KUALA LUMPUR (BERNAMA) – Malaysia needs tax reforms to raise additional revenues for reducing inequality, according to the World Bank.
Its latest report titled ‘A Fresh Take on Reducing Inequality and Enhancing Mobility in Malaysia’ said that the country needs to raise more revenues through both direct and indirect taxes.
“Malaysia’s (public) revenues not only lag the revenues of upper middle-income countries (UMICs) and high income country (HIC) peers but also the low middle income country (LMIC) average. The biggest consequence of low revenues is to limit what the country can spend,” said the report, which was developed in collaboration with the Economy Ministry and Department of Statistics Malaysia.
The World Bank said international data suggest that there is a relatively fixed cost of running a government, with total spending apart from that on health, education and social protection being relatively fixed as a percentage of gross domestic product (GDP) across all income levels.
“This means that as new revenues are raised, fiscal space is created for greater social spending,” it said.
According to the World Bank, income inequality in Malaysia trended down between 1970 and 2022, but the decline has stalled in recent years.
Inequality, as measured by the Gini index, fell from 45 in 2004 to 40 by 2014. It remained at that level through 2019 – before the COVID-19 pandemic – and declined slightly to 39, according to the most recent data from 2022.
“While this is not insignificant, Malaysia’s Gini remains higher than that seen for the advanced economies that it wishes to emulate,” the World Bank said.
The Bretton Woods institution said the personal income tax (PIT) could be made more progressive and tackle inequality at the top of the income distribution.
It said that Malaysia’s heavy reliance on direct taxation is progressive, but capital incomes are not taxed, and direct taxation through the PIT is low at less than 3.0 per cent of GDP.
Estimates from Malaysia’s PIT Policy Microsimulation Model suggest that lowering the taxable income thresholds and applying higher rates at the upper income brackets could increase PIT revenue by up to MYR2.5 billion-MYR2.8 billion in 2024, while imposing a cap on relief could add up to at least another MYR1.1 billion.
