By Dr Ismail Ait Saadi
Every year millions of individuals and firms pay tax to the government. To tax payers, it is expenditure and that’s why they dislike it. But to governments, it is revenue and that’s why they love it. Are taxes necessary? Some advocates of libertarianism see taxation as a necessary evil while to others it is a good thing when properly designed. For the extremists, it is purely stealing by the government. On the other hand, many see paying taxes as a civic duty like helping the elderly. You may choose where to belong but as things stand now governments will not abolish taxes. In fact they may ask their citizens to pay more.
The United States of America was on the verge of collapse because of its increasing debt and long term financing implications. In the midst of the crisis many asked for higher tax rates to be imposed on rich and big corporations, especially after billionaire Warren Buffett called on Congress to “stop coddling the super-rich” and raise income tax rates on rich Americans like him.
At a glance this may sound like a good solution, but this simplistic view does not solve the problem. Here are two major reasons why such action may have an opposite effect:
Tax evasion: Benjamin Franklin (1706-90) was proven wrong when he stated “In this world nothing can be said to be certain, except death and taxes”. Drawing on the certainty of death to emphasize the difficulty in avoiding taxes has become obsolete. Nowadays, corporations are experts in finding loopholes within the system to reduce the amount they pay to the minimum level or avoid paying taxes altogether. According to a report published early this month, 30 large US corporations paid no income tax during the last three years. General Electric, which made more than US$14 billion in profit last year, did not pay a single penny. You will be amazed to know that some US corporations are paying negative taxes. According to the report, Pepco Holdings Inc had the lowest effective tax rate, at negative 57.6%. This means that instead of paying money to the government, they get money from the government which includes “carry back” benefits – a form of tax rebate – applied to previous years.
Other firms avoid paying taxes by moving part of their operations to tax havens. One preferred destination is Zug, a small town in Switzerland. With a population of 26,000, this small town is home to 30,000 companies which are no more than mailboxes. The US has a corporate tax rate of 35%, the highest among developed countries. It is this high tax rate which forces firms to park their profits out of the country. Therefore imposing higher taxes will only encourage more firms to follow suit, which further reduces government revenue and pushes the government to impose even higher taxes leading to a dangerous vicious cycle.
Tax incidence is the division of tax burden between producers and consumers. When the government imposes higher taxes on big corporations, especially those that enjoy some kind of monopoly, they can easily pass the extra burden to consumers who end up paying higher prices for the same products and services. What is the result? Taxes that are supposed to be levied on rich corporations will be paid by you and me, and the very poor people whom we are trying to help.
Malaysia is aiming to become a high income nation by 2020. The government must spend billions in order to build world class infrastructure to enable such development to take place. So far Malaysia has been relying on the oil and gas sector as its major source of revenue (31% of its total revenue). According to the 2010 New Economic Model Report, only 12.4% of corporations paid income tax last year. This situation cannot continue forever. The government, which has been running a budget deficit for years, will eventually have to find ways to increase tax revenue. One way is to widen the tax base. Malaysia has 8.5 million registered taxpayers but only 1.7 million (6% of the total population) are actually paying tax. This is considered very low compared to Singapore (19.9%), the US (29.8%) and Australia (58.8%). While we are looking forward to reaching a developed nation status we must be ready to contribute more through taxes.
It is clear that imposing higher tax rates alone will not solve the problem. Perhaps the best recipe is one that consists of the following three ingredients: a tax system that is fair with fewer loopholes; a civic society that is willing to share the burden of taxes, and finally, a responsible government. If governments expect people to pay their share of taxes, the people have the right to expect their governments to spend wisely. Nobel Prize-winning economist Milton Friedman made it crystal clear that “…the burden of government is not measured by how much it taxes, but by how much it spends”.
Dr Ismail Ait Saadi is a senior lecturer with the School of Business and Design at Swinburne University of Technology Sarawak Campus. He can be contacted at email@example.com