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clock 26-09-2017
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Should Inheritance Tax Be Brought Back?

An economist has warned that reintroducing the inheritance tax can have severe repercussions on the economy, amid calls for its return to address the wealth disparity in Malaysia.

Speaking to FMT, Carmelo Ferlito said bringing back the inheritance tax, which was abolished 26 years ago by the administration of former prime minister Dr Mahathir Mohamad, could affect personal savings and investments.

He was commenting on the Consumers Association of Penang's (CAP) recent suggestion that the tax be brought back to help bridge the gap between the rich and poor in Malaysia, which has one of the highest Gini coefficient in Asia.

The Gini coefficient is used to measure income gaps between the rich and poor.

Before its abolition, the inheritance tax was applicable to estates with a net worth of above RM2 million (5% tax) and RM4 million (10% tax). There have also been rumours that Putrajaya would reintroduce the tax in the coming Budget, but this has been refuted by Second Finance Minister Johari Abdul Ghani.

Impact on savings, investments Ferlito, a senior fellow at the Institute for Democracy and Economic Affairs (IDEAS), said the inheritance tax hinders people from accumulating savings for their children, as they would be taxed for it.

"Imagine a man who wants to pass on an estate of RM1 million to his son. Without a tax, he must save RM1 million. With a 50% tax, he must save RM2 million. Will he do it? That depends on how much time, energy and money he's willing to sacrifice.

"The higher an inheritance tax, the more likely people will reduce their savings for the long term and increase their present consumption. This reduces a person's desire and ability to pass on their wealth.”

In the long run, Ferlito said that this would impact investments, as savings in banks are a primary resource for investments.

"Entrepreneurs need money to invest in businesses and usually these are in the form of loans from banks, which leverage on their customers' savings.

"If there is sufficient amount of savings, this can help lower interest rates for loans because the banks have a ‘safety net'.”

But, he said, if people are discouraged from saving their money, banks will be discouraged to loan money for investments due to a lack of customers' savings to back the loans.

Ferlito also said an inheritance tax may be construed by some members of society as a form of "double taxation”, as they would have already paid income tax and taxes on property when they were alive.

Housing market will be affected Real Estate and Housing Developers' Association patron Ng Seing Liong said an inheritance tax could lead to capital flight.

"A lot of money leaves Malaysia because people will take their savings elsewhere, possibly buying shares, properties or keeping it in overseas bank accounts.”

He also said the property market would be affected as those thinking of buying properties as investments may not want to do so.

"There is also the issue of those who inherit properties from their parents but are not financially able to pay the taxes on it.

"They might be forced to sell the property just to pay the inheritance tax.”

Not part of opposition's plans Meanwhile, PKR's Wong Chen said the inheritance tax, which the federal opposition had proposed in 2015, will not be part of Pakatan Harapan's (PH) 2018 Alternative Budget.

"We did consider the matter in 2015 and we are aware of the issues raised by CAP" said Wong, who is part of PH's policy group.

Generally, he said, an inheritance tax is aimed at re-distributing the wealth and targeting the richest Malaysians.

"Going forward, whether we implement the policy or not will depend on several factors.

"The most important factors are the data on the wealthiest Malaysians and what is the potential projected revenue from such a tax.”

Wong said a PH federal government will also need to consider the appropriate tax rate and what items to be exempted.

As an example, Wong said there is a strong argument for a family house to be exempted from inheritance tax.

"There is also a good argument to set a low tax rate of 10% and exempt the first RM10 million.”

But, Wong said, that until PH has better data to make the necessary projections, PH has no intention of introducing inheritance tax in its 2018 alternative budget.

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