MeThink: Negative Income Tax in Malaysia?

At first glimpse and judging from the arguments put forward by Noor Yahaya Hamzah on her(or his? Pardon me if I just assume the author is a her, Noor, my experience tells me it is a lady’s name) letter to MalaysiaKini, the idea of negative income tax (NIT) sounds plausible, as compared to other proposal like minimum wage. At least I am much convinced NIT over minimum wages because the latter will/can cause unemployment. And that is the major setback I have over minimum wages.

Well, just found out that another reader is responding to her proposal. I can understand why Mr. Azhar is worried about the development of dependant mentality (waiting for hand-out) on those who are “waiting” for the extra bonus from government on negative income tax. Can we say that actually NIT is quite similar to unemployment benefit in the West? Government would surely worry about the free-riding issue as well, that’s why there are/should be certain measures are counted in to take care the free-riding issue as well. At the same time, I am not much convinced to believe that a basic income at RM900 (as proposed by NYH) is a “very good” incentive for people to sit back and waiting for the “extra bonus” from government. The amount we are dealing here is probably just good enough to cover the basic or neccessity of living, but if you want more than that, you have to earn it by your work.

As for where the Malaysia government can get the money from to support the idea of NIT, that’s another issue. But I guess NYH had pointed out few major problems in her letter already (reduce red tape, free the capital market, increase efficiency etc). As for tax more on the rich (wonder how rich is consider rich), there is something to be wary of not to overkill and hence decrease the “incentive” of people to work hard or/and creatively, aka, daylight (sanctioned) robbery. So much for the trade off I can think of, imho…

P/S: Mr KokTheng, please do visit this post regularly to see if you can add something… sort of taking care of my blog while I am gone for 1 week 😛

PP/S: Well, it certainly surprises me to see my post was having 128 hits in short 2 hours time, thanks to Malaysiakini referral’s link here. I was having more thoughts on the NIT over my dinner just now, about the incentives… If NIT is implemented, what would happen to the incentives to all party involved – employee, employer and government? I was thinking would the existence of NIT encourage the employer the cut back on the salary, slow increment, no bonus and etc? Would the workers are more encouraged to take up the least working-hours job, merely making enough to pass the minimal wage in order to get the extra from NIT? What would happen at the point of RM900 job? More thinking for me about incentives, supply, demand…

PPP/S: As Rajan pointed out in the comment, the structure of NIT is different from what NYH proposed, and to curb the “incentives” of employer (read tauke) to offer lower wages than RM900 (the proposed basic wage) and employee (worker) has no incentives to bargain higher salary (after all, they will be getting same amount of money, regardless from whom – employer or government). Thus, the burden will or is expected to be shifted towards government.
As explained by Rajan, and now I put in table format, let’s say tax at 5, 10 and 20% and rebate at RM400 and RM500:
The lower the original income is, the higher amount of rebate or NIT you will be getting. However, the employee will still have the incentives to work hard for higher salary because the final income will be increased, even though the amount of rebate will be reduced compared to lower income. Furthermore, it makes fair sense that the government is giving out more rebate/subsidy to those who need it, like RM300 original income earner (amount subisidy/revate received=RM370 [tax 10%+RM400]) compared to RM2000 original income earner (RM200 [tax 10%+RM400]).

8 Comments

  1. enough_said said,

    July 20, 2007 at 11:37 am

    Minimum wage is fine in principle but who determine what is the minimum wage and what is that level?

    A better proposal as suggested by London Mayor is the working wage. ie. this is similar to minimum wage proposal but a working wage is one that take into consideration of the cost of living while in that locality. For instance the average minimum wage for UK is between £3.30 (under 18 yrs) to £5.35 (above 22 year old). The cost of living in London would render the minimum wage meaningless.

    In fact free market forces would have determine the wage level in London depending on supply and demand. The minimum wage rule is to prevent exploitation of vulnerable workers especially illegal immigrants. This in turn helps the locals to compete with “cheap” foreig labourers.

    What we have in Malaysia is worrying because employers prefer cheap foreign labourers and thus deny the unskilled local workers to earn a decent wage. Foreign labourers are willing to accept lower wage because they are better off from where they came from. The demand for more cheap foreign labourer encourages more illegal immigrants and the vicious cycle continues.

    This is the state we are in with up to 2 millions foreign unskill labourers. Can Malaysia absorb more cheap labourers. Even semi-skilled labourers are under threat while unemployed graduates are not far behind!

  2. gsnair said,

    July 20, 2007 at 3:14 pm

    Instead of NIT, the government should consider dividend payments to all Malaysians. The profit of Petronas and other GLC’s, should be distributed to all irrespective of age, gender and ethnicity. This is not a novel idea as many govenment throughout the world do pay yearly to the citizens. Using the profit of GLCs, Petronas to subsidise tolls and petrol benefits the better income group. If the profit of Petronas alone is distributed to the citizens, each may get a sum of about RM2,000. Imagine a family of 3 children (5 persons including parents) will get a windfall of RM10,000. Woh!……..BN is here to stay

  3. mich said,

    July 20, 2007 at 3:52 pm

    gsnair, yeah, i wikipedia-ed petronas, and it mentioned that their net income (2007) is 12 billion USD (roughly MYR41 billion ~ 1USD:3.40MYR). RM2000 per person per year? Hmmm, about MYR167 per month, nice for pocket money I think, but not practical for living…
    But putting that idea aside, you mentioned about subsidzing the toll and petrols. What about the people in Kampung Hulu Pendang who do not use highway or toll, and their main transport communication is motorbike? In a way, they won’t be enjoying the benefits that you were sharing… 😛

  4. Rajan R said,

    July 20, 2007 at 4:15 pm

    I must note what Noor Yahaya Hamzah wasn’t suggesting a Negative Income Tax. It’s quite different actually. What Hamzah wants is income to be topped up to a certain level. So if I earn RM400 a month, I would get another RM500 to RM900. If I earn RM300, the amount topped up would be RM600.

    However, the NIT gives everyone – from richest to poorest, a certain amount of money. Lets assume it is a flat amount – RM500. And for income earned, let’s assume the tax is 20%. So for someone earning RM500, he would pay RM100 in taxes while receiving RM500 (thus, in effect, making his subsidy RM400) so his net income would be RM900.

    Under Hamzah’s top-up scheme, that someone would get RM400 in subsidy – earning RM900.

    But the difference comes in when the income changes. If that someone got a pay rise to RM600, he would pay RM120 in taxes and receive RM500 in subsidy (in effect, making the net amount of subsidy RM380) – earning a net income of RM980. Under Hamzah’s top up scheme, he would still earn RM900.

    If the pay rises to RM700 – the net income would be RM1,060. Under Hamzah’s scheme, the net income would be RM900

    Move it up to RM800 – now the net income would be RM1,140 – far more than RM900 received under Hamzah’s scheme.

    You see, Hamzah is proposing something with no upward incentive. If I earn RM300 presently, I have no incentive to, say, go to some course and then start earning RM800. Also, notice another critical aspect – what if you’re an employer. If you know everyone with market wages below RM900 would earn RM900 regardless of how much they pay them, they would pay the least possible. Thus the dependency effect begins.

    Furthermore, notice how easy it is to institute a NIT. You could vary the subsidy received (so a single mother of five would get more than a guy working during his uni holidays). Tax fillings could be the size of a postcard. Subsidies, being fixed regardless of income, can be distributed more frequently (weekly for example).

    Furthermore, the NIT works as a progressive tax above a certain point. When a person earns RM2500 – he pays no taxes. When a person earns RM5,000 – he pays RM500 in taxes (10%). When a person earns RM10,000 – he pays RM1,500 in taxes (15%). When a person earns RM50,000, he pays RM9,500 in taxes (19%).

    One simple tax code for everyone.

  5. mich said,

    July 20, 2007 at 4:36 pm

    Yeah, your point on dependency effect described in “Also, notice another critical aspect – what if you’re an employer. If you know everyone with market wages below RM900 would earn RM900 regardless of how much they pay them, they would pay the least possible.” was boogling in my mind for a while here. I was thinking there is definitely no incentive for employer to offer higher wage (even at very high demand and low supply?), and they will be motivated to shift the balance/extra in this case to government to cover up the basic RM900 line. Consequently, the burden will be at government’s shoulder, and restributed it on various taxes (income taxes, higher vat etc)…

  6. July 21, 2007 at 12:00 am

    […] MeThink: Negative Income Tax in Malaysia? At first glimpse and judging from the arguments put forward by Noor Yahaya Hamzah on her(or his? Pardon me if I just […] […]

  7. zewt said,

    July 21, 2007 at 5:46 am

    really sounds like some unemployment benefit.

    I just have to say that whatever good initiative… masterplan that can work in a developed country, just wouldnt work here, know what i mean. until and unless the hands that run the show have absolute integrity, it will all turn into another ‘act of god’ ok ok … maybe i am running out of topic here.

  8. rea solis said,

    December 4, 2007 at 4:48 am

    I am a Philippine worker here in one of the Garments Factory here in Malaysia.My question is; is it proper or legal to my company to deduct a monthly salary tax of about RM100 per month eventhough we just receive somewhat like RM400 per month?


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