Malaysian Corporate Tax Strategy

Decoding Malaysian Corporate Tax: Is the Ibn Khaldun Theory the Key to Revenue?

Samir D’Costa in Business & Economy August 2025 • 4 min read.

"Exploring the sweet spot between tax rates and revenue using historical insights for modern economic policy."

In today's globalized economy, the relationship between corporate tax rates and government revenue is a topic of intense debate. Malaysia, with its strategic economic policies, offers a compelling case study. The nation has been progressively adjusting its corporate tax rates since 1988, aiming to boost its attractiveness as an investment hub and reduce the cost of doing business.

This strategy isn't unfolding in a vacuum. Alongside tax rate adjustments, Malaysia has introduced various tax incentives targeting key sectors such as tourism, technology, and SMEs. These incentives are part of a broader vision to stimulate economic growth and improve the well-being of its citizens.

But how do these tax policies impact actual government revenue? A fascinating perspective comes from the 14th-century scholar Ibn Khaldun, whose ideas on taxation, echoed in the modern Laffer Curve, suggest there's an optimal tax rate that maximizes revenue. This article delves into whether Malaysia's corporate tax strategy aligns with this ancient wisdom, potentially unlocking insights for modern economic policy.

Ibn Khaldun's Tax Theory: Finding the Revenue 'Sweet Spot'

Ibn Khaldun's theory, a precursor to the Laffer Curve, posits that there are two tax rates that can generate the same revenue—a rate too low to fully capitalize on potential earnings and a rate so high that it stifles economic activity, thereby shrinking the tax base.

The theory suggests an optimal rate exists between these extremes, which maximizes tax revenue while encouraging economic growth. If tax rates are set too high, businesses are disincentivized. When cultural enterprises grow, the number of individual imposts and assessments mounts, in consequence, the tax revenue, which is the sum total of the individual assessments, increases.

The Arithmetic Effect: If tax rates are lowered, tax revenues (per dollar of tax base) will be lowered by the amount of the decrease in the rate.
The Economic Effect: This recognizes the positive impact that lower tax rates have on work, output, and employment—and thereby the tax base—by providing incentives to increase these activities.

To determine whether the Malaysian context validates this theory, a study was conducted, using an autoregressive distributed lag (ARDL) approach, analyzing corporate tax rates and revenues from 1996 to 2014. The results revealed a fascinating 'inverted U-shape' relationship, suggesting that corporate tax revenue initially increases with tax rates, up to a point, after which it declines.

Implications for Malaysia's Tax Strategy

This study confirms that Malaysia's strategy of gradually reducing corporate tax rates has boosted economic growth, and decreased the cost of doing business. Corporate tax rate has a positive relationship with corporate tax revenue at the lower rates of taxes and a negative relationship subsequent to an optimal level of the tax rate. A closer look at the results suggests that the optimal tax rate is 25.5156 per cent. It could, therefore, be inferred that an increase of the corporate tax rate above 25.5156 per cent will lead to a decrease in corporate tax revenue. The results of the present study further show that the financial crises had a negative impact on tax revenue in the country. However, the study also suggests that simply slashing taxes isn't a guaranteed path to increased revenue. The key lies in carefully calibrating tax rates to maximize economic activity, a balance that policymakers must continually monitor.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1108/ijif-07-2017-0011, Alternate LINK

Title: Malaysian Corporate Tax Rate And Revenue: The Application Of Ibn Khaldun Tax Theory

Subject: Economics and Econometrics

Journal: ISRA International Journal of Islamic Finance

Publisher: Emerald

Authors: Hairul Azlan Annuar, Khadijah Isa, Salihu Aramide Ibrahim, Sakiru Adsebola Solarin

Published: 2018-10-30

Everything You Need To Know

What is the core idea behind Ibn Khaldun's theory of taxation, and how does it relate to the modern concept of the Laffer Curve?

Ibn Khaldun's theory, predating the Laffer Curve, proposes that there is an optimal tax rate that maximizes government revenue. This is because very low tax rates don't fully utilize the potential for earnings, and very high tax rates can stifle economic activity, shrinking the tax base. The Laffer Curve, a modern economic concept, visually represents this relationship, showing that as tax rates increase from zero, revenue rises to a peak (the optimal rate) and then declines as rates become so high that they discourage economic activity.

How has Malaysia's corporate tax strategy evolved since 1988, and what were the main objectives behind these changes?

Since 1988, Malaysia has progressively adjusted its corporate tax rates. The primary goals of these adjustments have been to boost Malaysia's attractiveness as an investment hub and to decrease the cost of doing business for companies. This approach is part of a broader strategy aimed at stimulating economic growth and improving the well-being of Malaysian citizens. Alongside tax rate adjustments, Malaysia has also implemented various tax incentives, particularly targeting key sectors like tourism, technology, and SMEs.

What were the key findings of the study on Malaysia's corporate tax rates and revenues from 1996 to 2014, and what does the 'inverted U-shape' relationship signify?

The study, using an autoregressive distributed lag (ARDL) approach, analyzed corporate tax rates and revenues in Malaysia from 1996 to 2014. The key finding was an 'inverted U-shape' relationship. This suggests that, initially, as corporate tax rates increased, tax revenue also increased. However, beyond a certain point (the optimal rate), further increases in tax rates led to a decline in tax revenue. This indicates that there is a point where higher taxes discourage economic activity, thus reducing the tax base.

Based on the study's findings, what is the estimated optimal corporate tax rate for Malaysia, and what are the potential implications of exceeding this rate?

The study suggests that the optimal corporate tax rate for Malaysia is 25.5156 per cent. If the corporate tax rate exceeds this level, the results indicate a likely decrease in corporate tax revenue. This is because higher tax rates can disincentivize businesses, potentially leading to reduced investment, economic output, and employment, ultimately shrinking the tax base and reducing the overall tax revenue collected by the government.

Besides tax rates, what other factors have influenced Malaysia's corporate tax revenue, and what does this imply for policymakers?

The study also found that financial crises had a negative impact on tax revenue in Malaysia. This underscores the sensitivity of tax revenue to broader economic conditions. The findings imply that policymakers need to consider not only the corporate tax rate itself but also monitor the overall economic environment. The key lies in carefully calibrating tax rates to maximize economic activity, which involves a balance that policymakers must continually monitor, adjusting tax policies in response to changing economic circumstances to maintain and optimize revenue streams.