Guys, This Argument Is A Total Waste Of Time

YB Rafizi Ramli is claiming that income tax collection has exceeded the rate of growth of the economy (excerpt, emphasis added):

PENINGKATAN KUTIPAN CUKAI PENDAPATAN SEJAK DATO’ SERI NAJIB MENJADI PM SUDAH PUN TINGGI, SEKARANG LHDN TERUS KEJAR RAKYAT

…Maknanya, dalam tahun 2017 ini pentadbiran Dato’ Seri Najib dijangka akan mengutip hampir sekali ganda lebih banyak cukai pendapatan (pada jumlah RM112 bilion) berbanding kutipan tujuh tahun lalu iaitu 2010 semasa beliau mula-mula menjadi Perdana Menteri (pada jumlah RM60.3 bilion).

Malah, kenaikan purata tahunan sepanjang tempoh 2010 ke 2017 (disebut cumulative annual growth rate atau CAGR) adalah 11%, iaitu kadar bertambahnya kutipan cukai tahunan secara purata di antara 2010 ke 2017 sebanyak 11% setiap tahun….

…1. Pertumbuhan ekonomi negara hanyalah sekitar 5% sahaja dalam tempoh yang sama. Jika ekonomi tumbuh hanya 5%, maknanya rakyat tidak merasa kenaikan gaji yang mendadak dan peniaga juga tidak merasa keuntungan yang mendadak yang membolehkan LHDN mengutip cukai yang lebih tinggi

2. Kenaikan gaji purata pekerja Malaysia adalah antara yang terendah di rantau ini, maka mustahil lebih ramai pekerja yang secara tiba-tiba menyumbang lebih banyak cukai kerana gaji mereka menjadi lebih besar

3. Pentadbiran Dato’ Seri Najib sebenarnya menurunkan cukai pendapatan ke atas syarikat dan individu apabila GST diperkenalkan, maka sepatutnya kutipan cukai pendapatan tidaklah meningkat sedemikian rupa kalau pun tidak lebih rendah

This was replied to by Dato’ Eric See-To, from the Barisan Nasional Strategic Communications (excerpt, emphasis added):

Media Statement from BNSC

…3. Yesterday, Rafizi made the observation that tax collections in Malaysia had outpaced GDP growth by stating that in 2010, the tax collection was RM60.3 billion and RM112.3 billion for this year.

4. Rafizi said that tax collections had grown at an average of 11% per year - faster than our average GDP growth of 5%. He said this is a bad thing and he compared this to Australia's tax collection average growth of 5.3% during the same period.

5. However, Rafizi does not state that the GDP growth of Australia is just 2.7% during that period meaning that tax collections had also outpaced economic growth there - a fact which completely destroys Rafizi's own argument.

6. Australia's example show that income tax collections outpacing economic growth is not unusual….

…to which YB offered a rebuttal (excerpt):

RAKYAT DICUKAI SECARA MENDADAK MELALUI CUKAI KORPORAT DAN GST, PERTUMBUHAN EKONOMI TIDAK MENAMBAH GAJI RAKYAT

…Bidasan beliau banyak berkisar kepada hujahnya bahawa “kadar peningkatan kutipan cukai yang dua kali lebih tinggi dari kadar pertumbuhan ekonomi adalah perkara biasa, dengan memberi contoh peningkatan kutipan cukai sekitar 5% oleh Australia juga 2 kali ganda dari kadar pertumbuhan ekonomi negara itu”….

…Untuk memahami sama ada kadar kenaikan kutipan cukai itu disebabkan oleh pertumbuhan ekonomi (lebih baik ekonomi, lebih untung dan lebih cukai), atau kenaikan gaji yang dijana pertumbuhan ekonomi (lebih baik ekonomi, lebih untung maka gaji dinaikkan dan rakyat berbelanja lebih) seperti yang didakwa oleh Lim Sian See/Eric Se-Too, analisa yang mendalam perlu dibuat untuk membandingkan bagaimana cukai yang berlainan bertukar jumlah kutipannya dengan perubahan pertumbuhan ekonomi….

…Rujuk nisbah cukai keseluruhan dikutip berbanding prestasi ekonomi: walaupun ekonomi Malaysia berkembang lebih konsisten berbanding Australia pada kadar pertumbuhan yang lebih tinggi (antara 4% hingga 6% di antara 2010 hingga 2016), sebenarnya pertumbuhan ekonomi itu tidak menyumbang kepada meningkatnya hasil cukai negara secara berkadar dengan pertumbuhan ekonomi itu.

Sebab itu nisbah cukai keseluruhan dikutip menurun setiap tahun dari 2014 hingga 2016 (16.2% kepada 15.6% ke 15.3%) walaupun Dato’ Seri Najib mendabik dada ekonomi berkembang pesat. Keadaan di Australia adalah sebaliknya: walaupun ekonomi mereka tidak berkembang sepesat Malaysia, jumlah cukai yang dikutip meningkat naik lebih baik dari kadar perkembangan ekonomi. Itu bermakna kerajaan Australia terus mendapat hasil yang meningkat yang boleh dibelanjakan kepada rakyat.

Sebab kenapa nisbah cukai keseluruhan dikutip menurun walaupun ekonomi Malaysia didakwa tumbuh pesat perlu dikaji dengan lebih lanjut. Namun, ia juga membuktikan bahawa pertumbuhan ekonomi tidak semestinya menjana pendapatan kepada negara kerana ada projek-projek yang melibatkan perbelanjaan besar tetapi tidak menguntungkan, maka kerajaan tidak boleh mengutip cukai dari projek-projek tersebut.

As much fun as it might be to watch this continue, I’m going to rain on this parade. They’re both wrong. The key point is the data that Rafizi is using, which I partially reproduce below.

Mistake No 1:

This is a regretfully common error – using the wrong GDP base as the denominator. The numbers used for Malaysia here are Real (inflation adjusted) GDP, but all the tax figures are Nominal (current Ringgit/Dollar). To get the right ratios, you either have to adjust the tax figures for inflation using the GDP Deflator (good luck with that), or more simply, just use Nominal GDP. I didn’t bother checking the Aussie numbers, because the OECD source they’re both quoting from directly provides the tax ratios using the correct NGDP base.

The same criticism applies to economic growth. For a like-to-like comparison, tax and revenue growth should be compared with NGDP growth, NOT RGDP growth.

Mistake No 2:

The revenue numbers from Rafizi’s original post come from the Treasury’s revenue estimates. The problem is that these are ex-ante forecasts from each budget, not the actual ex-post tax collection. Since the argument here is about actual tax incidence, using budget forecasts is obviously contraindicated. For example, 2010 direct tax collection was RM79.0 billion, not RM60.3 billion.

Mistake No 3:

The 11% CAGR growth of revenue that Rafizi quotes, is not actually CAGR. It’s a simple average of the growth of the forecast [sic] estimates (i.e. 23.5% + 11.4% + etc, then divided by 6).

The actual CAGR from 2010 to 2017, using the correct formula as well as actual direct tax collection and the 2017 tax forecasts, is just 5.16%. The CAGR for total revenue is even lower at 4.67%. Growth rate of the economy, again using the right formula as well as the correct NGDP base and the 2017 NGDP estimate from the budget, was 7.05%.

For those interested, here’s the CAGR formula for Excel spreadsheets:

=POWER([2017 numbers]/[2010 numbers],1/7)-1

More generally:

CAGR=(t_n/t₀)^1/n-1

Mistake No 4:

The Treasury spreadsheet showing the breakdown of government revenue has a couple of serious errors. To be fair to MOF, the errors are on the part of the spreadsheet that is not immediately accessible to the public, since the cells are hidden. You can only access the data prior to 2014 by unhiding the columns, which is what Rafizi apparently did.

There are two issues here: first, the data for 2013 is missing (which is apparent in the screenshot). Second, for some reason, the line data for corporate income tax and personal income tax got swapped. In other words, the RM51,288 million in the last screenshot above for 2012, is actually corporate tax collection for that year, not personal income tax collection. There was no sudden “drop” in tax collection between 2012 and 2014. The actual numbers for those years are RM22,977 million for 2012 and RM23,054 million for 2013.

Summing Up

For a more trustworthy dataset, I’d prefer using BNM’s Monthly Highlights and Statistics (rebranded from the Monthly Statistical Bulletin), which has all this data and more (2017 government finance and GDP estimates can be gotten from the 2016-2017 Economic Report).

I’ll leave you, the reader, to decide on the relative merits of each side. But let’s do it on the basis of the correct indicators, shall we?