Direct taxation in the Arab states is nonexistent or low but can it continue, Middle East editor with the Economist Intelligence Unit.
The American colonists summed up their angst with unfair taxation in 1773 by dumping countless boxes of British tea into Boston Harbour. Cries of "no taxation without representation" rang through New England streets as a harbinger of radical change in the way in which the British crown would treat its subjects. But no such cries will be heard in the streets of Riyadh or Amman. Quite the contrary. The autocratic regimes in place in the Middle East are well aware that taxation without representation can lead to such politically unsettling events. For this very reason, "no representation without taxation" is their mantra of choice in these countries.
Direct taxation in the majority of Arab states is extremely low and non-existent in most of the Gulf countries. Political reasons are the cause. Tax on citizens is more than just a source of revenue; it is an inextricable link to the public and its voice. As long as these countries can rely on outside revenue, be it oil, remittances or aid, they have no reason to pursue rule by popular opinion.
If any state takes to taxing its citizens, particularly through direct taxation, it is destined to be confronted with demands for popular participation. The more a state interferes in the incomes of its citizens, the more it must accept coming democratisation. Outside revenue reduces or completely eliminates the need to tax and therefore eliminates the need for the acquiescence of the public. This level of financial independence enjoyed by the Arab state provides it with a cushion of autonomy from the interests of its citizens.
As it stands, the public in such a scenario, particularly in the Gulf states, can rest easily at night knowing that while it may not have a voice in the government, its needs are being met. The state may look to college graduates and intellectuals as potential sources of opposition, so providing every graduate with guaranteed government work is seen as the panacea to political turmoil. In Saudi Arabia, the only direct withholding tax on the populace is the 2.5 per cent zakat, a tax mandated by Islamic law. The axiom of "you scratch my back, I'll scratch yours" certainly applies.
But if such a situation appears unstable, it is. No state can survive long without a steady stream of income, and oil revenue and foreign aid are notoriously temperamental. Oil prices just as quickly drop as they do rise, and a carefully planned budget can disappear like smoke. The same goes for foreign aid. Once a state's position is no longer seen as strategic or profitable, aid will soon dry up.
Jordan could have become a centre for economic dynamism in the Arab world. Instead, it has consistently relied on foreign aid and influence, painting itself as a pivotal piece in the Israeli conflict and peace process. But Jordan is not alone in shirking industrialisation and economic diversification. Few of these states recognise the need for restructuring their economies before a crisis hits. This time last year the government of Saudi Arabia was enjoying relatively strong oil earnings, and in this budgetary bliss they ignored pressure from the International Monetary Fund to cut subsidies and increase fees for utilities and other services. Government revenue has subsequently fallen 20 per cent short of budget projections due to the precipitous fall in oil prices.
The Saudi government dare not, however, look to introducing taxes or severely cutting services as a way of bringing down the deficit, less it faces a public demanding a voice. …