One of the three criteria Tony Pua sets out on the Goods and Services Tax (GST, also known as the value-added tax) is that Malaysia must be a high-income country. Despite the fact that neighbouring Indonesia (10%), Thailand (7%), and the Philippines (12%) in addition to Singapore (7%), have the GST.

Today, out of a population of 27 million, there are in effect only 1.8 million tax-payers who pays any income tax, or only 6.7% of the population. Even if we were to take into account only the 12 million working population, it is only 15% of them who have pay any taxes. The 85% who don’t pay are those who actually don’t qualify to pay any taxes because their income is too low. However, with the implementation of GST, every single one of them whether they are earning RM500 a month or RM1,500 a month or even RM2,500 a month, who don’t current pay any taxes, will be forced to bear the heavy burden of the GST.

Plenty of middle class households, who would otherwise be taxed in higher-income countries, pay no taxes in Malaysia. RM2,000 can afford you a pretty reasonable quality of life in Kuala Lumpur as a single, and will be sufficient for a young family in, say, Kota Bahru. They aren’t taxed not because taxing them will throw them into poverty, rather, broadening the income tax base is politically infeasible.

Tony Pua did point out several other ways to raise revenue (auctioning import quotas, for example) and save money. Nevertheless, the need for the GST goes beyond plugging budgetary holes – it serves the need to flatten the tax base.

The Swiss voted 57% in favour of a nation-wide ban on miranets. Only 55% bothered to show up for the polls, but the ban is constitutionalized because all but four cantons voted for it. It’s a tad silly – if the Swiss are worried about maintaining the character of a town, there are town building codes.

On the other hand, while the ban does not also ban mosques, it is a restriction on the freedom of religion and it is religious discrimination. Steeples, spires and other tall, religious architecture isn’t banned. So a Gothic cathedral could be build in Switzerland, assuming it adheres to the town’s building code. Knock the crosses out and replace it with crescents, and viola – you’re breaking federal law.

De minimis on the GST:

First, there must be a commensurate reduction in personal income tax. I still maintain that the ultimate target should be an 18% top tax rate. This will help to put Malaysia back on the competitive map.

The main purpose of the GST is as a new, efficient source of revenue for an increasingly-cash strapped, debt-laden government. In other words, the whole point of the GST is to be a new tax and a new additional source of revenue.

I hope there is true sincerity and genuine understanding on the part of the government regarding the true effect of the GST because all consumption taxes have a regressive effect i.e. where the lower income groups pay more as a percentage of their income than the higher income groups.

This contradicts a call for a “commensurate reduction in personal income tax”. The regressive nature of the GST essentially flattens the tax base – as the income tax is highly progressive (extremely so – only 15% or so file for income taxes for this reason). Reducing the income tax – especially on the higher end, only serves to further flatten the tax base – shifting more of the tax burden to the lower and middle classes.

Deborah Loh has a rather interesting article at The Nut Graph on getting Malaysia out of the rut. Most of the suggestions, vague as they are, were quite good. Except that of Universiti Kebangsaan Malaysia’s Prof Dr Ragayah Mat Zin:

Other problems she identifies: over-dependence on foreign workers in the labour market, and manufacturers’ reluctance to spend capital on high-technology methods of production. At the same time, Malaysia has lost its competitive edge as a cheap-labour destination to neighbouring countries which are also providing better investment incentives.

Its rare when a contradiction like this is placed next to each other. Weaning Malaysia out of our “over-dependence on foreign workers” while simulatenously encouraging capital investment on “high-technology methods of production” means Malaysia will become less efficient – and this means we become less competitive against our “cheap-labour destination” competitors.

If capital-intensive, high-tech means of production is cheaper than foreign labour, there would already have been a shift in production means. But labour market autarky means higher costs and a smaller local market for producers, as well as higher prices for consumers – all for a bump in wages for some workers, and an easier night of sleep for xenophobic Malaysians.

As for our competitive edge against China, Vietnam, Indonesia, et al – Malaysia has a competitive edge (better institutions, more straightforward taxes and regulation, less corruption, etc). Malaysia can deepen that simply by letting the market be (that is, allowing freer movement of labour into Malaysia) and further strengthening our institutional edge. After all, if MNCs are just looking for the lowest wage costs, the manufacturing power houses would have been edged out themselves.

I guess not.

Its slightly schizophrenic though, British immigration policy. Free immigration, even from new member (exempted from union-wide freedom of movement), is acceptable if you’re a European Union citizen. Unless you’re simultaneously an Irish or Commonwealth citizen (i.e. from Cyprus and Malta), there isn’t a right to vote or stand for office. On the other hand, Commonwealth citizens have this right – but not the right of abode. I’ll trade my right to vote for a right of abode.

Tony Pua blogged about the value-added tax (or called goods and services tax, GST, in Malaysia).

His main contention is that a VAT will flatten the tax base in Malaysia, taxing a large part of the population that previously wasn’t taxed – fair enough. In his words:

But you have to balance that against the pain you will incur on 85% of the working population who does not pay any income tax at this point of time because their income levels are too low (and not because they are evading taxes)

While I’m conceding that the majority of the workforce fall below the treshold. But, at the same time, it is completely illogical that all 85% of those who don’t file for income taxes are legitimately below that treshold – especially considering a large chunk of our economy is informal. Teachers giving tuition classes, civil servants selling drinks at a pasar malam – that sort of thing. Rarely is such income reported.

The VAT is extremely efficient that way, slashing compliance cost and generating a new source of income.

As for(4), I fully agree that implementing GST will increase govt revenue, that’s why BN is doing it, ‘cos they’ve run out of money after wasting it in the last 10-20 years. It has bled Petronas dry and now it wants to bleed the people too.

Yes, I completely agree with Tony Pua. Which is why I think the VAT is the most ideal tax. Our corporate income tax, which is usually absorbed more by labour and consumers than investors, is already the highest in the region. As all the income tax revenue come from 15% of the workforce, squeezing more will be tough. In both cases, we may have reached or passed the Laffer curve revenue maximizing point – especially since tax competition in this region is high.

While Barisan Nasional have squandered tax and oil monies, prudent expenditure would not plug the fiscal crisis Malaysia is experiencing. A tax isn’t a tax if it isn’t painful, but Malaysia needs more taxes. And, with the rich and Petronas sponged thoroughly, we need to flatten the tax base. Though it is not to say that the government’s GST proposal is great:

Some selected items especially essential goods like rice, sugar, cooking oil and flour as well as domestic transportation would not be subject to GST.

You would think Malaysia would have learnt from McVities’ Jaffa Cakes case in the UK, they would reconsider exemptions and zero-rates on “essential goods”. McVities argued that Jaffa Cake was a cake and thus subjected to a 0% VAT, while HM Customs and Excise held that it was a chocolate-covered biscuit and therefore a luxury fully liable for the tax.

A far better solution is to have a advance rebate system. The Ministry of Finance can decide, say annually, the basic consumption of households – and give every household a periodical advance rebate on that consumption. The average low income household will not be adversely affected by the tax – as their endowment increased roughly at the same scale as their cost of living.

DAP could show leadership in this issue – more than just issuing an annual alternative budget showing roughly where savings could be made, and more than just demonstrating as in Penang how DAP is capable of stretching its ringgit. Nevertheless, DAP should not assume that Malaysia could get out of this fiscal mess simply by cutting expenditure is naïve.

P.S. Such bold-faced lies:

He said the Consumer Price Index (CPI) would not increase as a result of the GST implementation.

The sales and services taxes the GST will replace is limited. The CPI will almost definitely move up. It is a consumption tax for cryin’ out loud: who did Husni think this bold face lie will convince?

Mahathir:

15. Thank you for agreeing that I am a dictator. Tell me which dictator ever resign.

Numerous examples. Take a look at the People’s Republic of China – there are a string of former premiers who retired: Zhu Rongji, Li Peng, and Zhao Ziyang. Same inclination to transition occurs for the presidency. Yet each of them is a dictator – they held power by authoritarian means. As did Mahathir.

I face this question so often: will I join politics? Maybe – it is a possible career option, in the distant future (that is, if I remain Malaysian). Most people assume that politics is the only way to influence public policy, and people with ideas generally do well – though the last two Prime Ministers aren’t exactly known for their ideas. Alas, I may be overly influenced by FA Hayek, who advised Sir Antony Fisher to build think tanks instead of joining politics.

Another common question, usually asked/said in jest, is on me becoming prime minister. Well, I never really put much thought into it: even by the most optimistic projections, my skin colour and religion would disqualify me for that office. And off the bat, I’d much prefer being a minister than the prime minister himself – I still get a vote in Cabinet, I get to influence my colleagues, but I don’t have to be the public face of the government.

Even so, I probably last a few short years in power – beyond basic reforms, ministership will bore me to tears (and it is not as if it is an easy, 9-to-5 job). But assuming, against all logic, rationality and precedence, as well as my own personal preference, that I become the most powerful politician in Malaysia, my policies will almost certainly ensure I won’t remain there for long:

Corruption: First off, I will set up several Royal Commissions of Enquiry into large, blatant cases of corruption (like the Port Klang Free Zone money hole) and incompetence (the Bakun dam, anyone?). Secondly, I will replace MACC with a new institution – after the 2009 Perak constitutional crisis and Teoh Beng Hock’s death, MACC has very little credibility left, and it is much easier replacing it.

Sizing down Barisan Nasional: Taiwan is a clear example how without restitution and correction after the fall of a dominant party system, the former dominant party will always have an inherent, unfair advantage. Separating Barisan Nasional from its ill-gotten business concerns will do more for democratic consolidation than any single reform. For party-controlled mainstream media (think The Star and Utusan Malaysia) will be nationalised, but kept entirely autonomous (and managed solely by an independent board) – in view of eventual privatisation.

Taxation (and welfare): I will abolish the corporate income tax (after all, the burden of the tax usually rest more heavily on labour and consumers than on investors). In return, I will introduce a value-added tax, which is an extremely efficient, business-friendly method of taxation (the regressivity of the tax can be offsetted by a rebate system).

For personal income taxes, I will introduce a flat tax on income. A real flat tax increases compliance and revenue because of the inherent simplicity of the system (unless, of course, if the tax rate is 50%). Adding negative income taxing, or rather, money transfers into the system reintroduces income redistribution into the tax system. The money transfers can eventually be grown to become the primary welfare instrument in Malaysia – for example, parents can be given a larger transfer so to pay for the education of their children.

Another reform is to allow state and local governments more avenue of raising revenue (hehe, it rhymes). Services by both level of governments is localised, therefore so should revenue generation. This will also give state and local governments, especially those under the opposition, more latitude in public policy.

Subsidies and price controls: Subsidies and price controls distort the market heavily. The money transfer mechanism in the negative income tax could be used to fill in the gap – after all, the reason why there are public subsidies and price controls is because market pricing will make a lot of goods unaffordable. Admitably, this will reduce net utility for subsidy recepients – but it only goes to show the distortive effect subsidies have on consumption and investment. For example, shifting from a fuel subsidy to a money transfer will almost certainly see a net reduction in consumption, reducing utility as a result – but a reduction in consumption is a good thing.

Protectionism: A large part of our trading policy isn’t popular – take import quotas on foreign-made cars, for example. By pitting public good against special interest good in public policy, broad sectors of our trading policy could be liberalised. For example, to liberalise the agriculture sector by allowing more foreign rice in and removing a price floor on rice – rice farmers and rural states like Kedah and Perlis will fight it to the death. But if you pit those against an informed public, knowing that they are paying far more on rice than they could for the benefit of some farmers, public support for liberalisation could be garnered.

Immigration: Complete liberalisation (open borders) may not be feasible, especially in shockingly xenophobic Malaysia. However, much can be done to improve matters – the simplification of rules allows potential immigrants to know how likely they are in migrating to Malaysia, and when they arrive, what status they will receive. Another key bit, which is unrelated to economics, is the recognition of refugee and asylee rights – no amount of xenophobia can justify keeping oppressed refugees like Burma’s Rohingyas out of Malaysia.

Health, pension and social security: I will make EPF opt-outable. Those who have the capability of managing their own savings should be allowed to do so. The savings system will be the primary tool for financing healthcare, retirement and social security (think things like disability and unemployment) – the money transfer element in the taxation system will provide for those where savings are insufficient. But I will also boost up the insurance elements of the system – taking advantage of risk-pooling to address unexpectancies (like living beyond your retirement savings).

As public subsidies can be channeled directly through the insurance and savings system, I will privatize clinics and hospitals.

Education and research: Similar to other welfare programmes, I will gradually privatise (for the lack of a better word) education. For public tertiary and research institution, full autonomy (i.e. privatisation) will be given with teaching funding done based on student composition and number, and research funding based on competitive grants. For primary and secondary education institutions, a voucher programme (that could be implemented through the tax’s money transfer system) will allow for the gradual reintroduction of competition. National and national-type schools will be gradually be more autonomous and eventually be privatised.

Unlike hospitals and public universities, there is very little private sector involvement in the primary and secondary education sector – allowing for initial growth in the private sector while retaining a public sector makes privatisation more acceptable.

Judiciary reform: The method of constitutional reform I will use is institutional replacement. For judiciary reform, the present Federal Court (the most supreme court in Malaysia) will be demoted by a new Supreme Court, with the Federal Court eventually merged with the Court of Appeals. This solves a huge problem of the judiciary (dodgy, Barisan-appointed judges making bad case law) without damaging the judiciary further (a purge in the judiciary, though matter how well-meaning, will have lasting damage).

Furthermore, I will create a Constitutional Court to try constitutional matters – this will also help develop constitutional case law in Malaysia. The only common law country with a separate constitutional court, South Africa, points to how such a court, even when conservative, can play a significant normative effect – preventing the abuse of constitutional principles by government, and giving those principles time to become societal norms. Even with massive corruption, an immature electorate and a dominant party, South Africa retained key, liberal democratic, norms.

Devolution: Another constitutional reform bit alluded earlier is devolution. This should be easier, as technically, no constitution amendments is necessary though it is preferable (the constitution allows the subsidiary of powers). Quite simply, beyond basic arguments of policy competition and power decentralisation, Malaysia is far too diverse to have centralised decision-making. One important aspect I will reintroduce is local government elections.

Another aspect of devolution is to return Labuan to Sabah, Putrajaya and Kuala Lumpur to Selangor. If at most, I would say a small federal territory (maybe, the size of the Vatican) is sufficient to serve as the seat of the federation. In the case of Kuala Lumpur and to a lesser extent, Putrajaya, separation from Selangor means that devolved public policy on matters such as urban transport, housing, public utilities and so on will be unnecessarily complicated by having two different governments in the Klang Valley.

Criminal and security law: The major reform here is in protecting defendant rights. Currently, police are given a free hand – severely limiting these will increase the outcomes of justice while having a small impact on efficacy. Among other things, the treshold for warrants should be higher, interrogations recorded with the right of legal counsel, as well as prohibiting evidence witholding by the prosecution. Greater protections against entrapment, duress, and other abuses should be put in place – for example, a police officer offering drugs in Chow Kit cannot charge his “customers” with an offence. Speaking of drugs, the Misuse of Drugs Act should be amended to return the burden of proof to the prosecution.

Judiciary discretion in punishment should be increased – removing minimum and mandatory punishments will allow judges to set fairer punishments. With regards to drugs, I will decriminalise drug trafficking and use (or the very least, the latter) – there is no reason why drugs should be treated differently from, say, bootleg alcohol. With the application of the principle of volenti non fit injuria (the no-harm principle), statutes like s377 (prohibiting sodomy) will not be usable against consensual sex.

Also, on security law – the detention order in the ISA will be restricted to a fixed term, granted by an independent magistrate and reviewable by an independent court, with detainees treated distinctly from prisoners, with each liberty restricted justified and deliberated by an independent tribunal. This will, in effect, prevent the use of security laws on non-security threats (like political opponents).

Conclusions: If anything, my policy stance showcases my political naivette (which I treasure) – therefore, I’m clearly poorly suited for politics and high office. Academia, NGOs and policy advocacy at least gives me a chance (greater chance, I’d say) to influence. As a bonus, I won’t be bogged down by politics.

I was at a Ho Yi Jian’s Talk Politics session last night, and at one point, Justin Ong (Reform Party’s youth chief) mentioned that the Singaporean constitution was too easily amended, and therefore (if I’m not mistaken) cannot have a normative effect as a supreme law.

I used to think the same was as Justin Ong, and on some levels, I do. In both Malaysia and Singapore, only a two-third majority in Parliament is required to amend the constitution. With a dominant party system in both countries, it was inevitable that the constitution was degraded by frequent amendments. But is it so?

Assume for a moment that Malaysia has the same rules on amending the constitution as the United States – and therefore, in addition to the two-third majority requirement, three-forths of states need to ratify an amendment. And it would have made absolutely no difference – until 2008, more than three-forths of the states were under and subserviant to Barisan Nasional. Assume different standards are used – like a referendum.

Increasing the amendment requirements does make amending the constitution harder – and some onnerous amendments may not have passed, but the main reason why the constitution was degraded and devalued wasn’t for the lax rules. It was a dominant party system. United Kingdom, New Zealand and Israel have much of their written constitution in regular legislative acts, easily amendable by a regular legislative majority.

Personally, I would prefer a constitution resembling more of New Zealand and the United Kingdom than of the United States for the very reason that the evolution of the constitution will be easier. In Malaysia, should Pakatan Rakyat form the next government, it is unlikely they will have an easy time amending the constitution – and thus, the constitutionally order will almost permanently be in favour of Barisan Nasional (bits like a static allocation of parliamentary seats to the states, regardless of population, favour rural-based Basian Nasional far more than urban-based Pakatan Rakyat).

I was staring at the family picture from my makeshift bed (the coach). It was taken when my eldest brother graduated – so I wondered when the next one will be taken. And realised, very eeriely, that my graduation picture would be taken a couple of months in advance of my younger brother, who started his law degree at the same age I started my degree.

And suddenly, I began reevaluating my graduation plans – more on that later. And another realization hits me: I will be graduating three months shy of my 25th birthday. This isn’t graduate school or a professional degree. It is a useless-ish bachelors degree in unmarketable majors – and I’m embarking into the working world while my age peers in most of the world had 2-3 years of a head start.

I went through all of the Malaysian primary and secondary education system (and kinda wish, don’t tell anyone, that I went through for the entirety). I wasted six months waiting for Form Six to start. I wasted another 8-9 months waiting for university to start. And I can safely say you could knock a year or two out of my secondary education without having a negative impact on my educational outcome.

I could have, as so many of my peers, jump off the public system after Form 5 (i.e. after the compulsory point) and pursued a private pre-university course. I could have done some one-year program like South Australian Matriculation. After that, I could have enrolled in some twinning programme with some second-rate British university and finish my degree in 2.5-3 years. Instead, I compounded my problems by opting for an “American” degree at SMU – a full, 4-year whammy.

I compounded it further by taking a term off. My preferred option after which was to graduate in December 2010 where my commencement will be in July 2011. My other option was to squeeze everything in, try to maintain my sanity and finish it in April 2010. Yet another option is to cancel my travel plans mid-next year (a painful, unimaginable thing) and spread out the horror using summer classes – and yes, I’m heavily regretting taking the term off.

The truth is it could be worse. I could have been Singaporean – lopped off a year from secondary school and add two years of National Service. It seems painfully stupid in countries where secondary/pre-university education extends so long into youth that university degrees should take four years. In Scotland, it make sense – kids there start university at 17 (about time when Singaporean kids start the A-level madness). In the United States, it still makes sense – kids there start university at 18.

And I can scarcely see how a English degree, which took 3 years of a boy’s life, is any less valuable than a four-year degree from the States. But at least there is a choice there, and I picked horribly.

My secondary education is less forgivable. With the combination of a terminal examination, heavy centralization and the inefficiencies that result from it, more than a year is wasted waiting for results and waiting for the next phase of education to start. Moreover, Malaysia is the only system that is based on the old English model to keep secondary education 5 years. For English, its four years to the GSCE. For Singaporeans, most of them skip a year and the N-Levels. In New South Wales, the School Certificate comes after four years and the Higher School Certificate in another two years.

Several Education Ministers have said they want to abolish PMR (and cut one year off secondary school). Then a new minister comes along and its forgotten. It’s sad though – if I went through a saner education system, I probably be one year into the working world. Oh, but student life is fun! Except if you’re in SMU. Then, tough luck.