Economists say 2pc tax cut for middle income group only translates to RM100 extra each month, second income source still needed

Malay Mail
Malay Mail

KUALA LUMPUR, March 17 — Several economists have suggested that some in the middle-income group seek a second income source to cope with the rising costs of living despite the recent tax cuts announced in Budget 2023.

They pointed out that the 0.5 to 2 per cent cut for the RM30,000 to RM100,000 taxable income band will only provide a meagre extra disposable income that ranges between RM25 to RM110 each month.

“Of course, it is good news for around 2.4 million M40 taxpayers but it will not make them rich. The savings is only RM25 per month for those earning between RM35,000 to RM50,000, RM50 per month for those earning between RM50,000 to RM70,000, and RM110 per month for those earning between RM70,000 to RM100,000. So most people will hardly notice the change,” said economist and professor at the Malaysia University of Science and Technology Geoffrey Williams when contacted by Malay Mail.

Instead, he suggested the middle-income group searches for additional income from side hustles, gig-economy jobs, or even change their career path if their current income is insufficient.

“Everyone has a skill, whatever it might be. So this should be evaluated to focus on income not wages.

“This income could come from investment and it could equally come from baking cakes or tutoring people in new skills,” said Williams.

Barjoyai Bardai, another economist and Professor Emeritus at Universiti Tun Abdul Razak, added that those in the lower range of the middle-income group should take the initiative to upscale and make sure they’re relevant to the current demands of the job market.

He added that families should consider opening small businesses that involve all family members as a second source of income to prevent them from falling into the B40 group.

Calling the middle-income group “The Sandwich Group”, economist Datuk Madeline Berma concurred with the others and said the extra disposable income is too little to make a meaningful change in their lives.

“Definitely it won’t change much in terms of their income standing, because the most important thing now is how to increase your income,” said Madeline, now a fellow at the Academy of Sciences Malaysia.

She said families nowadays need multiple sources of income to cope with inflation and added that the government should incentivise public and private workplaces to help housewives to return to formal work sectors.

“Government needs to provide the housewives with a support system by building a crèche in the office.

“They need to incentivise these workplaces to provide childcare facilities so that women can go back to work and provide income for the family.

“It’s better than the husband working three jobs at the same time,” said Madeline.

“The government needs to support because the private sector will question why I need to waste one extra room for my employees to put their children in?

“To them it’s the cost, but if you look at the Western and more developed countries, they look at it as an investment because it’s for your future generation and for your staff,” she added.

According to Department of Statistics Malaysia, the bottom 40 per cent earners in the country are classified as B40 with a household income below RM4,850 per month; the middle 40 per cent earners with a monthly household income between RM4,851 to RM10,970 are called M40; the top 20 per cent earners with monthly income exceeding RM10,971 are called T20.

The tax cut aims to increase the disposable income for the lower end of the M40 group which is heavily burdened by high inflation rates.

Economist Datuk Madeline Berma said the extra disposable income is too little to make a meaningful change in the lives of the middle income group. — Picture by Mukhriz Hazim
Economist Datuk Madeline Berma said the extra disposable income is too little to make a meaningful change in the lives of the middle income group. — Picture by Mukhriz Hazim

Economist Datuk Madeline Berma said the extra disposable income is too little to make a meaningful change in the lives of the middle income group. — Picture by Mukhriz Hazim

Reforming the tax system and creating high-income jobs

Although Madeline called Anwar Ibrahim’s latest tax cut in Budget 2023 an effort to “humanise” the tax system and redistribute the country’s resources, she urged the government to improve the transparency of the tax system and national expenditure.

She said this is imperative so taxpayers “know where their money is going” and doing so will encourage voluntary compliance in paying taxes.

“Another thing that might have an indirect impact is how to increase the opportunity for people to pay taxes rather than avoid taxes?

“Because chances are people want to avoid their taxes. (In order to collect more tax) one is you increase the taxes, the other way is to try to reduce avoidance,” said Madeline.

“For example, the Nordic countries don’t mind paying an income tax of 50 to 60 per cent because they know it’s ‘cradle to grave’ and everything is being taken care of by the state,” she added.

She, however, pointed out that what the middle-income group needed the most are high-paying jobs that can provide better income rather than a small sum of disposable income.

“For M40, many of them are willing to work but are there opportunities open to them?

“We are talking about a decent job that can help them earn a decent income because even if you are earning the minimum wage, you’re still poor,” said Madeline.

Malaysia’s newly implemented minimum wage stands at RM1,500 per month while the national poverty line is set at RM2,208 for each household.

The new wage came into law in May 2022 but businesses with less than five employees are not required to implement the new minimum wage until July this year.

According to Belanjawanku 2021, a research paper jointly published by University of Malaya and the Employees Provident Fund, it is estimated that the living expense of a single individual living in Klang Valley ranges between RM1,900 to RM2,570.

The estimated living expenses of a married couple without children is RM4,590, which is still a distance even though both of the couples may be working in minimum wage jobs.

On reforming the tax system, Williams said that the government should also review the current tax system in order to maximise the disposable income for middle-income earners.

He added that the government could incentivise people to seek for multiple income sources by reducing the tax on secondary income or exempting secondary income from tax below a fixed threshold.

“But all of this can only be done within a full review of the whole system,” he said.