Abstract

The tax rate imposed for direct tax mainly both individuals and corporate sector in Malaysia do not generate higher tax revenue thus affecting the revenue and economic growth indirectly.

Therefore, this research focuses on four core aspects. Firstly, this research will determine the linear or non-linear relationship between individual and corporate tax revenue and tax rate. Laffer Curve is the theory used for this section showing the arithmetic effect of tax revenue and tax rates. The second objective is to determine the optimum tax rate for both individual and corporate tax rate.

For this, Optimisation Tax Model is used to obtain the optimum tax rate for individual and corporate in order to generate maximum tax revenue. The next objective is to investigate the effect of tax rate on economic growth of Malaysia and to gauge where there is a two way relationship between both variables by using Granger Causality tests. The final aspect is to investigate the determinants that will affect the tax rates for both individual and corporate tax in Malaysia. This section depicts the economic effect of the Laffer curve.

Several models were introduced to answer the four objectives ranging from Linear-linear, quadratic, linear-log, log-linear, log-log to justify the core objectives of this research. Data collected from reliable sources ranges from 1980 to 2013. Four hypothesized relationships were justified through various models using E-Views and Ms Excel. The first objective indicated a linear relationship between tax revenue and tax rate.

However, the quadratic model was required to determine the optimum tax rate for both individual and corporate tax rate. The Malaysian Optimum Individual Tax Rate (MOITR) is 17.52% whereas theMalaysian Optimum Corporate Tax Rate (MOCTR) is 17.55%. Log-log is the best fit to show the relationship between GDP and tax rate and it was deduced that tax rate does effect economic growth of Malaysia.

This research stressed the significance of government expenditure, unemployment, base lending rate, consumer price index and exchange rate on tax revenue for individual tax rate which applies the same for corporate tax revenue in exception for government expenditure in Malaysia.

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