The Middle East needs fairer taxes to promote growth and reduce inequality…


(MENAFN-Caribbean News Global)

By Jihad Azour, Priscilla Muthoora and Geneviève Verdier

Countries in the Middle East and Central Asia have long used taxation to develop their economies and promote social inclusion. The first income tax dates back 5,000 years to ancient Egypt. The pharaohs used it to build granaries and feed the poor during shortages. Zakat, a progressive tax-like payment obligation that began in the 12th century, is still levied to fund social spending in Saudi Arabia and elsewhere.

Tax systems have evolved considerably over the centuries and there are striking differences between countries, including between exporters and importers of oil and gas. Despite recent progress, including the introduction of value added and corporate income taxes in some oil-exporting countries, efforts to establish modern, efficient and fair tax systems remain a priority.

Tax revenue as a share of gross domestic product remains relatively low despite progress in broadening tax bases in many countries. Governments, meanwhile, face immediate pressures to increase spending to protect the poor, including against soaring food and fuel inflation, improve health and education, build resilience to future shocks and achieve the United Nations Sustainable Development Goals.

A recent IMF staff paper examines the challenges and opportunities for raising tax revenue in the Middle East and Central Asia. It provides new estimates of the magnitude of additional revenue that could be collected to improve growth prospects and social inclusion: the difference between actual and potential tax collection is equivalent to around 14% of GDP (excluding oil and gas) , on average. In other words, governments have the opportunity to raise more revenue by bringing tax rates closer to the levels they could achieve given their economic structures.

Some of the largest income gaps are found in low-income countries in the region, often reflecting the effects of fragility and conflict. The weakness in tax collections can be attributed to a series of factors. The use of direct taxes, especially on personal and corporate income, is limited. Property taxes are relatively underdeveloped.

Various indirect levies on consumer goods account for the bulk of tax revenue (excluding gas and oil revenue), but exemptions are common and extensive. Weak tax compliance and widespread informality reduce the collection capacity of governments.

Taxation could also be more progressive. Personal income taxes across the region vary in the extent to which the average tax rate increases with income and in their ability to redistribute from wealthier to poorer households. In several countries including Algeria, Iran and Iraq, personal income tax is relatively progressive. In some countries, however, incomes are too low to achieve meaningful income redistribution. Other countries have larger personal income tax revenues, but the rates are less progressive.

Increase income, improve inclusion

Our research shows that eliminating blanket exemptions and ineffective incentives would broaden tax bases and make tax systems fairer and more transparent. Several countries have made significant progress in broadening the tax base or are in the process of doing so. Egypt, for example, aims to reform its income tax legislation to simplify the legal framework and streamline exemptions.

In addition, tax system reforms, such as the overhaul of personal income tax and value added tax, and the development of property tax, could boost collection, make tax systems more progressive and promote inclusion.

Modernizing tax administrations and making them more efficient would improve enforcement and compliance. Many countries like Algeria, Azerbaijan, Pakistan and Iran are already using e-filing. Still, more efforts are needed, including to streamline organizational structures, improve business processes and take advantage of digital technologies. Closer international cooperation to improve the exchange of information between tax jurisdictions could also be beneficial.

Reforms to reduce informality and promote economic diversification could support revenue mobilization. These include measures in Egypt and Tunisia to discourage the use of cash and to increase financial inclusion. Measures to fight corruption, improve governance and increase transparency could inspire confidence in taxation. Efforts in Georgia and Tajikistan to fight corruption by simplifying tax systems and procedures have doubled tax-to-GDP ratios over the past 20 years.

An appropriate sequence of reforms is important in all countries, but especially in the region’s low-income economies and its fragile and conflict-affected states.

With sustained political commitment, clear communication, and careful design and implementation of reforms, lasting improvements can be made to mobilize more revenue. Building on these efforts, countries in the Middle East and Central Asia can use tax policy to promote economic development, increase social inclusion and alleviate food insecurity, continuing the path laid down by the pharaohs. .

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