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UNIVERSITI PUTRA MALAYSIA

The Macroeconomic Effects ofCorporate Income Tax Rate Reduct ions

SHAHARUDIN BIN MOHAMAD ALI

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Grut School of MngmntUNRST PU MYS

The Macroonomic Efects ofCorpoate Incm Tax Rate

Reductos

By

SHAHARUDIN B OHAAD AL 02135

Sc (Fic)

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THE MACECONMIC EFFECTS F

CORAT INCME TAX ATE EDUCTIONS

By

SHAHARUIN BIN MOAMA A

Thss ttd t th Gradat hool ManagntUnvrsty Ptra Malaya, n Partal Flmnt o th

Rqrnt r th gr o Mast n

Dr

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DEDICATION

Wth lov to Allah wt

My aly and parnt

For thr ontno lov, sppo and ndrtandng

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Cairman

Facly

ABSTACT

Absrac of tesis presene o e Senae of Uniersii Praalaysia in para flfi men of he reiremen for e eree ofaster of Science

TH MACCNMIC FFCTS F

CPATE NCM TA AT EDCTINS

By

SHAHARUI BI MOHAMA AI

mr 2008

Professor Samser ohame Ramaili, PD

Grauae Scool of anaement

is stuy examines te impac of e corporae income ax rate recion on te

alaysian macro economy an is reationsip wi economic ro e recion in

te tax rate coincies wi te Keynesian eory tat sests a oernmen sol

ineene to al s isness in e economy by lowerin he corporate income tax rae

or escalatn pbic spenn or bot as t as a relatonshp wt economic row

e oernmen co correc e sluisness by raisin eir spenin or lowerin

ax rae to transfer fns from pblic o priate sector in erms of tis tax incentie or

increase pblic spenin o simlae areae eman for e oos an seices in

te contry Aocaes claim at te country's economic row rin e 1 990s was

eience on how is teory works e mltiplyin effect of tis sorerm economic

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simls is a wen companies incease ei inesmens moe jbs ae ceae

incease in pociiy, boos expos, eneae moe pofis an pain moe ax o

e Goenmen a will impoe be posiion an ss omesic poc an he

economy sas owin aain en e economy sas ow aan, moe foein

inesmens bo o iec inesmen an pofolio apial will be aace o o

bsiness in is conry as ey seek opponiy fo pofis an ow Aocaes

claim a e cony's economic ow in e 1 990s was eience on ow e

eo woks ee ae many finins pblise in e eelope economies iscss

e macoeconomic effec of e copoae income ax ae on e economy an is

elaionsip wi e economic ow Howee, ee is no ocmene eience aail

so fa o aess is opic in e alaysian conex an eseac in is aea is sill

lackin as well Daa cllece fom pblise epors by e easy Depamen, e

Sascs Depamen e Cenal Bank of alaysa an cosscecke aans e

Inenaional oneary Fn pblicaions A ime seies economeic analysis was se

o sy e macoeconomic effec of e ecion in e copoae income ax ae an

e elaionsip wi e conys economic ow is meo nomally employe by

eseaces o ascerain e macoeconomic effec of canes in e oenmen

policy e finins inicae a lowee copoae income ax ae a minimal effec

on e conrys maco economy All selece macoeconomic aiables a

insinifican eec i e eucion in e ax ae excep fo e foein excane ae

an oss omesic poc (GP) e sinifican leel fo bo aiables is 001 e

sinifican incease in e excane ae mi no iecly e o e ecion in e

ax ae b insea from e canes in e Goenmen moneary policy e

sinifican incease in e GP confims wi e Keynesian eory a claim lowe ax

ae as elaionsip i e conrys economic row is sy, owee, o no

sppos e applicaion of e Keynesian eory in e alaysian conex especially

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when he whoe wor is curreny facin wih he economic unceainy Maaysia

curreny has no incurre any bue surpus or inenion o increase is pubic eb o

finance his ax incenive hus he Governmen has no avail mean o finance he

sorerm reuce in heir rea income whenever ey reuce he corporae income

ax rae his sor-erm simulus incenive nees o be backe up eiher by bue

surplus or borrowin money oherwise he naion savins are ikely affece which wil

aravae he counry's fuure economic rowh Surprisiny, owere ax rae is foun

no effecive in aracin lon-erm forein invesmens o o business in his counry

Whis e ransformaion one on e ax assessmen sysem in 2000 was foun no

sinificanly improvin he counry's macro economy bu i has sinifican reaionsip

wih he Governmen Financia Posiion roup he sinifican eve is a 0 1 0 he

finins are inconcu sive for e perio uner suy

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Penersi

Faki

ABSTA

Absak esis yan ikemkakan kepaa Sena Uniesi Pa

Maaysia sebaai memeni sebaaian kepean nk ijazaMase Sains

KESAN PENURUNAN CUKAI PENDAPATAN KORPORATKE ATAS MAKO EKONOMI MAAYSIA

Oe

SHAHARUDIN IN MOHAMA AI

Dr

Pofesso Samse Moame Ramaii PD

Gaae Scool of Manaemen

Kajian ini ijalankan nk menkaji kesan penrnan ckai penapaan kopoa ke

aas mako ekonomi Malaysia an bnannya enan petmban ekonomi

Penrnan kaa ckai ini searas enan teori Keynes yan mencaankan

campranan kerajaan menyeka keembapan ekonomi neara meai pennan

kaar ckai ata meninkakan ai pebelanjaan awam aa kea-anya sekai

kerana epuyai kaitan dengan pe umb uhan ekonomi Keajaan ampu eul ih kan

kelembapan ekonomi melai peminaan ana ari piak kerajaan kepaa piak

swasta i alam bentk pemberian insenif ckai an peninkatan pebeanjaan awam

keajaan nk meransan areat perminaan teraap baanan an

perkimaan yan ikelakan alam neei Kesan beana ai ransanan

ekonomi janka penek ini iala sektor korporat ijanka akan meninkakan peabran

mereka i aam neara ini an menawarkan ebi banyak pean pekeaan,

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peninkaan prokiii baranan an perkimaan, pertambahan aanan ekspo,

merekokan lebi banyak kennan an melnaskan ckai kepaa piak kerajaan

yan akan memban memperbaiki kekan belanjawan neara an akhirnya

membannkan semla ekonomi Bila siasi ini berlak lebi ramai pelabr asin

akan erarik ntk melabr i alam neara ini sama aa melali pelabran lansn

aa secara portfolio Mala aa piak yan menaitkan permbhan ekonomi neara

yan berlak paa era 90an aala bkti baaimana eori Keynes ini bole

iaapasikan Kajian eraap kesan penrnan kaar ckai korpora an kaiannya

enan pemban ekonomi banyak ilakkan i neara-neara maj eapi iaa

bki yan mennjkan terapatnya kajian yan ela ijalankan merjk kepaa

perspekif neara ini Maklma ekonomi kajian ini ikmplkan a pelbaai laporan

kewanan yan ikelarkan ole Kemenerian Kewanan Malaysia, Jabaan

Perankaan Malaysia, Bank Neara Malaysia an irjk kepaa maklma kewanan

yan ikelarkan oleh Inernational Moneary Fn (IMF Kaea analisa ekonomerik

inakan i alam kajian ini nk menkaji kesan penrnan ckai teraap makro

ekonomi Malaysia an kaiannya enan permban ekonomi neara kerana ia

merpakan kaea yan biasa inakan ntk menkaji kesan ekonomi yan berlak

apabila berlaknya perbaan teraap sesat asar kerajaan Diapati penrnan

kaar ckai memberikan impak yan minima kepaa ekonomi neara ini Sema fakor

ekonomi iak mennjkka impak yan besar enan enrnan kaar ckai korpora

ini kecali kaar pertkaran asin an kelaran neara kasar Kea-a fakor ini

mempnyai kesan yan besar paa kaar 001 Wala baaimana pn kenaikan besar

aa kaar perkaran asin mnkin isebabkan perbaan asar kewanan

kerajaan an bkannya memnyai kaitan enan penrnan kaar ckai korpora

Manakala kenaikan besar paa Kelaran Neara Kasar selaras enan teori Keynes

yan menatakan baawa penrnan kaar ckai mempnyai kaian enan

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pembhan ekonomi neaa Kajian ini iak menyokon apikasi eoi Keynes i

aam ekonomi aaysia eama sekai biamana beak keaaa ekonomi nia

senii yan seba iak menen Ini keana alaysia iak mempnyai ebihan

beanjaan aa ancanan nuk menambahkan lai han neaa nk membiayai

ckai insenif ini le i, Keajaan iak bekemampan unk menampn

kekanan i aam kuipan sebena asi neaa apabia kaa ckai kopoa ini

ikankan Insenif ckai janka penek ini e iampun sama aa meai

ebian ckai aa pinjaman wan unk meneakkan penunaan simpanan neaa

yan asi akan meencakan perumbhan masa ean ekonomi neaa Penunan

kaa cukai kopoa iapai iak bekesan nuk menaik ana janka panjan ai

peab asin ke aam neaa Reosi sisem elapoan ckai yan ipekenakan

paa ahn 2000 ja iapai iak membeikan impak besa kepaa kesehan

ekonomi neaa Pebaan eseb baaimana n iapai mempunyai kaian apa

enan kekan keanan keajaan paa kaa 0 0 Kesiman ini iasakan

kepaa empoh an skop kajian ini ijalankan

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CKNOWLEDGEMENTS

Fis and foemos paise o Aa sw e os Gracios fo blessin me wi e

opporniy o pse and finaly compein my ase Deree

o my wife and kids Yazida bini oame Yasi Sii Aisa mmad Lman

and Abd Hadi fo ei coninos doa sppor an ndersandin A bi anks o my

paens oamad Ai bin Ismail and Zaia bini Basai fo ei payes and consan

doa fo me No o foe anks a o o Usaz Ismai bin am fo is payes and

doa.

I wod like o exend my mos raide o Pofesso Samse oamed Ramadili

and Assiae Pof D afi Hassan Sa my aed speisos and menos for

ei coninos idance eicaion aice and sppor fo me in procin is

al iy eseac wok

as b no leas o eeryboy wom I no menioned is or e names a conibe

in one way or anoe o is sy ank yo ery mc!

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ROV

I cerify a an Examinaion Commitee me on Dbr 10, 2008 o conc finaexaminaion of Shaharudin bin Mohaad i on is Mar of Sinc esis enied''h Maroconoi Ec of Corora no T Ra Rduion" inaccorance wih he Uniersii Peranian Maaysia (H igher Degree) Ac 1 980 andUniersii Peanian Maaysia ( Higer Degree) Regaions 1981 he Commiteerecommens ha he candiae be awarde e reean egree Members of heExaminaion commiee are as foows

Murali Sabaivan PhDAssociae Professorraae Scoo of anagemenUniersii Pra Maaysia

(Chairman)

Jyaalan a Kaiillai PhDProfessor & Depy Hea of Schoo (Ecaion)Schoo of BsinessMonas Uniersiy Snway Camps(Exerna Examiner)

nnuar Md. Nair Ph.DProfessor & DeanFacy of Economics an ManagemenU niers Pra Maaysia(Inernal Examiner)

Zukarnain Md. Sori Ph.DAssociae ProfessorFacy of Economics an anagemenUniersii Pra Maaysia(Inerna xaminer)

Shashr Mohaad Raadili PhDProfessor / Depy DeanGraduate hoo of Manageent

Uniersii Pra Maaysia(Represenaie of Speisory Committ /Obs rv r)-

SAMSER MOAMAD RAMADL MOAMAD Ph.Professor / D epty Deanraae Schoo of anagemenUniersii Pra Malaysia

Dae fQO

II

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is esis sbmie e Senae f Uniesii Pa alaysia as been accepe aspaia ffimen f e eiemen f e eee f ase f Science e membesf e Speisy Cmmiee ae as fws:

Shamshr Mohamd Ramad Ph.Pfess / Depy DeanGaae Scl f anaemenUniesii Pa alaysia(Caiman

Taq Hassan Shah Ph.

Assciae PfessFacly f Ecnmics an anaemenUniesii Pa alaysia(embe

1 2

-

SAMSIAR M. SII PhPfess / DeanGaae Scl f anaemen

Uniesii Pa alaysia

Dae 1!/s'e 9

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CRTION

I heeby eclae ha he hesis is base on my oiinal wok excep f oaions anciaions hich hae been ly acknolee I also eclae ha i has no beenpeiosly o concenly sbmie fo any oher eee a UPM o any oherinsiions

SHAHARUIN BIN MOAMA AI

Dae ,. I , " _

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TABES OF CONTENTS

DEDICAION

ABSRAC

ABSRAK

ACKNOLEDGEENS

APPROVAL

DECARAION

ABES OF CONENS

IS OF ABLESLIS OF FIGURES

CHAPER 1

INRODUCION

1.1 Backon1.2 Poblem Saemen13 Objeces an he Impoance of hs Sy14 Oanzaon of he ess

CHAPER 2

LIERAURE REVIE21 Backon2.2 ax as an Insment of Fscal Polcy23 e Sbstance of Economc Gow24 he Benefs of Foen Inesmens25 Recn ax Rae as an Incene26 e Keynesan heoy2 Leann fom US expeences28 he Impac on Economy

281 Aocaes2.8.2 Opponents

29 Sotcomns of lteatueCHAPER 3

RESEARCH FRAEORK

CHAPER 4

DAA AND EHDLOGY

41 Data Collecon42 Reseac eooloy

421 Descpte Statstcs422 Unt Root ests423 Reesson moels

1 4

Pae

3

4

1 0

1 1

1 3

1 4

1 18

1 9

1 9

1 9212526

2

2229313334363841449

5862

62

6

6

66868690

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4.2.3.14.2.42

CHAPER 5

Firs reression moelSecon reression moel

70

72

74

FINDINGS AND DISCUSSIONS 4

50 Oveiew 745.1 Finins

5. 1 . 1 he Governmen Financial Posiion 5 1 1 . 1 Descripive Saisics 5 1 . 1 2 Uni roo es 85 1 . 1 3 Reression analysis 95.1 .1 4 Chanes in he ax assessmen sysem 81

5. 1 2 he Financial Insrmens rop 835 1 2. 1 Descripive Saisics 835. 1 2.2 Uni roo es 85

5. 1 23 Reression analysis 865.12.4 Chanes in he ax assessmen sysem 88

5. 1 .3 he Naional Accons rop 905 1 31 Descripive Saisics 905 1 32 Uni roo es 925. 1 .3.3 Reression analysis 93513.4 Chanes in he ax assessmen sysem 96

5.2 Discssion 95.2 1 he effec on he Malaysian macro economy 99

52. 1 1 he eec on he Governmen Financial Posiion roup 10052.12 he effec on he Financial In srmens rop 1015.2.1.3 he effec on he Naional Accons rop 104

5.2.3 he relaionsip wih he conry's economic rowh 1 05.22 he effec of chanes in he ax assessmen sysem 108

53 Summary of he finins 110

CHAPER 6 1 12

CONCUSION AND RECOMMENDAION 112

6 1 Oveiew of he Sy 1 126.2 Resaemen of e Objecives 11363 Review of he Finins 1 1 46.4 Implicaions of e Finins 11665 Recommenaions an Sesions for Fure Researc 120

BIBIOGRAPHY 121

APPENDICES 124

DESCRIPIVE SAISICS 124Descriive Saisics for he Corporae Income ax Rae 124Descripive Saisic for he Governmen Financial Posiion roup 124Descripive Saisics for he Financial I nsrmens roup 125Descripive Saisics for he Naional Accons rop 125

UNI ROO ESS IN VE FOR 125Uni Roo ess in evel Form for he Governmen Financial Posiion rop 125Uni Roo ess in evel Form for he Financial Insrmens rop 126

Uni Roo ess in evel Form for he Naional Accons rop 126

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UNI ROO ESS IN FRS DIFFERENCE FORM 26Uni Roo ess in Firs Difference Form for e Goernmen Financia Posiionrop 26Uni Roo ess in Fi rs Difference Form for e Financia Insrmens rop 26Uni Roo ess in Firs Difference Form for e Niona Accons rop 27

REGRESSION ANALYSS IN LEVEL FORM 27Reression Anaysis in Leel Form for e Goernmen Financia Posiion rop

Reression Anaysis in Lee Form for e Financial I nsrmens ropReression Anaysis in Lee Form for e Naion Accons rop

REGRESSION ANALYSIS IN DIFFERENCE FRM

271271272

Reression Analysis in Difference Form for e Goernmen Financial Posiionrop 2Reression Analysis in Difference Form for e Financia I nsrmens rop 2Reression Anaysis in Difference Form for e Nional Accons rop 12

REGRESSON ANALYSS IN NE-PEROD LAG 29Reression Anaysis in neperio La for e Goernmen F inancia Posiionrop 29Reression Anaysis in One-perio La for e Financial Insrmens rop 129Reression Anaysis in One-perio La for e Niona Accons rop 1 29

REGRESSION ANALYSIS USING DU MMY VARIABLE IN LEVEL FORM 130Reressio Anaysis Usin Dmmy Variable in Lee Form for eGoernmen Financia Posiion rop 30Reression Anaysis Usin Dmmy Variabe 1 in Lee Form for e FinanciaInsrmens rop 30Reression Anaysis Uin Dmmy Variabe in Leel Form for e NaionaAccons rop 30

REGRESSION ANALYSI S USING DUMMY VARIABLE N LAGONE FRM 3Reression Analysis Usin Dmmy Variable in La-one Form for eGoernmen Financi Posiion rop 3Reression Anaysis Usin Dmmy Variabe 1 in La-one Form for e FinanciaInsrmens rop 31Reression Anaysis Usin Dmmy Variabe in La-one Form for e NaionaAccons rop 132

REGRESS ION ANALYSIS USING DUMMY VARIABLE 2 IN LEVEL FORM 132Reression Analysis Usin Dmmy Variable 2 in Lee Form for eGoernmen Financial Posiion rop 132Reression Anasis Usin Dmm Variable 2 in Leel Form for e FinanciaInsrmens rop 32Reression Analysis Usin Dmmy Variable 2 in Leel Form for e NaionaAccons rop 133

RGRESSON ANALYSS USNG DUMMY VARABLE 2 IN LAG-ONE FRM 133Reression Analysis Usin Dmmy Variabe 2 in Laone Form for eGoernmen Financia Posiion rop 33Reression Analsis Usin Dmmy Variable 2 in La-one Form for e FinancialInsrmens rop 134Reression Analysis Uin Dmmy Variabe 2 in Laone Form for e NaionaAccons rop 34

BIDAA 135

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IST OF TABES

Pae

abe 1 Corporae come ax rae from 196 o 2005 . 75abe 2 Descrpe sascs of e corpore come ax re from 1 9 o 2005 76abe 3 Descrpe sascs of e Goernme ac Poson ro 7be 4 U roo es eel form for e Goernme Fnnca Poso rop 7abe 5 Un roo es frs fferece form for e Goernme ancl Poso

rop 7abe 6 Reresso aalyss n fferece form for e Goernme Fnaca Poso

rop 0be 7 Reresson anayss n one-pero l for e Goerme nca Poso

rop 1be Reresso aalyss sn mmy rabes n leel form for e Goerme

Fnncal Poson op

2ble 9 Reresso aalyss s mmy rabes n l-oe form for e

Goernme nanca Poson rop 2abe 1 0 Descrpe sascs of e anc I srmens rop abe 1 1 Un roo ess for e aca nsrmes rop n leel form5abe 1 2 Un roo ess for e aca nsrmes rop frs fferece form 5abe 1 3 Reresso aalyss for e nanca I nsrmens rop fferece form 6abe 1 4 Reresso aalyss for e nancal I srmens rop one-perod a 7able 1 5 Reresso anayss s mmy rables for e aca Insrmes

rop n lee form be 1 6 Reresso aalyss s mmy arbes for e nacal I srmes

rop la-one form be 1 7 Descrpe sscs for e Naonl Accons rop 1abe 1 Un roo ess for e Nao Accons rop n lee form 92able 1 9 Un roo ess for e Naoa Accons rop n frs fference form 92abe 20 Reresso analyss for e Nonl Accons rop leel form 94abe 21 Reresso anayss for e Naonl Accos rop fference form 94able 22 Reresso anayss for e N onl Accons rop one-pero la5abe 23 Reresso analyss sn mmy rbes n leel form 6be 24 Reresso anlyss usn mmy rbes l-one form97

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IST OF FIGUS

Fe e Pae

Fire 1 aaysan Corpoae Income ax Rate ren from 1 986 to 205 .75

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1 1 Bkgrond

Chpter

INTROUCTION

ax is n insrmen of fiscal policy a e oernen eliberaely ses o conrol an

moe e economy in e esire irecion e prpose of a ax sysem is o raise e

income a is necessary o rn oernmen an o o so in e mos efficien way a

col minimise any possibiliy of isoion o e economy e poicies are forlae

an aws are relae in e process o ensre a economic row is acieabe

wi reaiely low nemploymen rae, price sabiliy, an sron exernal baances

axaion oeer wi oer fisca an moneary poicies are empoye o aciee

ceain economic objecies sc as fll employmen conro of inflaion baance of

paymens an simlaion of economic ro Conries economic ros are eaiy

epenen on forein fns (Asiaweek, 2000) orein inesmens brin aon a

bne of inanible asses o e os cony sc as boosin e aerae

prociiy in e cony, bo ro a composiion effec an ro spioers o

naionl firms besies job creaion, impoe skills in labor force, ransfer of

ecnooy an incoe eneraion from corporae income x Nmeros incenies are

inroce an promoe o arac forein inesmens o e conry, bo irec

inesen a ooi aial a oe o e is b loei e ooae inome

ax rae oer ax rae is onsiee as ax ienie a ol aac foein irec

inesmen (FI) o e os conry (oisse, 2003) an inesos narally prefer

lowerax jrisicions (icell, 200) as e ax rae is one of e facors a

eerne e rae of ern of F income (Kan-Yeo Yoo 200)

1 9

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To achieve the taget to be a deveoped nation by the yea 2020, Malaysia is

committed to poviding a conducive and business-fiendy envionment that is

conducive fo copoate secto to gow and povide oppotunities fo pofits and

maintain intenationally competitiveness as wel Te govenment is willing to etain its

wokfoce as pe the needs of a company, setting up onestop cente to cut

bueaucacy, ibealising pivate secto policies, intoducing pivate finance initiatives

and offeing incentives ne of te enticements is educing the copoate income tax

ate The eduction in the tax ate offes the potential to aise economic gowth by

impoving incentives to wok, save, and invest Many counties ae cuenty competing

to educe thei copoate income tax ates fo the same easons. KPMG 200) epoted

that competition beween counties to attact and keep foeign investment is continuing

to dive down copoate tax ates acoss the wod as ow tax ates coud hep to give a

county a significant competitive advantage ove economic ivals and ae connected

with highe than aveage economic gowth

Te eduction in the copoate income tax ate coincides with the Keynesian

theoy tat suggests govenments inteention to hat suggis economy by loweing the

copoate income tax ate o escalate pubic spending, o both as it has a significant

eationship with economic gowth. y ding this the govenment could coect the

sluggish economy by tansfeing funds fom te public to te pivate secto to stimuate

demand and incease ivate consution and sending Subsequently new jobs ae

ceated, incomes would ise, and eope would send moe at eventualy the

econoy woud stat gowing again onvesely if an econoy is oveheated, te

govenment shoud aise taxes and eope would ave less money to spend that woud

soften the demand fo consume and investent goods. Go vaies because of

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changes in aggegate demand causing fims to poduce fewe gos fo sale and

hence ateing the size of the economy

Economists, howeve have litte ageement on the eal effct of copoate

income tax ate eduction on maco economy and its elaionship with economic gowth

dvocates claim that the eduction in the tax ate wil boost economic gowth and

pospeity pponents ague that most of the tax benefits ill go to the ich as they ae

the ones that contibute the most. f this tax incentive fails to poduce the expected

esuts tax evenue would decline, putting upwad pessue on the deficit, wosening

levels of nationa saving, and leading to lagged economic gowth eduction in the

copoate income tax ate is not the only facto that affects the countys maco

economy and investos' decision making n economy is also affected by the level and

type of govenment spending, tade policy, monetay policy, eguatoy poicy, politica

stabiity and many othe govenment actions as wel nvestos also seek fo a

favouabe investment climate such as a stable poitica egime, good pospects fo

economic goh, libea and pedictable govenment egulation, and easy convetibi lity

of the nationa cuency Hence it is had to ascetain the effects of the tax cuts have

had on the economy as thee is no way to compae actual events to the countefactual

case whee the tax cuts wee not enacted (abonte, 2004)

. Prolm tatmnt

This study examines the macoeconomic effect of the copoate income tax ate

eduction and the elationship ith economic gowth The eduction in the tax ate

coincides with the eynesian theoy that suggests govenments intevention to hat

sluggishness in the economy by loweing the tax ate o escalate public spending o

both as it has elationship ith economic goth Thee ae many studies published in

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the deveoped counties that discuss about this topic but the esults ae mixed and

inconcusive. Deich et a 99 ) study the economic effect of the govenment spending

fo infastuctue and othe pubic investments. Mitche 1 996) studies the effect of

oweing the tax ates on the US economy. Kogan 1 996) study the effectiveness of

cutting the tax ates to incease economic gowth. Saxton 1 999) study the eationship

between the tax eduction and the US economy uebach and Gale 1 999) study the

justification to use budget suplus in financing the eduction in the tax ate Woodwad

and Stuock 2002) evauate the poposed changes in tax poicy to stimuate the

economy Gavele 2003) study the usage of business tax cuts to stimulate the

economy and in othe study, she also wites 2003) about the effectiveness in ctting

tax to stimuate the US economy Kogan and on-Dine 2006) examines the caim

that the tax cuts pay fo themseves abonte 2003) examines which atenatives

might add moe stimui to the economy between escalating the govenment spending

and educe the tax ate Mooe 2003) comments on the Pesident Bushs economic

gowth tax cut. Gae and szag 200) study the Bushs administation poicy

egading the effects of educing the tax ate on the ong-tem economic gowth.

abonte 200) examines the effect of cutting down the tax on the economy. Page

2005) anaysed the economic and budgetay effects of a 1 0 pecent cut in income tax

ates Bagchi 2005) examines the claim that "low taxes mean moe taxes KPMG

2006) concludes that owe tax ate helps to give a county a ignificant competitive

advantage ove economic ivals and it elates with highe than aveage economic

gowth

Based on liteatue the eduction in the copoate income tax ate in Maaysia has thee

majo poblems that need to be clealy addessed:

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The immediate effect of copoate income tax ate eduction is that the

Govenments eal i ncome is likey deceased and smultaneousy inceased in the

eal income of the copoate taxpayes The eduction in the tax ate does not pay

fo themselves as thee is no cedibe evidence accoding to Mankiw 1988) that

pove tax evenues ise in the face of lowe tax ates Kagon and on-Dine

2006) The Maaysian govenment has no budget suplus o intention to boow

money bdulah 2007) to back up the educed income due to this eduction in

the tax ate The longe the financing is postponed the lage the decline in the

natona saving wi be Gae and szag 2004) Pesistent budget deficits

accoding to Kugman 2005) can cause poblems fo both the govenment and

the economy as it has a potential to incease the public debt that inevitaby would

negativey affect the countys longun economic gowth Thus the eduction in

the copoate income tax ate might have affected the Govenment Financia

Position as it is expected to dive down evenue collection put up pessue on

deficit budget) as the Govenment continues with its expansionay poicy to

incease public expenditue to continuousy stimulating business activity and

incease moe investment in the county

The Govenments effot to incease investment in this county howeve might

not be attainable if the copoate secto is not attacted to do so especially duing

this globe facing economic uncetainty nstead of inceasing the investment the

copoate secto might opt to distibute this unanticipated income fom tax

savings) to the shaeholdes as additional dividends which might not use to

enage thei stakes in business but instead ae spent on non-poductive activities

such as going fo oveseas holiday tips which aggavate this economy Thus to

attact investos invest in this economy the Govenment should evise its

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monetay poicy to cub ifation by educing its iteest ate When the inteest

ate educes investos ae expected to incease thei investments both though

diect investmet and potfoio capita that simutaneousy icease demad fo the

local cuency incease foeign exchage ate and intebank oveight moey

ate) and icease business activi

In economics the lag effect occus wheneve the Govement chages its fisca

policy Thee ae tee types of ag, amey, the ecogitio ag the decision lag,

and the effect ag Te ecognition lag is te time taken by te authoities to

discove the eed to make a change i its poicy Whie the decisios ag is the

peiod between te time whe the eed fo action is ecognized ad the time

when the action is take Whist te effect ag is the time taken betwee the time

actions is taken and an effect is ealized The poblem with the ag effect is that it

takes a log peiod of time befoe the tue effect is eaised ad by then the

economic situation might ot be the same Te lag effect might affect the peoples

motivation to wok incease te unemploymet ate) ad become unpoductive

educe te PPI ate) to poduce quality poducts decease tade baace and

aggavates investos oppotunity fo pofits and gowt educe FDI) tat

eventually woud advesely affect te goss domestic poduct

lbeit inconclusive fidings publised in the deveoped counties ad advocates

caim that te 1 990s economic go evidence on ow the teoy woks in tis

county, tee is no documented evidence availabe egading this topic i the

Malaysian context Reseach o this aea is sti scace even though the Govement

ad seveal times educed te copoate income tax ate since te fist anouncement

made in 19 effective fo the Yea of ssessment in 199) Tus te eduction in the

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