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Assessing the economic and social impacts of fiscal policies: Evidence from recent Malaysian tax adjustments

Saeed Solaymani (Department of Economics, Faculty of Law and Economics, Arak University, Arak, Iran)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 3 March 2020

Issue publication date: 6 May 2020

930

Abstract

Purpose

This study is the first attempt to analyze the effectiveness of recent two major tax policies, the reductions in personal and corporate income taxes and a rise in indirect tax and their combine, under both balanced and unbalanced budget conditions, on the economy and social aspects of Malaysia.

Design/methodology/approach

This study uses a computable general equilibrium model to investigate the impacts of all simulation scenarios on the key macro and micro indicators. Further, based on the 2012 Malaysia Household Income and Expenditure Survey, it uses a micro-data with a significant number of households (over 56,000 individuals) to analyze the impacts of tax policies on poverty and income inequality of Malaysian.

Findings

Simulation results show that, under the balanced budget condition, personal and corporate income tax reductions increase economic growth, household consumption, and investment, while the rise in indirect tax has adverse impacts on these variables. However, in the unbalanced budget condition, all tax policies, except indirect tax policy, reduce real GDP and investment in the economy and the indirect tax policy has insignificant impacts on all indicators. All policy reforms reallocate resources, especially labor, in the economy. In both budget conditions, the reductions in corporate and personal income taxes, particularly the corporate income tax, decrease poverty level of Malaysian households. Results also indicate that both tax policies are unable to influence income inequality in Malaysia.

Social implications

This study recommends that the government can increase its revenue by increasing indirect taxes as it does not have any impact on household welfare. In order to increase government revenues, initial increases in personal and corporate income taxes are suggested as they may have small negative impacts on the economy and welfare of households.

Originality/value

One of the significant features of this paper is that it examines both expansionary and contractionary fiscal policies in a country that government budget depends on oil exports. Since the literature on this subject is limited, particularly in the Malaysian context, the authors used Malaysia as a case to show how tax reform policies affect the economy and poverty level of such countries. Distinguishing the Malaysian households into 10 deciles and analyzing the distributional impacts of tax policies on these categories are the most significant contributions of this study.

Keywords

Acknowledgements

I would like to thank professor Dr. Fatimah Kari from Department of Economics, Faculty of Economics and Administration at the University of Malaya, Malaysia, for her support on data and comments on the paper.

Citation

Solaymani, S. (2020), "Assessing the economic and social impacts of fiscal policies: Evidence from recent Malaysian tax adjustments", Journal of Economic Studies, Vol. 47 No. 3, pp. 671-694. https://doi.org/10.1108/JES-09-2018-0334

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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