Is tax refund on EVs justified?

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The 2022 BUDGET with the theme “Keluarga Malaysia, Makmur Sejahtera” has three main focus areas: the well-being of rakyat, resilient businesses and a prosperous and sustainable economy.

During the presentation of the initiative to implement low-carbon practices (as part of the sustainable development program), the Minister of Finance indicated that the government is committed to becoming a carbon neutral country through reforms to keep growth sustainable and competitive on the global market.

To achieve the goal of carbon neutrality, the government views the potential of electric vehicles (EVs) with energy-efficient vehicle (EEV) characteristics as a way to minimize pollution from vehicle emissions into the atmosphere.

To support the development of the local electric vehicle industry, the government proposes to grant exemption from import duties, excise duties, sales tax on electric vehicles and exemption from road tax. up to 100% to owners of electric vehicles.

In addition to this, personal income tax relief of up to RM 2,500 will be granted for the rental, hire-purchase, purchase and installation of electric vehicle charging stations and the payment of subscription fees to charging stations for electric vehicles.

While the incentive for the proposed tax exemption and relief appears gradual and inviting for behavioral substitution of consumers to electric vehicles, is the incentive effective for Malaysia as a whole?

In approaching this issue from an economic perspective, it is imperative to first understand what Pareto efficiency is in the context of this incentive: the welfare of an individual who benefits from the exemption. tax cannot be improved without reducing the welfare of another member of society.

From this definition alone, Pareto efficiency is not achievable because Malaysians who did not benefit from the incentives will see their welfare decline due to the opportunity cost of government in terms of tax loss. potential gained.

The potential tax earned can be used to provide public goods or subsidies to Malaysians.

If we were to look at the same perspective using a different tool, the Kaldor-Hicks effectiveness test says that a policy is effective if those who gain from it can in principle compensate those who have been “wronged” and even better off.

If the government can guarantee that Malaysians who do not benefit from the tax exemption can have better air quality and better health, they are considered compensated, thus making the EV tax exemption effective in theory.

Posner, the father of the economic approach to law, argues that an economic approach is different from Aristotle’s principle of corrective justice. Aristotle says that if someone injures another, either emotionally or physically, the injury caused must be rectified and the injured part must be restored to its previous position before the injury is inflicted.

Posner’s approach to this issue is that if the policy adopted makes someone’s situation worse, injustice is considered to be happening. This view is simpler and applies to Malaysians who will benefit from a tax exemption such as loss of grants and public property.

Using Posner’s approach, the government should ensure that not a single person is worse off by proving that the policy is fair.

In principle, the government’s decision to grant a tax exemption to owners of electric vehicles is justified, according to the Kaldor-Hicks efficiency test. This incentive, however, needs to be studied in depth to see the feasibility of such a policy in improving the well-being of all Malaysians.

If the improvement in the well-being of Malaysians does not improve and is not proportional to those who benefit from a tax exemption, this incentive is considered ineffective.

An alternative policy should then be proposed to make Malaysia a carbon neutral country by 2050. – December 10, 2021.

* Aizat Nizam Shah and Shahrul Mizan Ismail have read The Malaysian Insight.

* This is the opinion of the author or post and does not necessarily represent the views of The Malaysian Insight.


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