the concept of TAX

In the west the rich avoid the tax while the poor are punished by it. Islam shows taxation doesn’t have to be taxing

In September 2011 in a letter to the Financial Times twenty high-profile economists urged the UK government to drop the top 50% tax rate, which they say is doing “lasting damage” to the UK economy. In a speech in response to this letter, Chancellor George Osborne said recent economic data had led to short term forecasts being revised down over recent weeks – but pledged to stick to his budget deficit-cutting plans, of which this 50% income tax rate is a part.

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 policy lever. During the 1970s and 1980’s this was the main method used to ensure an economy didn’t overheat. In 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 to keep inflation down.

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.

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 31% on the UK average salary of £26,000. Add to this consumption taxes, local government taxes, road taxes and other indirect taxes such as VAT, then the tax burden rises close to the 50% mark. This means in the UK half of the average wage is paid to the Government on a combination of direct and indirect taxes.

The level of taxation in any nation will affect people’s behaviour, including their choices in working, saving, and investing. Taxation in the UK 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.

The fundamental problem here is the fact that government through legislation can invent taxes overnight. 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 Her successor, John Major, repealed the tax in 1991.

As there is no fixed blueprint for revenues for Western government they can introduce taxes and spend where they want. Whilst the current strategy to reduce the deficit was in large part due to the bailouts needed due to the financial crisis created by banks, the British government has imposed extra taxation on society and let the bankers off the hook. This process is perfectly legal as the government can create taxes and decide where is spends what it raises. This is why big business has for the last decade seen its taxes falling as it has been able to influence government decisions through funding political election campaigns.

Islam and Taxes

Islam has a completely different taxation philosophy. Rather than taxing income the Islamic fiscal policy focuses taxation on wealth. Islamic taxes on wealth broadly focus on unused monies, land and benefits. Islam has an array of taxes related to the production of land and the utilisation of land. Islamic taxation consists of very low taxes and hence does not burden the Ummah. This means that individuals are more likely to invest their wealth without being afraid of high taxes and will be motivated to work harder to reap the rewards for themselves and their families.

The low taxes allow more private enterprise and entrepreneurship by removing barriers for entry. Islamic fiscal policy does not tax individual incomes or company profits.

Islam has fixed the permanent revenues and as a result it only has a handful of taxes. Due to this the taxation system is not a mind boggling process as seen in the West where ones income, spending and death are taxed.

An Islamic tax regime also administers the state properties, as Islam has obliged the collective ownership of public properties. These are goods and services which if not made available to the public would make it almost impossible to live. These include roads, bridges etc., utilities like electricity, water as well as natural resources such as oil, gas, coal. The state would charge a small fee for their administration and use the monies received from exports to fund expenditure.

Aside from this Islam has permitted the state to tax wealth above what is needed for normal living in order to meet the costs of government expenditure in cases where revenues are not sufficient to meet expenditures. How this is only in exceptional circumstances. This means that in Islam only a set number of taxes can be raised thus restricting what is deducted form citizens, An Islamic ruler (Khaleef) cannot just invent taxes!

In contrast to the West, the Islamic system does not contain a vast number of differing taxes. The Islamic system is very simple and hence fraud via loopholes will be very difficult. Compliance is high while compliance costs are negligible. The rate of Nisaab – tax free amount – is high and rises with peoples’ standard of living which effectively means the poor rightly pay no tax at all.