Is it possible to reduce taxes in Malaysia?

The question of whether Malaysia can reduce taxes sounds simple, yet it sits on top of complex economics and practical state capacity. Lowering statutory rates is not a magic switch. It is an outcome that becomes possible only after the system that collects, spends, and accounts for public money is strengthened. The most useful way to think about this is the way a founder would think about lowering prices without harming a business. You do not cut the price of your product if your unit economics are weak. You improve the product, the process, and the cost structure until the numbers support a lower price that still leaves you solvent and trusted. For a country, the equivalents are growth quality, compliance ease, base breadth, spending discipline, and administrative capability. When those parts improve together, a lower headline rate becomes not only possible but sensible.

Consider growth first. Government revenue scales with national income. When nominal GDP expands faster and in a more predictable pattern, the same tax structure generates more cash per point of the rate. The most durable way to create room for lower taxes is to shift the growth mix toward activities that throw off higher value added, can be recorded cleanly, and are exportable. For Malaysia, that means deepening specialisation in higher value electronics, tradable digital services, data infrastructure, and green transition supply chains, while lifting productivity in domestic services that support these sectors. When activity flows through formal rails and leaves a clear data trail, the same rate collects more, and the pressure to set a high headline number weakens. Lower rates then become a dividend of better growth composition rather than a political gesture that needs to be financed with larger deficits.

Compliance is the second pillar. A state that makes paying tax simple, legible, and predictable collects more at the same rate than one that relies on paperwork and fear. People are more likely to comply when filings are digital from end to end, when information is prefilled from payroll, business registries, and payment systems, and when there is a single view of a taxpayer across agencies. They are also more likely to comply when they see a fair chance of being audited if they do not. The psychology is no different from how people behave on a well designed checkout page. If the path to completion is short and the rules are clear, abandonment drops and conversion rises. If Malaysia continues to streamline e invoicing, to integrate data from customs, banks, and payroll submissions, and to offer service level guarantees on refunds and queries, it will raise collections without touching the headline. At that point, a lower rate is not a risk. It is the natural by product of a smoother system.

The breadth of the tax base matters just as much. A narrow base forces governments to push rates higher on those who do pay. A broad base allows a lower rate because the same fiscal need is spread across more activity. Malaysia still has a meaningful share of economic life in the informal sector and a long tail of micro businesses that under report or fall outside formal rails. To bring these segments in, carrots usually work better than sticks at the start. Link access to affordable working capital, faster permits, and eligibility for public procurement to adoption of e invoicing and verified payment rails. Make the benefits concrete and immediate. Once businesses feel the upside of being formal, they are more likely to stay inside the system, and enforcement can operate as maintenance rather than constant firefighting. Over time, this expands the base, stabilises collections, and builds space for rate reductions that do not starve the budget.

Any conversation about taxes that ignores spending is incomplete. You cannot lower price if your cost to serve keeps rising. That principle applies to states as much as it does to firms. Sustainable tax relief requires careful work on the expenditure side, starting with subsidy rationalisation that protects the most vulnerable while cutting leakage, procurement reform that ties payment to delivery and performance, and sunset clauses for programs that have outlived their purpose. When policymakers evaluate programs on measurable outcomes and retire what no longer works, they bend the outlay curve. As that curve flattens, the revenue requirement falls, and any reduction in rates stops fighting the budget. The political work here is delicate, but the payoff is direct. Every ringgit saved on poorly targeted spend is a ringgit of tax a household or business need not pay.

Composition is the next lever. Many countries trim the effective burden on work and investment by gradually shifting toward consumption taxes and pricing of environmental externalities, while using transfers to shield low income households. The logic is straightforward. A state should tax less of what it wants more of, such as employment and productive investment, and more of what it wants less of, such as pollution and congestion. This does not mean an overnight flip. It means building credible mechanisms for excise and environmental pricing, tightening exemptions that lack a clear policy rationale, and improving refund and credit schemes that protect the bottom of the income distribution. When the mix improves, the economy can grow with less drag, and the effective pressure on productive activity falls even before headline income tax rates move.

Administration underpins everything. A revenue authority that operates with modern tools, integrated data, and risk based audits can deliver more service with less friction. That begins with internal platforms that triangulate corporate accounts, payroll submissions, customs declarations, and payment data under strong governance, and continues with analytics that direct human attention to where problems are most likely. It includes publishing service metrics that taxpayers can see, such as refund turnaround times, average response times for queries, and completion rates for digital filings. When a tax authority behaves more like a high reliability platform and less like a paper workflow with a website, trust rises. With trust comes voluntary compliance, and with compliance comes fiscal room.

Sector strategy also matters in a practical way. Malaysia seeks to attract and retain higher margin activities in electronics, data infrastructure, digital services, and green value chains. Incentives will continue to play a role, but they should be performance based, time bound, and designed to deliver clear local capability gains rather than open ended holidays that erode the base. Think of this as tiered pricing with milestones. Early cohorts can receive a ramp discount tied to export performance, skilled job creation, supplier upgrading, and technology transfer. If those milestones are not met, the discount expires automatically. If they are met, the effective rate sits at a sustainable level that reflects the value created. Smart incentives grow the pie rather than simply shifting slices, and a larger pie makes lower general rates easier to afford.

Against this backdrop, the temptation to cut headline personal or corporate income tax immediately is understandable, yet risky if done in isolation. Markets, rating agencies, and citizens all price credibility. If rates are lowered in a way that widens the deficit without a visible, believable path to close the gap, the country will pay through higher borrowing costs or a weaker currency, or both. That is the macro version of putting your product on discount while your burn rate climbs. It looks attractive in the short run, and it punishes you later. The more credible path is to build momentum through the improvements described above, demonstrate better collections at current rates, show discipline on spending, and then convert the efficiency into a measured rate cut.

There is a distributional dimension that cannot be ignored. Lowering rates while leaving loopholes intact transfers the largest benefits to those best placed to exploit complexity, while the state trims services that matter to the middle. That kind of design creates cynicism and resistance. Cleaner rules, fewer carveouts, and consistent enforcement at the top change the social contract around paying tax. When citizens see that large actors play by predictable rules and face real scrutiny, smaller actors feel less like they are carrying the load alone. Trust is not just a feel good asset. It is a driver of revenue and a foundation for reform.

Some will ask whether one off support measures can substitute for rate cuts. Rebates and targeted credits can cushion households during price adjustments, and they can help firms invest in productivity upgrades. They are useful tools in a transition. But they do not replace the need for a coherent long term design. One off support does not change the structure of incentives or the ease of compliance. Structural improvements do.

If there is a practical sequence that increases the odds of success, it looks like this. First, raise the quality of growth by focusing on sectors with strong export and capability multipliers and by improving the productivity of domestic services that support them. Second, compress friction in compliance so that the existing base pays without drama, with digital rails and clear service commitments. Third, broaden the base with incentive led formalisation tied to e invoicing and verified payments, then lock in gains with predictable enforcement. Fourth, shift composition gently away from taxing inputs you want to expand and toward pricing externalities you want to reduce, while protecting vulnerable households through simple and verifiable transfers. Fifth, upgrade administration so the tax system behaves like a modern platform with transparent performance metrics. Sixth, rationalise spending with outcome evidence and clear sunsets. Once those elements have moved in the right direction for a sustained period, then lower the rate. At that point the reduction is not a bet. It is a harvest.

Cultural change supports everything else. If tax is framed only as a burden, citizens respond with adversarial behavior and the state relies on heavy enforcement to compensate. If the state shows value for money and transparency in service, the relationship shifts. Publishing refund timelines, answering queries within known targets, and closing the loop on how funds are used all move behavior. In a product, transparency reduces churn. In public finance, transparency reduces evasion and tempers resentment. The story people tell themselves about the system determines how they act within it.

So can Malaysia reduce taxes. Yes, but not by declaring a number and hoping the math will work out. The path runs through better growth mix, easier compliance, a broader base, smarter composition, stronger administration, and disciplined spending. Treat the public finance system like an operating platform. Improve the rails, align the incentives, and make the user experience simpler and fairer. When the operating system improves, the price can fall without breaking the product. That is the responsible way to deliver tax relief while keeping fiscal credibility intact.