Budget 2018: Govt reduces individual income tax and theorical effect on tax pay cuts in economic
The Federal Government will reduce individual income tax rates by two percentage points for 2.3 million taxpayers in the country, especially those in the M40 group, specifically households with income of less than RM9,000.
Prime Minister Datuk Seri Najib Tun Razak, during the tabling of the 2018 Budget in the Dewan Rakyat today, said the move would increase the household disposable income of the people from between RM300 and RM1,000, and was aimed at narrowing the income gap in Malaysia.
"This means that an estimated RM1.5 billion in disposable income can be spent by the people. With this move, more than 261,000 individuals are no longer subjected to income tax," he said.
He further explained the reduction of the individual income tax rate by two percentage points was for income ranging from between RM20,000 and RM70,000.
For income ranging from RM20,001 to RM35,001, the rate is reduced from five to three percent; while that ranging from RM35,001 to RM50,000, the reduction is from 10 to eight percent.
As for those in the income range of between RM50,001 and RM70,000, Najib said the tax rate would be reduced from 16 percent to 14 percent.
In addition, the Prime Minister said the government through the 2018 Budget, would also maintain RM3.9 billion worth of goods and transport subsidies, including cooking gas, flour, cooking oil, electricity, and toll charges. -- Bernama
Prime Minister Datuk Seri Najib Tun Razak, during the tabling of the 2018 Budget in the Dewan Rakyat today, said the move would increase the household disposable income of the people from between RM300 and RM1,000, and was aimed at narrowing the income gap in Malaysia.
"This means that an estimated RM1.5 billion in disposable income can be spent by the people. With this move, more than 261,000 individuals are no longer subjected to income tax," he said.
He further explained the reduction of the individual income tax rate by two percentage points was for income ranging from between RM20,000 and RM70,000.
For income ranging from RM20,001 to RM35,001, the rate is reduced from five to three percent; while that ranging from RM35,001 to RM50,000, the reduction is from 10 to eight percent.
As for those in the income range of between RM50,001 and RM70,000, Najib said the tax rate would be reduced from 16 percent to 14 percent.
In addition, the Prime Minister said the government through the 2018 Budget, would also maintain RM3.9 billion worth of goods and transport subsidies, including cooking gas, flour, cooking oil, electricity, and toll charges. -- Bernama
The effects of reducing income tax rate
- Increased spending. Workers will see an increase in their discretionary income. With lower income tax rates, they would keep more of their gross income, so effectively they have more money to spend.
- Higher economic growth. With lower tax rates, we could expect to see a rise in consumer spending because workers are better off. Because consumers spending is a component of aggregate demand (AD) (roughly 60%), then a rise in consumer spending should cause a rise in AD, leading to higher economic growth.
- Government borrowing. Tax cuts will, ceteris paribus, lead to lower tax revenue and this is likely to cause higher borrowing. Though some economists believe income tax cuts can increase productivity, which offset this fall in revenue.
Effect of tax cut when economy is below full capacity
Impact of tax cuts on AD/AS diagram, when there is spare capacity in the economy.
However, the effect of tax cuts depends on how the tax cut is financed, the state of the economy and whether low tax rates actually increase productivity and the willingness to work.
However, the effect of tax cuts depends on how the tax cut is financed, the state of the economy and whether low tax rates actually increase productivity and the willingness to work.
Islamic Tax?
Islam has a completely different perspective on the economy and tax as the Islamic basis is different to that of capitalism. Fundamentally taxation in Islam and under the khilafah puts the emphasis of taxation on wealth rather than income. The Islamic taxation system does not tax income, but taxes wealth. This means that the average person will be left with more disposable income and will be liable for tax on whatever wealth is left at the end of the year. This will have a significant effect on the economy.
Islam has a completely different perspective on the economy and tax as the Islamic basis is different to that of capitalism. Fundamentally taxation in Islam and under the khilafah puts the emphasis of taxation on wealth rather than income. The Islamic taxation system does not tax income, but taxes wealth. This means that the average person will be left with more disposable income and will be liable for tax on whatever wealth is left at the end of the year. This will have a significant effect on the economy.
The main revenues of the khilafah are:
1. The different types of public property revenues
2. The properties of Zakat
3. Booties (Fai’),
4. Land Tax (Kharaj)
5. Head Tax (Jizya)
As conclusion, to implement the reducing in income tax , goverment must pay an attention to effect of reduce tax in ecomic before it can be implement and also in the islamic perspective.
2. The properties of Zakat
3. Booties (Fai’),
4. Land Tax (Kharaj)
5. Head Tax (Jizya)
As conclusion, to implement the reducing in income tax , goverment must pay an attention to effect of reduce tax in ecomic before it can be implement and also in the islamic perspective.
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