Political risk makes tax reform difficult

GOVERNMENT are often reluctant to introduce major economic reforms, including changes to the tax system, when economic conditions are uncertain, according to Tunku Zain Al-‘Abidin Tuanku Muhriz.

The founding president of the Institute for Democracy and Economic Affairs (IDEAS) said political considerations often influenced the pace and scale of reforms, as governments weighed the potential impact on public sentiment and electoral support.

Tunku Zain said difficult decisions were harder to make during periods of economic vulnerability.

“I think it handicaps it when we are in a position of economic difficulty.

“All governments are worried to do anything radical or significant when things are precarious," he said, adding that governments are bolder when it comes to institutional reforms when they feel safe and when the economy is healthy,.

Tunku Zain said Malaysia’s challenges were also part of a wider global environment, with countries facing geopolitical uncertainty, the effects of the Covid-19 pandemic and economic pressures.

“This is not a unique position. All over the world, everyone is suffering from geopolitical instability, everyone is suffering from the war in Iran, everyone is suffering from even the legacy of Covid.”

He said civil society had an important role in continuing to explain the need for reforms, even when such measures could be unpopular in the short term.

“There is a lot of work that civil society needs to do to continue to argue and convince the political actors as well as the people at large that yes, some reforms can be very painful but sometimes you need to do it to guarantee your long-term sustainability,” he said.

However, Tunku Zain acknowledged that politicians often faced electoral consequences when implementing difficult reforms.

“There is an electoral cost which is why politicians are not brave when things look precarious. It is a chicken and egg (situation) but this is how it is," he said.