Kuala Lumpur: Malaysia needs tax reforms to raise additional revenues for reducing inequality, according to the World Bank. Its latest report titled “A Fresh Take on Reducing Inequality and Enhancing Mobility in Malaysia” highlights the need for the country to increase revenues through both direct and indirect taxes.
According to BERNAMA News Agency, Malaysia’s public revenues are not only below those of upper middle-income and high-income countries but also fall short of the low middle-income country average. The report, developed in collaboration with the Economy Ministry and Department of Statistics Malaysia, warns that low revenues limit the country’s spending capabilities. The World Bank emphasized that international data suggest a relatively fixed cost of running a government, with spending on health, education, and social protection being consistent as a percentage of GDP across income levels. This implies that new revenues could create fiscal space for increased social spending.
The World Bank noted that while income inequality in Malaysia decreased from 1970 to 2022, the decline has stalled recently. The Gini index, measuring inequality, fell from 45 in 2004 to 40 by 2014 and remained at that level through 2019, before slightly declining to 39 in 2022. Despite these improvements, Malaysia’s Gini index remains higher than that of advanced economies it aims to emulate.
The institution suggested that making the personal income tax (PIT) more progressive could address inequality, especially at the top of the income distribution. Although Malaysia’s reliance on direct taxation is progressive, capital incomes are untaxed, and direct taxation through the PIT is low at less than 3.0 per cent of GDP. Estimates from Malaysia’s PIT Policy Microsimulation Model indicate that lowering taxable income thresholds and applying higher rates to upper income brackets could increase PIT revenue by up to RM2.5 billion-RM2.8 billion in 2024. Additionally, imposing a cap on relief could add at least another RM1.1 billion.
The report also suggested that increasing PIT collection from specific reforms could raise at least an extra 1.0 per cent of GDP. This would create additional fiscal space and reduce inequality, as most of the tax burden would fall on wealthier households, keeping the overall tax burden reasonable.
The World Bank emphasized that Malaysia needs to increase public spending to achieve high-income country goals by investing in capital and productivity, thus improving wages. The country is expected to achieve high-income status by 2028-2030, but less than half of its population is projected to earn above the high-income cut-off due to uneven income distribution. In 2022, nearly two-thirds of the population earned less than this threshold, according to the report.
The report also pointed out that even after achieving high-income status, Malaysia will still face challenges in catching up with more advanced economies. It noted that like other East Asian and Pacific economies, Malaysia confronts issues such as deglobalisation, changing regional trade patterns, rapid population aging, and climate change.