Why is Malaysia avoiding higher income tax for top earners?

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Malaysia's Stance on Higher Income Tax for Top Earners

Malaysia is not implementing higher income tax rates for individuals earning above RM1 million, as the government considers the current top rate of 30 per cent to be sufficiently high. The approach taken involves adjusting tax brackets for incomes up to RM1 million, which indirectly affects those earning more, rather than directly increasing the rate for the highest earners. This policy aims to ensure that the most fortunate contribute moderately towards national well-being without imposing a significant burden on the highest income brackets.
Adjusting Tax Rates Instead of Direct Increases for High Earners

The government's strategy focuses on modifying the progressive income tax structure rather than imposing a new, higher rate specifically for those earning over RM1 million annually. Treasury secretary-general Datuk Johan Mahmood Merican explained that the existing 30 per cent top tax rate is deemed adequate. By adjusting the tax rates on income bands up to RM1 million, all taxpayers earning above this threshold will consequently face a higher tax burden due to the progressive nature of Malaysia's income tax system, which does not employ a flat rate.
Limited Impact on the Overall Taxpayer Population

The changes to the income tax structure are expected to affect a relatively small segment of the population. Johan highlighted that approximately 150,000 individuals will experience an increase in their tax payments. He further clarified that to actually begin paying these higher taxes, individuals need to have a taxable income of around RM230,000 after reliefs, which translates to a monthly earning of approximately RM20,000. This group represents the top one per cent of the labour force, often referred to as T1, rather than the broader T20 group.
Targeted Tax Reductions and Incremental Increases

The national budget outlines specific adjustments to income tax rates. For individuals earning between RM35,000 and RM100,000 annually, income tax rates will be reduced by two percentage points. Concurrently, annual incomes ranging from RM100,001 to RM1 million will see an increase in their tax rates, with increments varying between 0.5 and two percentage points. This tiered approach ensures that while higher earners contribute more, the increases are managed incrementally across different income bands below the RM1 million threshold.
Rationale for Contribution from More Fortunate Individuals

The government's policy is underpinned by the principle that those who are more financially able should contribute modestly to the nation's progress. Prime Minister Datuk Seri Anwar Ibrahim's view is that beyond government efforts to support the less fortunate, there is a societal expectation for the more prosperous to lend their support. Consequently, asking the top one per cent of the labour force, comprising about 150,000 people, to contribute a little more towards the country's well-being is considered a reasonable request.

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Why is Malaysia avoiding higher income tax for top earners?

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