Tax
is one of the very few aspects of life which are certain alongside death
according to the well known saying. Taxation is the system states use to raise
money to finance government spending. Governments use tax revenues to pay the
army and police, to build dams and roads, to operate schools and hospitals, to
provide food to the poor and medical care to the elderly, and for hundreds of
other purposes. Without taxes to fund its activities, government could not
exist.
Throughout
history, people have debated the amount and kinds of taxes that a government
should impose, as well as how it should distribute the burden of those taxes
across society. Unpopular taxes have caused public protests, riots, and even
revolutions. In political campaigns, candidates' views on taxation often
determine their popularity with voters. From an economic aspect taxation
transfers wealth from households and businesses to the government of a nation.
The side-effects of taxation and theories about how best to tax are an important
subject in microeconomics. Taxation is almost never a simple transfer of
wealth. Economic theories of taxation approach the question of how to minimise
the loss of economic welfare through taxation and also discuss how a nation can
perform redistribution of wealth in the most efficient manner.
Taxation
and the Economy
Fiscal
policy is used by governments around the world to influence the level of
aggregate spending in the economy, although this method has lost influence as a
lever by most governments until the 1980's this was the main method to ensure
an economy never overheated and curtail inflation, during the era of Margaret
Thatcher and Ronald Reagan using taxes to control an economy gave way to
monetarism i.e. the use of interest rates and money supply.
Taxation
is the most important source of revenues for modern governments, typically
accounting for 90% or more of their income. The remainder of government revenue
comes from borrowing Countries differ considerably in the amount of taxes they
collect. In the United States, about 30 percent of the gross domestic product
(GDP), a measure of economic output, went for tax payments in 2000. The 30
percent figure is relatively low from a historical standpoint. As a result of a
new round of tax cuts in 2003, the tax percentage share of GDP was expected to
be lower than at any time since 1959 when many major government programs, such
as Medicare and Medicaid, did not exist. In Canada about 35 percent of the
country's gross domestic product goes for taxes. In France the figure is 45
percent, and in Sweden it is 51 percent.
Types
of Taxes
Governments
impose many types of taxes. In most developed countries, individuals pay income
taxes when they earn money, consumption taxes when they spend it, property
taxes when they own a home or land, and in some cases estate taxes when they
die. In the United States, federal, state, and local governments all collect
taxes. Taxes on people's incomes play critical roles in the revenue systems of
all developed countries. In the United States, personal income taxation is the
single largest source of revenue for the government. In 2006 it accounted for
nearly 50% of all federal revenues.
Consumption
taxes symbolise the West, such tax is levied on sales of goods or services. The
most important kinds of consumption taxes are general sales taxes, excise
taxes, value-added taxes, and tariffs. A general sales tax imposes the same tax
rate on a wide variety of goods and, in some cases, services.
When
the British government implemented a system of local poll taxes in 1990,
citizens considered the tax so unfair that they held demonstrations-some
violent-around the country. The extreme unpopularity of the tax contributed to
the downfall of Prime Minister Margaret Thatcher. Her successor, John Major,
repealed the tax in 1991. In the United States, the 24th Amendment, ratified in
1964, prohibited the payment of poll taxes as a requirement for voting in
federal elections.
Issues
in Fiscal policy
The
level of taxation in any nation will affect people's behaviour, including their
choices in working, saving, and investing. Taxation in the West has created a
number of problems in wealth distribution where the burden falls heavily upon
the poor with the rich utilising tax loopholes and tax havens.
A
simple example to understand this is in the UK one would be liable for Income
tax and national insurance contributions which brings the tax burden to 34%.
Add to this consumption taxes, local government taxes, road taxes and other
indirect taxes then the tax burden falls close to the 50% mark. Whichever tax
regime is used progressive or regressive the tax burden remains very high in
the West and drastically affects consumer spending. The level of spending in
any economy is affected by the level of taxation. A high tax burden can have a
drastic effect on the overall economy especially in the West where spending
plays a key role.
Investment
decisions by companies are also affected by taxation, investment includes such
items as machines, factories, computers, trucks, and office furniture. The
return on a physical investment is the amount by which the investment increases
the business's revenues. How do taxes affect physical investment? In effect, a
tax on business income is a tax on the physical investment's return-the tax
reduces the firm's income and thus the benefit from making the investment. Most
economists believe that business taxes decrease the amount of physical
investment by businesses.
Taxes
also influence the types of physical investments that businesses make. This is
because the government taxes returns on some types of investments at higher
rates than others. These differences cause businesses to make investment
decisions based on tax consequences, rather than whether they are sound from a
business point of view. By distorting physical investment decisions, the tax
system leads to an inefficient pattern of investment.
The
amount of taxes represents a recurring debate in the West as an example in the
UK Companies are liable for an excise duty when they drill oil from the ground,
once it leaves the factory after being refined it is liable for tax and then
motorists are liable for either a duty or a consumption tax when they fuel
their vehicles. Here the same oil was taxed three times. Fundamentally the
problem or debate remains should income be taxed or wealth, governments in the
developing world continue to argue that the level of taxation is necessary for
them to carry out the functions of the government. More than 40% of government
expenditure every year is spent on social security and national health systems.
Islamic
Tax?
Islam
has a completely different perspective on the economy and tax as the Islamic
basis is different to that of capitalism. Fundamentally taxation in Islam and
under the khilafah puts the emphasis of taxation on wealth rather than income.
The Islamic taxation system does not tax income, but taxes wealth. This means
that the average person will be left with more disposable income and will be
liable for tax on whatever wealth is left at the end of the year. This will
have a significant effect on the economy. If we take figures from the British
economy, and incorporate them in an Islamic model we can demonstrate the effect
of this. In 2007 the average UK salary is £23,244, and the tax burden on this
salary is 34% (income tax and National insurance together), which is just under
£8000. This alongside indirect taxation (that is taxation on spending rather
than income) as well as council tax, road tax, sales tax and so forth mean that
the real tax burden falls at closer to the 40-50% mark. This means that the
average person in this country is losing between £10,000-12,000 to taxation.
In
Islam although simplified, the wealth tax falls at 2.5%. This means that the
within one year, the average person can save at is at least £10,000. This means
that the average person will have an extra £700 to spend each month as he will
not be taxed on his income. Taking into account that the total UK workforce is
approx 31 million this means that the extra money flowing around the economy
would be £240 billion, if the income was not taxed. Therefore two or three
people could easily enter into a business contract to supply some of the demand
in the economy for consumer or manufactured goods thereby creating more
employment in the economy. The net effect of this is that it will increase
demand for goods and services right across the economy which will generate an
increase in trade and in turn an increase in wealth for businesses.
The
main revenues of the khilafah are:
1.
The different types of public property
revenues
2.
The properties of Zakat
3.
Booties (Fai')
4.
Land Tax (Kharaj)
5.
Head Tax (Jizya)
The
different types of public property revenues
Islam
funds the basic needs of its entire population by designating any utility
regarded as indispensable for the community, such that its absence would
require people to search far and wide for it, i.e. the asset is difficult to
find and make use of as it requires refining, as a public property. This means
the utilities would be publicly owned and the revenue generated would be
administered for the benefit of all citizens. This is derived from the hadith
of the Prophet (saw)
"Muslims are partners in three things: in
water, pastures and fire". Although the hadith
mentioned just three things we can utilize qiyas (analogy) and extend the
evidence to cover all instances of indispensable community utilities. Thus
water sources, forests of firewood, pastures for livestock and the like are all
public utilities as well as oil fields, electricity plants, seas, lakes, public
canals, gulfs, straits, dams etc. The Khilafah will impose an admin charge on
the people which will be revenue for the state. It will also export oil to
nations abroad which will bring in huge amounts of wealth to the states
treasury. In 2006 81 million barrels of oil were produced a day 45% of this was
from the Muslim world that's nearly 38 million barrels a day, at current oil
prices $80 a barrel (12th Oct 2007) that's income of $3 billion a day!
The
properties of Zakat
Zakat,
the alms is a wealth tax liable on 2.5% of people wealth held for a year. The
Zakat properties are kept in a special place in the Bait ul-Mal (state
Treasury) and they are not spent except for the eight categories mentioned in
the Qur'an. But the Khalifah is allowed to spend them, according to his opinion
and Ijtihad, for whom he sees fit of the eight categories. This tax is a wealth
distribution tax which is re-distributed to the poor, the needy, those with
debts and for the dawah amongst other categories.
Booties
(Fai')
This
is the wealth that will come under the jurisdiction of the khilafah via the
integration of the Muslim world. Islam obliges the Muslims to live under the
khilafah which is the political structure of the Islam. The net result of this
is the khilafah's economy will continually be integrating other economies as
they come under its jurisdiction.
Land
Tax (Kharaj)
The
Kharaj is a levy imposed on land; it's a type of land tax. The tax is
calculated according to the quality of the land and the possible production
worth. This will change the landscape of the Muslim world as much of the
productive land remains unused today or in the hands of land owners who
inherited vast amounts of land by the departing colonialists. This tax will be
coupled with a number of other policies; the khilafah will initiate an
agricultural revolution by providing grants, cheap rental of land to all its
citizens to ensure its agricultural policy is met. Those landowners whose land
remains unused for 3 years will have their land confiscated.
Head
Tax (Jizya)
The
jizya tax is applied to all mature, male dhimmi (non-Muslim citizens) who have
the means to pay it. Women and children are exempt as are the poor who have no
livelihood.
The
jizya is applied according to the prosperity of the dhimmi. In the time of
‘Umar ibn al-Khattab (ra), he established three different bands of jizya depending
on the prosperity of the person.
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