Evaluating GST Implementation: A New Framework for Cost-Benefit Analysis and the Measurement of Benefit Intensity of GST Growth (Presentation Slides)

Abstract

Crucial to the economic growth and fiscal management of a nation is the balancing between expenditure and taxation to increase the welfare of its citizens. The implementation of a new taxation scheme to replace obsolete and less efficient one requires care analysis between the costs and benefits of implementation. Benefits in terms of revenue are the bedrock of a functioning economy for any government wishing to progress and to implement its expenditure program. It is of great importance for policy makers to be able to measure the benefit intensity of a nation’s economy to identify regions of productive benefit growth. Evaluation of government expenditure and taxation is often measured by the traditional cost benefit analysis. Benefit intensity too has been traditionally measured in relation to national consumption growth typically as ratios. However, the widely employed benefits ratio is known to suffer from functional deficiencies that can cause mismeasurement. Furthermore, this conventional ratio is not dynamic in nature to capture changes in time. Thus, we propose two new measures in the static and dynamic. The first is a static cross sectional new measure of cost benefit which we call the Tax Gap Index (TGI). It is an index which is symmetrical, scale invariant and proportional that can provide reliable interpretations of benefits and costs in context of the recently introduced goods and sales tax (GST) by the Malaysian authorities and is friendly to econometric analysis. The second is the dynamic index that captures growth changes in tax base and consumption which we call the Benefit Intensity of GST Growth Index (BIG). The BIG index is time dynamic and time consistent in measuring changes in the tax base, revenue growth and consumption growth of an economic sector. In cases of uncertainties and complexities arising in the measurement of costs, we illustrate the estimation exercise of these components using appropriate Monte Carlo simulation software. Extending the analysis, we further propose a national TGI/BIG measure of GST by aggregating benefits and costs across all GST categories. Policy implications include the easy monitoring of benefits and costs as the TGI/BIG index is easy to use and interpret.