Monday, April 02, 2007

Real Property Gains Tax Abolishment (II)

Sigh... I completed the entire article and clicked "publish" only to find it completely disappeared! I've got no clue what happened! As there appears to be no way I can recover what I wrote earlier, this is my second time writing this post.

Yesterday, I wrote on the effectiveness (or potentially the lack of it) on the Governments announced intent to scrap the real property gains tax, specifically on the property sector, as well as the economy in general. This post however, will raise additional concerns of such a policy on the risk posed to the economy as well as the potential socio-economic impact of such a decision.

But before I get into the above issues, let me discuss another point which will question the effectiveness of scrapping the real property gains tax. The Prime Minister himself believes that "potential that has gone unrealized or under-optimized will be turned into new industries and businesses, new value creation and new jobs." This in other words, is the verbalisation of the much touted "multiplier effect" from such a move.

The "multiplier effect" result stems from the assumption that the bulk of the untaxed earnings will be consumed or re-invested resulting in a more vibrant economy. However, given that the biggest benefiaries of scrapping the tax will be property companies as well as the wealthy who can afford multiple properties, the impact of the "multiplier effect" may be muted.

The reason is straightforward. Economic surveys have led to the general conclusion that the wealthy has a much lower propensity to consume additional income, as opposed to the poorer segments of society. For e.g., if you were to give RM10,000 to the poor, it is likely to be spent on their "needs", while if it were to be given to the rich, it is more often than not "saved", as their "needs" are already well taken cared off. Hence, the anticipated multiplier effect, which depends on further consumption and investment (which are the key drivers of the economy), may be overrated given that the beneficaries of the new policy are largely the well-to-do.

This bring me to my next point which is the socio-economic impact of the policy on Malaysians. Malaysia adopts a progressive taxation system to promote equity amongst Malaysians. This means that Malaysians of a higher income bracket pays proportionately higher income taxes, when compared to the poor or lower middle income, who are often not taxable. Hence, the wealthy are expected to finance government expenditure which are meant for all Malaysians.

Real property gains tax is one of the key tools in the Government's armoury which will improve the progressivity of our income tax system. However, as discussed earlier, by scrapping the tax, the biggest beneficiaries will be the wealthy who will be contributing less to our national coffers.

As it stands, income inequality in Malaysia currently ranks the worst amongst Southeast Asian nations. Yes, it means that our income distribution is worse than Philippines, Thailand, Vietnam, Cambodia and Indonesia. Between 1999 - 2004, our income inequality as measured by the Gini-coefficient has also increased most rapidly, particularly within the bumiputera community. Hence, will scrapping the real property gains tax worsen the already dire state of income inequality amongst Malaysians?

Finally, I'd like to throw into question the wisdom of permanently abolishing the real property gains tax. The tax act was set up in 1976 to curb speculative activities. Does the Government believe that such speculative threats are no longer relevant in our world today? Certainly, if anything, such threats are becoming increasing real as the world is flushed with excess liquidity waiting to create the next big bubble.

During the Asian Financial Crisis of 1997/8, the Government introduced a interim measure to waive the real property gains tax, in order to stimulate the property industry. Could the Government do the same currently instead of a permanent abolition? Alternatively, could the government have instead reduce the taxable period for property gains from six years to maybe two or three?

Speculative pressures are usually well absorbed by the economy in a state of overall economic growth. However, in the event of a global downturn of the economy, such pressures will unnecessarily place disproportionate amount of pressures on our property sector, and correspondingly the financial sector which supports its development. The housing recession in the United States (US) has bankrupted many sub-prime mortgage lenders, and is threatening the entire financial system. While the overall financial system in the US may be mature enough to withstand the impact, can our limited and protect financial system hold up?

Instead, if the Government decides to do a "U-turn" on its policy later (which we are quite famous for doing), it will then form another black mark for the consistency of the Government's policies, a key barometer used by foreign investors to judge a country.

Hence, I hope that the Government will take these factors raised here into serious consideration when amending the Real Property Gains Tax Act. In particular, if the amendments were to be passed as proposed, I hope that the Government will enact the necessary compensatory measures to address the impact of worsening income inequality amongst Malaysians.
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