in Table 1. Figure 3 contrasts the net effect between our proposal (bars with horizontal lines) and the Budget’s (dotted bars). We show that: 1) middle income will be less worse off – with those households earning around RM 60,000 annually pay RM 318 extra in tax rather than RM 1,123; and 2) the highest income household will be less better off – tax savings will drop to RM 449 vs. RM 3,127 when using the Budget’s income tax rates.
Table 1: Proposed income tax rates to mitigate
Figure 3: Net effect from BR1M plus tax savings minus GST payment – Budget vs. Our proposal
For more information and our interactive spreadsheet detailing the impact on different households, visit: https://www.penanginstitute.org/gst/