Income tax collection: Rafizi versus Eric See-To

 |Sep 7, 2017
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Much has been said about the state of our economy, with the latest being a claim made by PKR’s Rafizi Ramli that Malaysia’s income tax collection has exceeded the rate of growth of the economy.

The claim was made via a statement released on Aug 30, in which the Pandan member of Parliament alleged that since Prime Minister Datuk Seri Najib Razak took up office, the collection of income tax is high, however the Inland Revenue Board (LHDN) is still going after the rakyat.

Rafizi’s statement can be viewed here.

A rebuttal to Rafizi’s claim was then offered by Barisan Nasional Strategic Communications Deputy Director Datuk Eric See-To on Aug 31.

In his rebuttal, Eric was of the opinion that Rafizi was ‘a master of using figures to mislead but all too frequently his conclusions do not hold up to scrutiny but is just designed to incite without telling the truth’.

Eric’s statement can be viewed here.

Rafizi, on Sept 5 issued a statement in response to Eric’s, stating that economic growth was not increasing the rakyat’s paycheck.

The PKR vice president alleged that Eric is actually political observer, Lim Sian See.

Lim is well-known on Facebook for offering various criticism on the Pakatan Harapan coalition.

Rafizi offered what he claimed as an analysis he conducted to check on the measures of Malaysia’s economy from 2010 to 2016. Rafizi’s rebuttal can be viewed here.

With the back and forth going on, a blogger who describes himself as an applied and practicing economist in the Malaysian financial sector by the name of ‘hishamh’ wrote on his blog Econs Malaysia, pointing out the flaws in the argument mentioned above.

The following is the observation made by ‘hishamh’ as posted on his blog:

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)

More generally:

CAGR=(tn/t0)1/n

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?

“This is the personal opinion of the writer or publication and does not necessarily represent the views of Malaysia Outlook.”