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Evaluation of the 1988 Malaysian tax reform proposals: A general equilibrium approach

Bardai, Barjoyai bin; (1991) Evaluation of the 1988 Malaysian tax reform proposals: A general equilibrium approach. Doctoral thesis (Ph.D), UCL (University College London). Green open access

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Abstract

In the Malaysian 1988 tax reform proposals, recommendations were put forward to reduce taxes on corporations by an effective rate of 10%, to introduce Value Added Tax system, to implement some short term measures such as the blanket increase in the Sales tax rates by 5%, to reduce export tax and to broaden the tax base on import tax. These proposals has been evaluated and counter proposed by the author. A general equilibrium approach was adopted to evaluate the proposal. The model used was static in nature and only produced a marginal impact due to restructured tax instruments. Some extrapolation on the result was necessary to enable data to be used for a specific evaluation. An actual benchmark data set was constructed based on data available from Malaysian Statistics, except in certain areas where actual figures were not available. Sensitivity analysis was performed on these assumed parameters to gauge the sensitivity of the result. The work performed here would make a significant contribution to the economic forecasting work in Malaysia, as it paves the way for a general equilibrium theory in the area of tax reform. It would also permit more extensive research to be carried out using such a model especially in the annual budget exercise of the Treasury Department. The study shows that Corporate Tax is one of the most efficient and productive tax instruments in the economy. Its tax burden distribution has also been found to be quite positive. It has therefore been ascertained that reducing the tax would be unjustifiable unless a better tax instrument was created. The author's (counter) proposal to reduce Payroll Tax rate by 5% was found to be more viable as Payroll tax was found to be inefficient and unproductive. This counter proposal would also achieve the objective of reducing the cost of doing business in Malaysia and at the same time improve the overall tax burden distribution. The existing imputation tax system was found to still be the most efficient and productive mechanism for Malaysia. The proposal to introduce the Value-Added tax system is optimally desirable judging from the three main criteria of efficiency, equity, and tax revenue productivity. The claim that the tax system would create some inflationary impact was also proven to be ill founded; provided the tax rate structure is not altered. In other words, an effort to make the rate structure uniform should occur in stages. In analysing the various feasible types of VAT system, the consumption type was the most efficient, tax productive as well as equitable. The author's proposal to increase tax rates on Clothing and Footwear and Manufacturing durables was also found more viable, as these two intruments are quite outstanding, compared to others in the system. A counter suggestion to abolish the export tax altogether is also sensible if the tax revenue loss was recouped by raising the rate on the producers tax. This is optimal, and hence desirable, since a producers tax has been observed to be much more efficient and productive than the export tax. It had however been qualified that the counter proposal will only be viable when a separate channel of marketing could be created for small scale producers in an effort to exempt them from paying the tax. Finally, it is also desirable to exclude imported manufacturing durables from the import tax base judging from the efficiency, tax productivity as well as equity objectives of tax reform. The sensitivity analysis on the income elasticity and the substitution elasticity of the household sector had been carried out to prove the moderate nature of the result obtained in the tax reform analysis.

Type: Thesis (Doctoral)
Qualification: Ph.D
Title: Evaluation of the 1988 Malaysian tax reform proposals: A general equilibrium approach
Open access status: An open access version is available from UCL Discovery
Language: English
Additional information: Thesis digitised by ProQuest.
Keywords: Social sciences; Malaysia; Tax reforms
URI: https://discovery.ucl.ac.uk/id/eprint/10108635
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