AN increase in wages is necessary to transform Malaysia into a high-income nation.
The Congress of Unions of Employees in the Public and Civil Services's (Cuepacs) recommendation for the government to consider increasing the wages of low-income public sector workers is well founded on two reasons.
First, the wage level for most workers is not enough to cope with the increased cost of living.
According to our analysis, the income for more than half of households in Malaysia is insufficient to absorb the surging living cost.
Since the Covid-19 pandemic, the rise in the prices of goods and services has contributed to the rising living cost, while wage growth has been slow for decades.
This impacts the low-income group.
Second, the government needs to be a model leader in solving the low-wage issue.
In most countries, including Malaysia, the private sector will follow the footsteps of the government to raise the wages of workers.
A study by the European Central Bank found evidence that the growth of public sector wages positively affects the growth of private sector wages.
Increasing wages does not hurt the economy but gives more benefits to employers, employees and the government.
We addressed this issue in an article, "The Need for Escaping the Wage Curse", published in the "Economic Outlook 2023" by the Finance Ministry.
It is claimed that an increase in wages for civil servants will lead to a fiscal deficit of 6.5 per cent to gross domestic product (GDP) in 2023, an increase from the projected fiscal deficit of five per cent.
The claim has merit, assuming the government's revenue is almost similar to the level of 2022.
The government has opportunities to expand its revenue by considering the following suggestions.
Firstly, find a way to tax shadow economic activities that take place outside the formal economy and not reported for taxation or regulatory purposes.
These include undeclared work, unregistered businesses and informal markets.
EU-ERA research shows that the shadow economy is almost 30 per cent of Malaysia's GDP.
In 2021, Malaysia's GDP was RM1.545 trillion. This would mean the shadow economy was at an estimated RM464 billion.
Secondly, the introduction of a consumption-based tax levied on goods and services that are consumed, rather than on income or profits.
The most common, efficient and fair consumption-based tax is the value-added tax known previously known as Goods and Services Tax (GST).
Reintroducing GST with a lower rate, say 2 to 3 per cent, is reasonable under current economic conditions.
Thirdly, consider introducing a new non-tax instrument such as a business civil fee for every business establishment.
Many business establishments are exempted or do not pay tax on their business profits.
Thus, a business civil fee is justified because they use public infrastructure to run their businesses (for example, roadside stalls) that are funded by the government from tax revenues.
The wage issue for the private sector should not be ignored as private sector workers dominated about 71 per cent of the total workforce in 2021.
If the productivity level of workers is almost constant, the increase in wages for the private sector would incur additional costs to industries.
Thus, to be more effective for wage interventions in the private sector, implementing an approach that interlinked corporate tax, income and consumption can be considered.
Under this approach, the corporate tax is reduced to allow the reduced costs of industries transferred to workers through increased wages.
To compensate for the reduction in the corporate tax, the government should then introduce a broad-based consumption tax such as a value-added tax, in addition to the individual income tax that will be increased when wages increase.
Thus, taxation reform is one way to address structural issues in Malaysia, such as wages, shadow economy and business competitiveness and efficiency, while maintaining fiscal sustainability.
In Organisation for Economic Co-operation and Development countries, consumption tax is the most important tax for these countries, which contributed about 32 per cent in 2021 while the individual income tax generated 24 per cent.
The corporate tax gives only 9.8 per cent to the tax revenue for the average OECD country compared with Malaysia, around 39 per cent in 2021.
The experiences of OECD countries indicate the benefits of reducing corporate tax for wage shifting and fiscal sustainability.
Dr Mohd Yusof Saari and Badrul Ezham Badrul Hisham are chief economist and junior economist at the Centre for Future Labour Market Studies (EU-ERA)
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times