What structural issue prevents Malaysia from expanding its income tax base?

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Structural Wage Problem Hinders Expansion of Malaysia's Income Tax Base

Malaysia's ability to broaden its personal income tax base is significantly constrained by a persistent structural issue related to low wage levels. The current priority for the government remains focused on increasing the income of more citizens rather than imposing taxes on a larger segment of the population. This approach acknowledges that without improvements in earning capacity, any attempts to expand the tax base could negatively impact consumption and overall economic earnings.
Low Percentage of Taxpayers Reflects Wage Levels

Currently, only approximately 15% of Malaysian workers contribute to income tax. This low figure is a direct consequence of the prevailing wage structure within the country. The fundamental challenge lies not in a lack of tax instruments but in the fact that average wages are not sufficiently high to necessitate income tax payments for a broader demographic.
Prioritising Wage Growth Over Tax Base Expansion

The government's strategy prioritises addressing the structural problem of inadequate wages. This involves implementing measures aimed at increasing people's incomes. The consideration is that any new tax measures should not adversely affect people's spending power or their earnings, making wage growth a prerequisite for any significant tax base expansion.
Balancing Revenue Generation with Economic Growth

While acknowledging the need to strengthen public finances, the approach taken by the Ministry of Economy seeks to expand government revenue without stifling economic growth. This involves a careful balancing act, considering how to generate more revenue through tax measures while simultaneously ensuring that these measures do not constrain the economy's ability to expand and create further opportunities for increased earnings.

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What structural issue prevents Malaysia from expanding its income tax base?

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