Use inheritance tax to narrow the gap between the rich and the poor

It is a given that the gap between the haves and have-nots in Malaysia is widening. The recent study by the Khazanah Research Institute, the United Nations Human Development (UNHD) Report 2013 and a recent book by Dr. Muhammed Abdul Khalid, all gives the latest evidences pointing to this maldevelopment.

According to the UNHD Report, the total wealth of the richest 40 Malaysians is equivalent to 22% of the country’s GDP, an increase from 15.7% in 2006. In relative terms, Malaysia’s 40 richest individuals are in fact much wealthier than the top 40 richest individuals from the United State, Singapore or Thailand. At the households’ level, the top 20% of Malaysia’s population hold more than 51% of the country’s wealth with the top 10% owning more than 35%. Meanwhile, the bottom 20% has less than 5% of the country’s wealth.

The general consensus is that the issue needs to be urgently addressed for reasons of social equity, social stability and economic growth.

The government’s plans to address this issue, however, have one very glaring omission and that is it does not involve the use of taxation.

This is most unfortunate because taxation should be one of the preferred choices. It not only help to bridge the wealth gap but it also raises money needed to fund programmes on social transfers, health and education that will help the lower income groups.

There must be some form of redistribution and the answer lies in the inheritance tax. Given that wealth inequality is mostly transmitted through inheritance, not taxing ‘unearned’ wealth is not only against meritocracy, but dis-incentives hard work, effort, and talent.

Inheritance tax (similar to estate duty or estate tax) is assessed on the net worth of an individual at death. Not all estates are subject to tax, only those estates of and above a certain value are included. Some of the countries with inheritance tax (or its equivalent) are United Kingdom, France, the United States of America, Japan and Germany. Thailand is proposing to implement the inheritance tax.

Malaysia had this form of taxation before we abolished it in 1991. Back then, it was applicable only if the net worth of the estate exceeded RM2 million. The rates were 5% on estates worth RM2-4 million, and 10% if it exceeds RM 4 million.

CAP has been calling for the reintroduction of the inheritance tax since 2001.

Malaysians should not fear the inheritance tax. This is because they do not have to pay a single sen in inheritance tax unless they happen to have assets worth millions. Inheritance tax hits the super-rich not the ordinary citizens.

According to Khazanah inaugural publication which was recently published “The State of Households”, it is wealth inequality that really counts. And CAP thinks that the best way to tackle the problem of wealth inequality is through the use of taxation, especially that of inheritance tax. As billionaire Warren Buffet sees it, “Without the estate tax, you will in effect have the aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit.”

It is impossible to narrow the growing gap between the rich and poor if the issue of wealth inequality is not urgently addressed. We urge the Government to seriously consider implementing inheritance tax.

Press Statement, 22 January 2015