Wealth tax: An Islam-friendly way to combat inequality

Arabnews24.ca:Sunday 2 May 2021 08:39 AM: The Saudi tax system’s nascence allows room for experimentation. One trial that merits consideration is a wealth tax: it would combat inequality in an Islam-friendly manner, and would make foreign experts keen observers of the Saudi economy, as western economies consider their own wealth taxes.

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The Saudi government – like others – views the income inequality that arises in a pure market system as intolerably large. Therefore, it uses taxes and subsidies to redistribute wealth from rich to poor, most notably via the “citizen’s account.”

However, unlike western economies, Saudi Arabia has no income tax, and funds its subsidies primarily using oil revenues. Lately, value-added tax and migrant worker levies have diversified the government’s revenues in line with Vision 2030, but hydrocarbon income remains the most important source.

Over the next decade, Saudi Arabia’s oil revenues are unlikely to grow as the Kingdom invests in other sectors, necessitating tax reforms to maintain a fiscal balance. In his recent Vision 2030 interview, Crown Prince Muhammad bin Salman ruled out an income tax, but there was no discussion of a wealth tax. It has several properties that make it an attractive choice.

First, zakat (almsgiving) is the fourth pillar of Islam, and loosely corresponds to a 2.5 percent wealth tax. At the moment, Saudi households voluntarily pay the tax, and distribute the revenues themselves according to Islamic guidelines.

While the government should not centralize the collection and disbursement of zakat, it should consider requiring those eligible to demonstrate that they have paid the zakat, and regulating the poverty-relief institutions that help in the disbursement of almsgivings. This will likely lead to a considerable increase in the flow of income from rich to poor.

Second, while western economies have been averse to wealth taxes during the last century, policymakers have recently started to give them serious consideration in light of the arguments made by French economist Thomas Piketty in his 2013 book, Capital in the 21st century.

Piketty reasoned that in the low-growth environment of modern capitalist economies, income will tend to get increasingly concentrated in a small class of capital owners. The rising inequality will cause mounting societal tension, with potentially grave political and social consequences.

Critically, according to Piketty’s calculations, conventional income tax is not enough to reverse the growing gap between rich and poor, and that instead, governments must consider a wealth tax of approximately two percent. The proximity of this figure to the level prescribed by Islam is a coincidence since Piketty’s argument was not based on any Islamic jurisprudential analysis, but it is noteworthy.

Piketty’s ideas have been so influential that US Treasury Secretary Janet Yellen – an outstanding economist and former Chair of the Federal Reserve – has strongly considered instituting a wealth tax, as has President Joe Biden. While no western economy has pulled the trigger on a wealth tax yet, such proposals would have been dead on arrival prior to Piketty’s book. In fact, the French economist himself described such a tax as political unfeasible.

From the Saudi perspective, therefore, a wealth tax does not only represent a potentially effective and Islamic-friendly tool for combating inequality. It will also put the Kingdom on the radar of policymakers and senior economists across the world. Fiscal experts are keen to gauge the economic impact of a wealth tax in a high-income country, as demonstrated success in the fight against inequality could give western policymakers the scientific support required to overcome the remaining political obstacles.

One of the virtues of Saudi Arabia’s fiscal blank slate is that there is no institutional pushback from the government’s tax-collecting agencies when radical reforms are proposed, unlike in western economies, where entrenched interests can erect considerable impediments to change.

Wealth taxes have fallen out of favor for decades, but they have recently received an intellectual and ideological boost, and policymakers the world over are mulling them over. In light of Islam’s long-standing support for such fiscal instruments, the time is right for Saudi Arabia to experiment, with the whole world watching.

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