Taxing the rich more will help reduce income inequality, says economist

Taxing the rich more, a move aimed at enhancing the progressivity of the individual income tax structure, will help reduce the nation's income inequality, said economist Dr Muhammed Abdul Khalid.

"It is an unexpected move taken by the government," he said.

Prime Minister Datuk Seri Najib Razak in tabling the 2016 Budget announced a 1-3 percent income tax increase.

The income tax rates for resident individuals with income from RM600,001 to RM1 million are proposed to be increased by one per cent to 26 percent from 25 percent now, while for those with income exceeding RM1 million, the tax will be higher by three percent at 28 percent from 25 percent starting 2016.

Although it would affect less than one percent of the total workforce in the country, it would nevertheless help reduce the nation's income inequality, he told Bernama after a post-2016 Budget discussion forum at Universiti Malaya here today.

Najib, who is also Finance Minister, also announced that the fixed income tax rate for non-resident individuals will be increased by three percent to 28 percent from 25 percent currently.

Muhammed said overall, the measures undertaken in the budget are commendable but the lower allocation for development is “a bit worrying”.

"Ten years ago, the development expenditure allocation was about 30 percent (of the total expenditure), now it is almost half of that. If we want to become a high-income nation, we should be spending a lot on development," he said.

In the budget, a total of RM52 billion was allocated for development, just slightly higher than the RM48.5 billion for 2015.

On the 1Malaysia People's Aid (BR1M) scheme, he said he believed it is just a temporary measure but the government needs to ensure it only reaches the targeted groups as well as serves its purpose well.

Cornell University post-doctoral researcher Dr Nur Ain Shahrier also concurred with Muhammed on the BR1M payout but also noted that something more sustainable for the bottom 40 percent (B40) income group needs to be created.

“One needs to know what is the multiplier effect of the spending on the recipients, whether they are spending it on something more productive for economic growth or to enhance themselves.

"The implementation should be better managed, and the database on the recipients should be supervised,” she said, stressing the need to be more transparent in the implementation of BR1M.

On another matter, Muhammed suggested an unemployment insurance scheme be introduced to safeguard the well-being of employees.

“While the economy is moderating, consumption is also moderating, firms are no longer as robust as before, and workers need to be protected,” he said.