A Cut in Taxes

Based on the Star Online dated 1^st October 2012 in an article by P. Aruna, it was stated that there would be a slash in individual tax rates by one percentage point by next year. Malaysians were told to anticipate a cut in taxes This tax cut is exclusive of tax reliefs and other such benefits. Based on researchers from Deloitte, the standard corporate tax rate is 25% whereas for smaller companies, it is 20%. This amount is indeed a very huge one as if the company is making on average 1 million a year, its corporate tax rate is 250, 000. Even with all the tax exemptions that the company gains, said company is still obliged to give up a lot in order to pay their taxes.

            With the cut in taxation rates, companies will be able to keep more profits for themselves. As they do so, said companies are capable of producing more products. Hence, supply is increased. They are able to produce more with the extra revenue that they save when they have less tax to pay. Although one percentage may not seem like a lot, but if put into context of a major company, for example Apple Inc, who made a gross income of $ 44.52bn in 2011 (www.marketwatch.com, 2012), 25% of that income will come up to approximately $11.13bn.

A cut in taxes enables big-name companies to increase their research and developments to come up with new products to be put out in the market. With all that being said, this could lead to market failure. This is due to the fact that when companies have the ability to produce more; supply will increase and as it is good for the company’s revenue, an issue of overproduction will also arise. Overproduction is indeed a market failure because too much of an item has been produced and the quantity supplied may also exceed the quantity demanded in the economy. Although resources have been used efficiently, producers mat react to the economic situation in accordance to their own interest. Yes, this is normal human mentality, selfishly only wanting the best for themselves, but the entire economy will be affected by the said selfishness and ultimately the ones most affected are the producers.

Overproduction will lead to a fall in price and an increase in quantity supplied of a product. True enough, consumers will benefit from the decline in the price of the good. However, producers may have to carry the burden of needing to face market failure issues such as buffer stock schemes. For some, such a scheme is possible but for others, it is not such a good idea. Take for example again, Apple Inc. Let’s say they engage in the buffer stock scheme and buy more resources just because of the tax cut, the technological trend changes are so frequent. If they do what is mentioned above, it will only cause them to incur losses in the future. Although it may seem beneficial at the moment, when their resources become obsolete and is no longer usable, Apple Inc will be faced with another problem; how to get rid of those items without being looked at as not being environmental friendly. It may seem like a minor issue, but the reputation of a company is crucial to any organization, like it or not; especially one that is as reputable as Apple Inc.  

            However, it is also safe to say that by reducing taxes, consumers will benefit greatly from this. Not only are there ample supply of goods in the market, the price of those items will be cheaper too. This is due to the fact that price of the goods will fall. This is all simple logic. When there are a lot of similar products in the market, competition will be very high and yes, it causes companies want to perform more efficiently. Thus, they will be competing among themselves to gain as many customers as possible and thus lower the prices of their products.

            That is not the only thing that is important, though. In the same article by P. Aruna in the Star Online, Prime Minister Datuk Seri Najib Tun Razak announced that there would be a one percentage reduction in individual income tax rates for each grouped annual income tax between RM2, 500 and RM50, 000 in his during the 2013 Budget speech. This is a good move as this cut in tax would help the middle income earners to save more money. However, it will not affect the very poor neither would it affect the very rich. More money will be able to be spent or saved by individuals because of the tax cut. This is good news for Malaysian citizens everywhere!

            The cut in tax, although having both pros and cons, will ultimately be a decision that is greatly supported by the citizens of Malaysia. Although companies will face some very serious issues if this is not handled properly, they too will benefit from this. It is common knowledge that anything that involves saving money, paying less or gaining anything from the government is indeed a good move. Large and small companies alike have to be more cautious as to how they deal with this issue. Being too greedy may result in the fall of the company whereas if they are too carefree and do not take the slightest advantage of the situation, it may be disastrous for them as well. As for individuals, middle income earners are the ones benefitting from this. Bad news for the low income earners and the wealthy, but they will survive. I, for one, am thrilled to hear this news! However, the philanthropist in me thinks that the government should come up with methods that are able to help the poor out and narrow the uneven income distribution that is so evident in our country. However, that is a whole other topic and not one to be discussed here or today.