The Factors Determinant Tax Revenue In Malaysia

The Factors Determinant revenue receipts In MalaysiaINTRODUCTIONMalaysia is a federation of 13 States and the federal official Territories of Kuala Lumpur and Labuan. The national Constitution contains special provisions regarding sources of gross that be assigned to the Federal and the State regimes. Those that are assigned to the State administrations include revenue fom land, forest, mining, entertainment, wet 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). every other revenues, not specifically assigned to the states, are Federal governing revenues. evaluateation become crucial economic tools to govern economics for either country, especially to developing countries like Malaysia. With the rapid trend toward globalization and internationalization, the pattern of task revenues and economic growth accross countries has become a signifi brush offt concern to economists. Recently, Malaysia has also performed wholesome and shows the similar growth pattern in saving. Therefore, fund lift uped from levy utilize by the presidency to provide facilities for its population and for the development of the nation. Other than that income value is genius 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 go in administering, assessing, collecting, and enforcing payment of income appraise and other revenue as may be agreed amidst Government andd the Board. For many days, the Inland Revenue Board (IRB) has presumed that its activities promote better revenue enhancement collection starting from Official Assessment System (OAS) until Self Assessment System (SAS).Malaysia Federal Government revenues are broadly classified as revenue enhancement revenues, non-tax revenues and non-revenue receipts. Tax revenues include both Direct and Indirect Taxes. Direct taxes are hive away 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 take up Department. Indirect taxes include instant duties, export duties, excise duties, sales tax, service tax and last but not least goods and go tax (GST) that counterchange 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 Governments 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. even so, 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 utmostly-developed and with the tax reform less reliance was placed on indirect tax which starting from year 1999 the major theatrical role to government revenue is come from direct tax (69%). In 2008 the collection of direct tax represents 52% o f the Government total revenue (Economic Planning Unit, Ministry of pay and Bank Negara Malaysia). It is believed that the encouraging growth in Gross Gomestic growth (gross domestic product) in 2009 stood at 23% contribute positively to the national revenue collection (9MP). after(prenominal) brief introduction the remainder of this paper is structured as follow. Chapter 2 provide approximately sort of literature review regarding all the proteans included in this interrogation. Chapter 3 consist of research methodology and design, info collection, theoretical framework, hypothesis statement, and info analytic thinking. Chapter 4 provides data description and military issue analysis and finally in section 5 fuddles conclusion and summary of the study.BACKGROUND OF memoriseTax 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 corpo position incom e, 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. every(prenominal) earnings of companies and individuals acccumulated in, derived from or remitted to Malaysia are liable to tax.Government will use 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 for each one year. Determination of budget is based on union 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 decline the tax rate or to remain unchage based on the goals of government in each budget every year.Definition Of TermsGross Domestic Product (gross domestic product)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 go forthput 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 modus operandi 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 staying of those living in it. swelling RateInflation rate is a measure of inflation, the rate of increase of a price index. It is the character rate of change in price train of time. The rate of decrease in the purchasing power of money is approximately equal. T he employ 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.UnemploymentThe definition of unemployment is an economic condition marked by the fact that individuals actively seeking jobs remain unhired. Unemployment is an significanceant measure of the economys strength. A high unemployment rate more often than not indicates an economy in recession with few job opport social unities, while a low unemployment rate points to an economy running at or near integral throttle.OpennessThe 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 nub 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.PROBLEM STATEMENTMalaysia is facing budget deficit every year since government expenditure exceed government revenue. If the governments budget are not sufficient, some of the macroeconomic factors cant be achieved. Government cannot get over unemployment and inflation rate and also cannot increase the economic growth and promote currency stability if they cannot legislate 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 governments revenue for the development and operational expenditure that will bring an economic growth.This study is undertaken to peril factors determinant of tax revenue which are in mutualist inconsistents namely Gross Domestic Product (GDP), inflation rate, unemployment and openness (trade) on interdependent variant which is tax revenue. It tries to gr asp those varyings volatility impact on tax revenue in a given economic environment and horizon.Besides, this study was brought up to strenghten tho rebel 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 visualizeings 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 riddle statement for this study is which variables that have strongly positive portentous relationship towards tax revenue?RESEARCH QUESTIONIn order to realize the factors find tax revenue, this question must be taken into consideration.The question isWhat 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 STUDYGeneral accusativesThe general objective of this study is to disclose the factors determine tax revenue in Malaysia from year 1990 to 2009 which is 20 years.Specific objectivesTo 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 tip of openness in Malaysia significantly affect total tax revenue collected by the government.SIG NIFICANCE OF STUDYThis 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 STUDYThe scope of study is as followThis 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 acquiren 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 STUDYCostCost also becomes one of the limitations in doing this research because the researcher demand to bear all the greet and expenses in completing this research without ge tting any sponsorship. The cost that incurred such as stationeries expenses, photocopying, printing, transportation expenses and others are fully support by the researcher.Choice of covariantsChoice 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 get 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 CollectionData 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 DataAccuracy also become a limitation of the study. researcher used tributary sources in conducting this stdudy to collect data. The secondary sources such as annual reports, harbors , 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 flavour of the journal but the data needed depend on the materials.CHAPTER TWO2.0 LITERATURE REVIEWSThe criterion 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 2 interesting results. First, by finding an inverse relationship between the level of effort and the inflation purport, the authors show that the lower the inflation target is, the higher the governments 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 step forward 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 governments 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 portion. 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 governments tax collection effort.Lucotte (2010), used a methodology suggested by Dehejia and Wahba (1999) which consists of dropping handle observations whose the propensity score is higher than the maximum or smaller than the minimum in the control group. Th e result shows that the estimated average treatment effect on inured (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 defend 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 statisti cally 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 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 pe rcent level.CHAPTER THREE3.0 RESEARCH METHODOLOGY AND DESIGNRESEARCH DESIGN3.1.1 Purpose of StudyThe 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 InterferenceMost 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.3.1.2.1 Accuracy and Data ReliabilityMultiple 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 liable(predicate) 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 va riable 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 SettingSecondary 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 sightIn 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.Secondary DataIt 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.3.2.1.1 Internet and websiteGoogle SearchThe major sources that the researcher choose to find and gather journal that related with this study. This webs ite are useful to the reasercher because help the researcher to gain the information about this study.3.2.1.2 Library ResearchThe 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 moving-picture show of the situation.THEORETICAL FRAMEWORKINDEPENDENT VARIABLESGDPTaxRevenueInflation Rate DEPENDENT VARIABLEUnemploymentOpenness epitome 1.0 Theoretical Framework found 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 Relationship1. GDP and Tax Revenue if GDP increase, the total tax revenue collected by government will also increas e. 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.HYPOTHESIS STATEMENTThe purpose of the hypothesis statement is to illustrates which of the hypothesis is most affect the dependent variable. The hypothesis areH0 GDP is not statistically significant to affect tax revenue in MalaysiaH1 GDP is statistically significant to affect tax revenue in Malaysia.H0 Inflation is not statistically significant to affect tax revenue inMalaysiaH1 Inflation is indeed statistically signifi cant to affect tax revenue inMalaysia.H0 Unemployment is not statistically significant to affect tax revenue inMalaysia.H1 Unemployment is indeed statistically significant to affect taxRevenue in Malaysia.H0 Openness is not statistically significant to affect tax revenue inMalaysia.H1 Openness is indeed statistically significant to affect tax revenue inMalaysia.DATA summaryIn 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 important 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.T-StatisticIdentify significant relationship of each independent variable with the dependent variableF-Statistic interrogatory the significance of the overall independent variables with the dependent variableStandard Error of Estimation (See)The objective is to identify whether a particular variableis significant at a certain level of confidence.Multiple Regression AnalysisTR = 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 + WhereTR = Tax RevenueGDP = Gross Domestic ProductInf = Inflation RateUn = UnemploymentOp = OpennessThe 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 (R)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 belowRange of R Strength of relationshipNo relationship with dependent variable0.1 to 0.5 Weak relationship between independent variablesand dependent variable0.6 to 0.9 Dependent variable is stron gly explained byindependent variables1 Dependent variable ia perfectly explained byIndependent variablesT-StatisticT-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 followDegree of freedom = n k 1Where k = bout of Independent Variablen = Number of ObservationThe results for T-statisticAccept H1, reject H0If the computed t-statistic is greater than the book T-value at a 95% confidence interval.Reject H1, learn H0If the computed t-statistic is lower than the book T-value at a 95% confidence interval.F-StatisticF-test is an overall test of the null hypothesis that group means on the dependent variable do not differ. It is used when compa ring 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 followBook F-value = F (k 1, n k)Where = Significant level (5%)k = Number of Independent Variablen = Number of Observationk 1 = Numeratorn k = DenominatorThe result for F-StatisticsAccept H1, reject H0If the computed F-Statistic is greater than the book F-value at 5% significant level.Reject H1, accept H0If 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. Its objective is to identify whether a particular variable is significant at a certain level of confidence. Standard error can be measured in two waysUsing T-statSee = bt-statDegree of freedomDf = n k 1It is also useful in determining the range in which the dependent variable will point to a specified probability.CHAPTER FOUR4.0 DATA DESCRIPTION AND ANALYSISThis 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 reckoner is employed due to the complex nature of data and time required. The presentation of findings is made to examine the relati onship 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 DESCRIPTIONDependent VariableFigure 1Independent VariablesFigure 2Gross Domestic Product is the value at current prices of the total annual output of final goods and services produced in a country. ..Figure 3Inflation rate is the percentage annual increase in the general price level, commonly measured by the consumer price index (CPI) or some comparable price index. .Figure 4Unemployment rate is Figure 5Openness is 4.2 INTERPRETATION OF DATA AND FINDINGS4.2.1 Research AnalysisFrom the data obtained, it shows the result of regression output as stated in Table 1 as followsTable 1VariablesConstantGDPInflationUnemploymentOpennessBeta Analysis-144980.36913 .4811657.5575860.522-572.845T-statistics8.2845.5623.4352.6437.017R-squared 0.990F-statistics 358.696Standard error of estimation 6122.504194.2.2 Regression EquationFrom the result obtained, we can derive the regression linear function as followsGeneral functionTR = f ( GDP, Inf, Un, Op )Multiple Regression EquationTR = a + b1 GDP + b2 Inf + b3 Un + b4 Op + TR = 144980.369 + 13.481 GDP + 1657.557 Inf + 5860.522 Un 572.845 Op + 4.3 RESULT OF FINDINGS4.4.1 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 analysisVariablesBeta AnalysisGDP13.481Inflation1657.557Unemployment5860.522Openness-572.845Beta 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 InflationFrom the results obtained, it shows that an increase of 1 unit in inflation can