The Factors Determinant Tax Revenue In Malaysia
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Published: Tue, 20 Feb 2018
Malaysia is a federation of 13 States and the Federal Territories of Kuala Lumpur and Labuan. The Federal Constitution contains special provisions regarding sources of revenue that are assigned to the Federal and the State governments. Those that are assigned to the State governments include revenue fom land, forest, mining, entertainment, water supply, bank interests, returns from investments, fines including forfeitures (other than imposed by Federal Courts) and fees for licences and permits (but not licences relating to motor vehicles and registration of businesses). All other revenues, not specifically assigned to the states, are Federal Government revenues.
Taxation become crucial economic tools to govern economics for any country, especially to developing countries like Malaysia. With the rapid trend toward globalization and internationalization, the pattern of tax revenues and economic growth accross countries has become a significant concern to economists. Recently, Malaysia has also performed well and shows the similar growth pattern in economy. Therefore, fund collected from taxation used by the government to provide facilities for its population and for the development of the nation. Other than that income tax is one of the surest way to make sure the Government fund is available for spending.
Inland Revenue Board (IRB) has play their main role as an agent of Malaysian Government and to provide services in administering, assessing, collecting, and enforcing payment of income tax and other revenue as may be agreed between Government andd the Board. For many years, the Inland Revenue Board (IRB) has presumed that its activities promote better tax collection starting from Official Assessment System (OAS) until Self Assessment System (SAS).
Malaysia Federal Government revenues are broadly classified as tax revenues, non-tax revenues and non-revenue receipts. Tax revenues include both Direct and Indirect Taxes. Direct taxes are collected by the Inland Revenue Board (IRB) and includes taxes such as income tax on individuals and corporations, petroleum income tax, stamp duty and real property gains tax. While for indirect taxes the responsibility of collection is taken by the Royal Customs and Excise Department. Indirect taxes include import duties, export duties, excise duties, sales tax, service tax and last but not least; goods and services tax (GST) that replace sales tax and service tax.
Non-tax revenues of Malaysian Government consists of fees for issue of licences and permits, fees for specific services, proceeds from sale of government assets, rental of government property, bank interests, returns from Government investments (including gains from sales of investments) fines and forfeitures. The non-revenue receipts consist mainly of repayments and reimbursements such as refunds of overpayments in previous years and repayment of loans from the Federal Government’s Consolidated Fund (Revenue Account) received from other Federal Government Agencies and State Governments.
The trend of tax collection in Malaysia is inconsistent, changing upward and downward depending upon economic conditions. However, over a 30 period, most years show an increasing incremental in total collection. The exceptions are when there is an abnormal economic condition such as financial crisis, war or increase in world oil prices.
During the early stages of its development which is in year 1960, Malaysia similar with most developing countries relied heavily on indirect taxes accounted for 76.7% (Kasipillai, 2006). However as the economy developed and with the tax reform less reliance was placed on indirect tax which starting from year 1999 the major contribution to government revenue is come from direct tax (69%). In 2008 the collection of direct tax represents 52% of the Government total revenue (Economic Planning Unit, Ministry of Finance and Bank Negara Malaysia). It is believed that the encouraging growth in Gross Gomestic Product (GDP) in 2009 stood at 23% contribute positively to the national revenue collection (9MP).
After brief introduction the remainder of this paper is structured as follow. Chapter 2 provide some sort of literature review regarding all the variables included in this research. Chapter 3 consist of research methodology and design, data collection, theoretical framework, hypothesis statement, and data analysis. Chapter 4 provides data description and result analysis and finally in section 5 gives conclusion and summary of the study.
BACKGROUND OF STUDY
Tax is the main sources of income for government. Tax is defined as a fee charged (levied) by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is direct tax. If tax is levied on the price of a good or services, then it is called an indirect tax.
Malaysia is a very tax friendly country compared than the others. Income tax comparaly low and many taxes which are raised in other countries, do not exist in Malaysia. All earnings of companies and individuals acccumulated in, derived from or remitted to Malaysia are liable to tax.
Government will used this tax revenues to fund all spending made by government in order to achieve an economic growth and also to promote a sound of economy.
Government will present their budget in Parliament around September each year. Determination of budget is based on estimation of government revenue and spending. An increase in government revenue will increase the allocation for government spending. The tax rate is one of the components in government budget. The government will decide whether to increase or decrease the tax rate or to remain unchage based on the goals of government in each budget every year.
Definition Of Terms
Gross Domestic Product (GDP)
Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. It is also define as an economic measurement that monitors the overall income and output of a country. It is a way to interpret the overall prosperity of the economy. It is culculated on an annual basis with quarterly updates. The data produced by GDP is interpreted in number of ways. Some use it to measure the productivity of the country, in that it shows how much product was produced and sold. Others use it to measure the general health of the economy and the standard of living of those living in it.
Inflation rate is a measure of inflation, the rate of increase of a price index. It is the percentage rate of change in price level of time. The rate of decrease in the purchasing power of money is approximately equal. The used of inflation rate is to culculate the real interest rate, as well as real increases in wages. When interest rate are high, fewer people and businesses can afford to borrow and it will usually slows the economy down.
The definition of unemployment is an economic condition marked by the fact that individuals actively seeking jobs remain unhired. Unemployment is an important measure of the economy’s strength. A high unemployment rate generally indicates an economy in recession with few job opportunities, while a low unemployment rate points to an economy running at or near full throttle.
The meaning of ‘openness’ has become similar to the notion of ‘free-trade’, that is a trade system where all trade distortions are eliminated. Openness also means the extent to which an economy is open to trade, and sometimes also to inflows and outflows of international investment. The openness here means ”trade openness’ that consist of imports and exports from a large percentage of GDP.
Malaysia is facing budget deficit every year since government expenditure exceed government revenue. If the government’s budget are not sufficient, some of the macroeconomic factors can’t be achieved. Government cannot reduce unemployment and inflation rate and also cannot increase the economic growth and promote currency stability if they cannot reach a sufficient budget to cover all the expenditure.
Tax is the main component of government revenue that will use to finance all the government expenditure to stabilize the economy. The expenditure here means the used of government’s revenue for the development and operational expenditure that will bring an economic growth.
This study is undertaken to discover factors determinant of tax revenue which are independent variables namely Gross Domestic Product (GDP), inflation rate, unemployment and openness (trade) on dependent variable which is tax revenue. It tries to grasp those variables volatility impact on tax revenue in a given economic environment and horizon.
Besides, this study was brought up to strenghten tho prove of previous similar study. However, due to the changing environmentof the economy, past researchers cannot be deem a suitable for current application. There is a need to revise the findings from the previous researchers, so it is consistent with current economic situation. The horizon of the research will cover from 1995 to the ending 2009. From this, all the indpendent variables are important towards dependent variable.
Therefore the problem statement for this study is which variables that have strongly positive significant relationship towards tax revenue?
In order to realize the factors determining tax revenue, this question must be taken into consideration.
The question is:
What is the relationship between GDP and tax revenue?
What is the relationship between Inflation rate and tax revenue?
What is the relationship between Unemployment and tax revenue?
What is the relationship between Openness and tax revenue?
This question must be taken into consideration because the questions will answer the overall study and to make sure whether the problem lies within this factor or the others factor.
OBJECTIVES OF STUDY
The general objective of this study is to identify the factors determine tax revenue in Malaysia from year 1990 to 2009 which is 20 years.
To know what are the factors that will increase or reduce the total tax revenue collected by government.
To determine whether growth in GDP significantly affect tax revenue collected by government.
To determine whether inflation in Malaysia significantly affect tax revenue collected by government.
To determine whether unemployment in Malaysia significantly affect tax revenue collected by government.
To determine whether the degree of openness in Malaysia significantly affect total tax revenue collected by the government.
SIGNIFICANCE OF STUDY
This research study can help the researcher to determine the most significant independent variables to the dependent variable.
From this study, it can help the relevant parties to know which variables can give influence to the tax revenue collected government.
The findings from this research can provide the information to the other researcher for future research that is similar or related with this study.
SCOPE OF STUDY
The scope of study is as follow:
This study focus on factors determining tax revenue collected by government. The data will be collected from 1990 to 2009 which is twenty years in yearly.
Four variables are choosen which are GDP, inflation rate, unemployment, and openness.
Software that used as a regression tool is Statistical Package for Social Science (SPSS) 16.0.
LIMITATIONS OF STUDY
Cost also becomes one of the limitations in doing this research because the researcher needs to bear all the cost and expenses in completing this research without getting any sponsorship. The cost that incurred such as stationeries expenses, photocopying, printing, transportation expenses and others are fully support by the researcher.
Choice of Variables
Choice of variables is the other limitation of the study. There have many variables that are determinants tax revenue and the researcher need to choose the exact variables so that it is suitable with the dependent variable. The variables that are choosen in this study are GDP, inflation rate, unemployment, and openness.
Data collection is one of the limitation of the study. The data covered a period of twenty years which is from 1990 to 2009 in yearly. Besides that, there have difficulties while choosing the exact journal and literature review that are strongly support all the variables.
Accuracy of Data
Accuracy also become a limitation of the study. Researcher used secondary sources in conducting this stdudy to collect data. The secondary sources such as annual reports, books, article, journal that the researcher found from internet and library. So, the accuracy of data depend from all the secondary sources that found in various materials. It means that, the researcher trying to maintain the originality and quality of the journal but the data needed depend on the materials.
2.0 LITERATURE REVIEWS
The amount of literature that directly deals with an analysis of factors that determine tax revenue collected by government in Malaysia is fairly limited.
Minea and Villieu (2009), in their research show theoretically that a tighter monetary policy should induce the government to improve institutional quality in order to limit the erosion of tax revenue. The model developed by them exhibits two interesting results. First, by finding an inverse relationship between the level of effort and the inflation target, the authors show that the lower the inflation target is, the higher the government’s effort in enhancing the quality of its institutions will be. In other words, by setting a lower inflation target, the ‘supra-authority’ encourages the fiscal authority to intensify its effort to implement a more efficient tax-collecting administration in order to recoup the loss of seigniorage revenue due to a tighter monetary policy. Effectively, a decrease in the inflation target reduces the interval in which government’s effort is minimal and increases the interval in which the effort in improving institutional quality is maximal. To conclude, it is important to note that the incentive of the government to improve the collection of tax revenue could be nonetheless diminished by a significant decrease of inflation rate.
Huang and Wei (2006) extended the model developed by modifying the principal-agent setup and by incorporating an indicator of financial development and social welfare function. They conclude that, conditionally to the cost of institutional reforms, pursue a low inflation target encourages the government to increase the performance of its tax collection system. Therefore the adoption of Inflation Targeting in emerging countries is expected to exert a positive effect on tax revenue collection.
Indeed, empirical literature has provided evidence that tax revenue is negatively affected by inflation, the so-called Olivera-Tanzi effect (Tanzi, 1992). This inverse relationship is usually explained by the fact that the real value of tax revenue is erode by inflation, since it exists for some tax categories a time-lag between the date of imposition and the effective collection of these taxes. Therefore, by theoretically maintaining inflation at low levels, and therefore by increasing the real value of tax revenue, Inflation Targeting may attenuate the government’s tax collection effort.
Lucotte (2010), used a methodology suggested by Dehejia and Wahba (1999) which consists of dropping treated observations whose the propensity score is higher than the maximum or smaller than the minimum in the control group. The result shows that the estimated average treatment effect on treated (ATT) are all found to be positive and statistically significant. This suggests that, on average, Inflation Targeting has a quantitatively large and statistically significant impact on increasing public revenue in emerging market economies. This result largely support their hypothesis that the adoption of Inflation Targeting may encourage the government to improve the collection of tax revenue.
Clausing (2007), analyze the impact of the size and the profitability of the corporate sector on revenues from corporate tax. The result of her regression analysis confirm that the share of the value added of the corporate sector, profit level GDP per capita and GDP growth have a positive impact on revenues from corporate tax, whereas the unemployment level has a negative impact.
Kubatova and Rihova (years of study are not stated), found that all of their examined factors (GDP growth, inflation and unemployment) were statistically significant. Along with the growth of GDP comes the growth of revenues from corporate tax. Inflation also has a similar effect. Conversely, higher unemployment leads to a decrease of the revenues from corporate tax.
Qazi (2010), in his paper attempts to search the determinants of tax buoyancy of 25 developing countries. He found that growth in import and manufacturing sectors have positive and significant impact on tax buoyancy which shows with the increase in growth of import sector tax revenue collection increases through import duties, tariff, sales tax on import stage and withholding income tax at import stage.
Saeed, Ahmad and Akhtar (2010), have studied the impact of corruption index on the tax revenues over 27 developing countries and use annual data for the 2002 â€“ 2006 periods found that GDP per capita is positive but it is significance at 12 percent level. The coefficient of the ratio of exports and imports (openness) to GDP is positive but not significance at even 10 percent level.
3.0 RESEARCH METHODOLOGY AND DESIGN
3.1.1 Purpose of Study
The purpose of this study is to determine the factors determinant tax revenue in Malaysia namely Gross Domestic Product (GDP), inflation rate, unemployment and openness.
3.1.2 Research Interference
Most of the data used in this study are obtained from the secondary sources from various resources that have been analyzed. The data are collected from an internet resources.
126.96.36.199 Accuracy and Data Reliability
Multiple regression analysis and a correlation research design are selected as the method of this study in order to investigate the variables that are associated with the problem. Two random variables are positively correlated if high values of one are likely to be associated with high values of the other and negatively correlated if high values of one are likely to be associated with low values of the other known as correlation. A statistical method used with one dependent variable and more than one independent variable known as multiple regression analysis. Thus, the accuracy and the data reliability of the data may partly depend on the published materials.
3.1.3 Study Setting
Secondary data from various resources have been analyzed. Research here is a field study where it is non contrive setting with minimial interference.
3.2 DATA COLLECTION
In completing this study, data is the most important thing needed. From the data collected, the researcher can make analysis and interpret the output to find out the result.
It refer to the data collected by someone for some other purposes. The sources include census reports, organizational records, surveys and annual reports. This secondary data used by the researcher to gain the idea and information to develop the literature review and complete this study.
188.8.131.52 Internet and website
The major sources that the researcher choose to find and gather journal that related with this study. This website are useful to the reasercher because help the researcher to gain the information about this study.
184.108.40.206 Library Research
The researcher find the journal and books through the library reserach. Some of the information from journals and published materials can be used as references to the researcher to get a better picture of the situation.
Inflation Rate DEPENDENT VARIABLE
Figure 1.0: Theoretical Framework
Based on the figure 1.0 above, it shows the relationship between the dependent variable which is Tax Revenue and the independent variables that includes Gross Domestic Product (GDP), Inflation Rate, Unemployment and Openness (trade). All these independent variables will be test to determine the relationship among these independent variables and dependent variables.
3.3.1 Priory Relationship
1. GDP and Tax Revenue : if GDP increase, the total tax revenue collected by government will also increase. This two variable have a positive relationship.
2. Inflation Rate and Tax Revenue : if an inflation rate increase, the total tax revenue collected by government will decrease. This two variable have a negative relationship.
3. Unemployment and Tax Revenue : if unemployment increase, the total tax revenue collected by government will decrease. This two variable have a negative relationship.
4. Openness and Tax Revenue : if the degree of openness increase, the total tax revenue collected by government will also increase. This two variable have a positive relationship.
The purpose of the hypothesis statement is to illustrates which of the hypothesis is most affect the dependent variable. The hypothesis are:
H0 : GDP is not statistically significant to affect tax revenue in Malaysia
H1 : GDP is statistically significant to affect tax revenue in Malaysia.
H0 : Inflation is not statistically significant to affect tax revenue in
H1 : Inflation is indeed statistically significant to affect tax revenue in
H0 : Unemployment is not statistically significant to affect tax revenue in
H1 : Unemployment is indeed statistically significant to affect tax
Revenue in Malaysia.
H0 : Openness is not statistically significant to affect tax revenue in
H1 : Openness is indeed statistically significant to affect tax revenue in
In this study, the data analysis need to be explained clearly. The data also consists of independent variable and dependent variable which is GDP, inflation rate, unemployment and openness . Pearson coefficient of correlation is used to the extent of relationship among different variables. All the data has been analyzed by using Statistical package Science for Social (SPSS) program. The data will be examine by:
Beta analysia (Coefficient)
To find out the relationship between independent variables and dependent variable. Does the relationship exist or not.
Coefficient of Determination (R-squared)
To know how well the independent variables explain the variation of the dependent variable in the regression.
Identify significant relationship of each independent variable with the dependent variable
Testing the significance of the overall independent variables with the dependent variable
Standard Error of Estimation (See)
The objective is to identify whether a particular variableis significant at a certain level of confidence.
Multiple Regression Analysis
TR = f ( GDP, Inf, Un, Op )This technique will focus on a relationship between a dependent variable and one or more independent variable. The regression analysis help the researcher to understand how the typical value of the dependent variable changes when any one of the independent variable is varied, while the other independent variables are held fixed.
TR = a + b1 GDP + b2 Inf + b3 Un + b4 Op + É›
TR = Tax Revenue
GDP = Gross Domestic Product
Inf = Inflation Rate
Un = Unemployment
Op = Openness
The dependent variable in the above equation is tax revenue while the independent variables are GDP, inflation rate, unemployment and openness.
Beta Analysis (Coefficient)
Beta analysis is a measurement used in order to find out the relationship between independent variables and dependent variable does exist or not. Therefore, if the result is positive that means the independent variables can explain the changes in the dependent variable.
Coefficient of Determination (RÂ²)
The coefficient of determination is a statistic that will give information the goodness of fit of model. It is a statistical measure of how well the regression line approximates the real data points. Is a descriptive measure between zero and one, indicating how good one term is at predicting another. The value of coefficient of determination is shown below:
Range of RÂ² Strength of relationship
No relationship with dependent variable
0.1 to 0.5 Weak relationship between independent variables
and dependent variable
0.6 to 0.9 Dependent variable is strongly explained by
1 Dependent variable ia perfectly explained by
T-statistic is used to determine whether the significance between the dependent variable and the independent variables exists or not. If the computed T-stat is greater than book T-value, the independent variable is statistically significant or vice-versa. In order to get book T-value, the degree of freedom should be culculated at a 95% confidence interval.
The degree of freedom can be calculated as follow:
Degree of freedom = n â€“ k â€“ 1
Where: k = Number of Independent Variable
n = Number of Observation
The results for T-statistic:
Accept H1, reject H0
If the computed t-statistic is greater than the book T-value at a 95% confidence interval.
Reject H1, accept H0
If the computed t-statistic is lower than the book T-value at a 95% confidence interval.
F-test is an overall test of the null hypothesis that group means on the dependent variable do not differ. It is used when comparing statistical models that have been fit to a data set, in order to identify the model that best fit the popultaion from which the data were sampled. F-test mainly arise when the models have been fit to the data using least squares. In order to get book F-value, it should be culculated at a 5% significant level.
Formula for book F-value is as follow:
Book F-value = FÎ± (k â€“ 1, n â€“ k)
Î± = Significant level (5%)
k = Number of Independent Variable
n = Number of Observation
k â€“ 1 = Numerator
n â€“ k = Denominator
The result for F-Statistics:
Accept H1, reject H0
If the computed F-Statistic is greater than the book F-value at 5% significant level.
Reject H1, accept H0
If the computed F-Statistic is lower than the book F-value at 5% significant level.
3.5.6 Standard Error of Estimation (See)
It is a measure of the dispersion of tthe data points from the regression line. It’s objective is to identify whether a particular variable is significant at a certain level of confidence. Standard error can be measured in two ways:
See = b
Degree of freedom
Df = n â€“ k â€“ 1
It is also useful in determining the range in which the dependent variable will point to a specified probability.
4.0 DATA DESCRIPTION AND ANALYSIS
This chapter focuses on the data description and result analysis. All the data collected in this study were processed using Microsoft Office Excel and the SPSS program. Microsoft Office Excel was used to describe the performance of dependent variable and independent variables. SPSS program was used to analyze the data from the correlation and regression analysis. The method was used to analyze the data was Multiple Regression Correlation Analysis. A multiple regression analysis involves more than one independent variable.
The process of evaluating is the same with simple regression, but in order to derive the estimated regression, a computer is employed due to the complex nature of data and time required. The presentation of findings is made to examine the relationship among independent variables (GDP, inflation, unemployment and openness) and dependent variable (tax revenue).
This study used Multiple Regression Method Analysis which is the interpretation of Regression Analysis includes Beta Analysis (Coefficient), Coefficient of determination (R-Squared), T-statistics and F-statistics.
4.1 DATA DESCRIPTION
Gross Domestic Product is the value at current prices of the total annual output of final goods and services produced in a country. ……..
Inflation rate is the percentage annual increase in the general price level, commonly measured by the consumer price index (CPI) or some comparable price index. …….
Unemployment rate is ……
Openness is ……
4.2 INTERPRETATION OF DATA AND FINDINGS
4.2.1 Research Analysis
From the data obtained, it shows the result of regression output as stated in Table 1 as follows:
R-squared : 0.990
F-statistics : 358.696
Standard error of estimation : 6122.50419
4.2.2 Regression Equation
From the result obtained, we can derive the regression linear function as follows:
TR = f ( GDP, Inf, Un, Op )
Multiple Regression Equation:
TR = a + b1 GDP + b2 Inf + b3 Un + b4 Op + É›
TR = â€“ 144980.369 + 13.481 GDP + 1657.557 Inf + 5860.522 Un
â€“ 572.845 Op + É›
4.3 RESULT OF FINDINGS
4.4.1 Beta Analysis (Coefficient)
Beta analysis is a measurement used in order to find out whether a relationship exists between the independent variables and the dependent variable.
Table 2: The result of beta analysis
Beta analysis for Gross Domestic Product (GDP)
From the results obtained, it shows that when GDP increase by 1 unit, tax revenue will increase by 13.481 units. The increase in GDP will raised the total tax revenue collected by government. It shows that this two variable have a positive relationship and consistent with the economic theory. This is because …..
Beta analysis for Inflation
From the results obtained, it shows that an increase of 1 unit in inflation can
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