OF late, the Goods and Services Tax, or GST, has been occupying the mindscape of Malaysians. A good fiscal policy debate to have, it must be said.
Many economists want GST to be brought back. The reason is plain to see.
For a government which is short of cash, RM44 billion that GST collected in the dying year of its life for the government coffers would be a blessing, no doubt.
For once, economists — the on-the-one-hand and on-the-other-hand lot — agreed that GST is the way to go. It is, however, the exact shape it should take that is up for debate among the dismal scientists.
But expectedly, politicians appear to have a more dismal view of GST.
Perhaps their fear is about breaking the promise of the mandate on which they were elected to office. Understandable, but should such a promise-worry sentiment stand in the way of the good that may come out of GST? Should this fear be worrisome enough, the government may consider a referendum.
But if referendum is the way the government wants to go, let it not be another Brexit.
One economist who thinks Malaysia will do well to implement GST is Dr Carmelo Ferlito, senior fellow, Institute for Democracy and Economic Affairs.
He says GST, accompanied by a reformed income tax and a progressive capital gains tax, can be part of a new regime helping to counter the frequent economic cycles that are the fate of the capitalist system.
The new tax combination does not eliminate economic cycles — no tax regime can — but it blunts it by decelerating an overheated economy and encouraging savings.
But Ferlito’s idea comes with a caveat. An increase in consumption tax such as GST must come with a reduction in personal and corporate income tax.
The rationale is not hard to comprehend.
Keeping the latter at the present rate while imposing GST may depress economic acitivity, say economists.
Ferlito, a free market economist, reasons thus: the reduction in the supply of goods due to the increase in the tax rate can be so large that tax revenue actually decreases. No sane government would want this.
Ferlito’s solution? A graded GST system with four rates for four different goods — exempted basic goods, such as rice; key-development goods (culture and educational items) for the low-income group; common goods not within the first two categories; and luxury goods.
Pending further study, he suggests zero per cent, three per cent, six per cent and between eight per cent and 10 per cent, respectively.
This newspaper thinks there is a good case for a consumption tax such as GST. Our reasons are these: one, GST is a very transparent system; two, it is easy to implement and enforce.
As Ferlito says, a tax on consumption such as GST leads to a modification of our intertemporal preferences, nudging us towards a postponement of instant gratifications. GST may just be the answer to our high debt-to-GDP ratio.
Taxing as GST may be, it promises to make Malaysia a nation of savers. Funds, anyone?