Malaysia’s Tax Structure – Aligning Taxes to Higher Income Country

After four decades of rapid, inclusive growth averaging 6.4% pa since 1970, due to successful transformation of the economy from an agriculture to a modern and open economy, Malaysia needs to embark on painstaking reforms to launch its trajectory to a higher growth path. Among the urgent reforms is taxes, which need a restructuring from direct and commodity taxes with overdependence on oil and gas, to a more diversified tax base. Its tax dependence on the oil and gas sectors for revenue reached a 41% high of GDP in 2009, before settling to 14% with the introduction of GST/SST. The long-run elasticity of tax burden is -0.25, which implies that GDP growth will be reduced by 0.25% for every 1% increase in tax burden, compared with -0.27 for OECD countries. In general, taxes are negatively correlated with economic growth, even after taking into account the different types of taxes. The structure of taxation showed that GST is most sensitive to economic growth and has the highest impact. Among taxes, GST, PIT and CIT are negatively correlated to growth whereby for every 1% increase in taxes, economic growth will be reduced by 0.17%, 0.06% and 0.06% respectively. PROTAX and OTHTAX are positively related to GDP growth.