PETALING JAYA: An economist has proposed that income tax rates be reduced in order to free up the people’s cash flow and to encourage spending and consumption.
He also believes that the affluent should not be taxed more at this time, as there would be a greater spillover effect on society by leaving more money in the hands of the rich.
The economist, Carmelo Ferlito, a senior fellow of the Institute for Democracy and Economic Affairs, said the principle of redistributing the tax collections from the rich to help the poor seemed fair and sound.
However “in this peculiar moment, we don’t need to get resources away from the market, quite the contrary. In a moment in which the economy suffers from the lack of consumption because many people have lost jobs, we need the more affluent part of society to regain trust and confidence and spend money,” he said.
“By spending money and by consuming, the rich can help the less rich or the poor to regain jobs and therefore get back on track.”
He said the effect would be greater and more targeted than the government’s redistributive capacity, by creating jobs and allowing resources to remain in the market.
Putrajaya should not target a specific group while planning the economic recovery, as this could dampen the confidence needed to restart the nation’s consumption.
He said the money spent by the rich on certain goods and commodities will also contribute towards paying the wages of workers involved in the supply chain.
“Even if that money is spent on luxury goods, they are helping the poor. For example, if you go and buy a yacht, you are contributing to pay the wages of all the people that worked to build that yacht,” he said.
Back to GST, but with rates between 3% and 10%
Ferlito added that he was in favour of a return to the goods and services tax, but with some tweaks to make it more progressive.
He said GST was a more effective system than the sales and services tax (SST) in terms of the government’s collection as well as its implementation from the business side.
“A reintroduction of GST must be done in a way that addresses the concerns that led to its abolition, including that the burden of the tax falls disproportionately on the middle class.”
He proposed that different GST rates be charged, with luxury goods associated with higher-income households charged 10%, while “key-development” items related to culture and education can be charged a lower rate of 3%.
Basic goods regularly consumed by the lower-income group, such as rice, could be GST-exempted, he said, while other items are charged a standard 6% rate.
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