GST

I really don’t understand opposition to the Goods and Services Tax (GST) apart from concern over problems associated with adjusting to the new tax.

GST is a tax on spending, like the existing sales and service taxes it will replace. A lot of the complaints seem to mistakenly suggest that GST will be imposed on top of the existing taxes. While the service and sales taxes are between 5 and 10 percent, GST when introduced will be at only 4 percent.

Then, there is argument that while the tax is introduced at a low 4 percent, it will only increase in the future as what happens in other countries. The problem with this argument is that the government can increase the rate of any tax, including the current sales and service taxes. The government has also stated that companies earning RM500,000 or less in revenue will be exempt from GST, as will many essential goods.

If it is not clear yet, I am all for GST. “The devil is in the details,” they say, but all else equal GST is a superior tax than what we presently have.

So I am quite amused today when I read that as part of its Common Policy Framework, the Pakatan Rakyat wants to “[i]mplement a progressive taxation system and reject Goods and Services Tax.” Wait, do they mean progressive taxation and GST mutually exclusive?

Quite simply with a progressive tax, the higher your income the higher your tax rate. Many people believe that a fair tax system should be progressive. I am not entirely convinced myself. A flat-rate sales tax – GST is a sales tax – is the classic example of a regressive tax, the opposite of a progressive tax. Lower income people pay a higher percentage of a regressive tax out of their income than people of higher income.

But GST is not necessarily regressive. If essential goods that make the bulk of spending of lower income people are exempt from GST – which the government already says will be – and say luxury goods are charged a higher rate, GST can be made progressive.

Most importantly, GST provides the government a broader, more efficient tax. Whoever will be in office five, ten years from now will definitely benefit from it.

In the meantime, complaints over corruption and wasteful mismanagement aside, like it or not Malaysians must face the fact of higher taxes soon as our petroleum reserves dry up.