As the new British ConDem government went into its first summer recess, the economy, the budget, the deficit and the national debt has dominated the government’s attention ever since it rose to power in May 2010.The Labour government constructed a national budget prior to the elections however the new government proposed to abrogate the budget and replace it with its own version.
The state budget has almost become a seminary event across the world.The government in power uses it as an opportunity to showcase its priorities, whilst the opposition use it to show the incompetency of the governing party. The ConDem government focused the budget prioritising the soaring deficit (this is the amount the government spends over what it gets each year in revenue – currently £160 billion) through saving money and using this to cut the deficit.
Fiscal policy is used by governments around the world to influence the economy. Governments use different kinds of taxes and vary the tax rates in order to ensure the economy functions. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign and military aid.
Taxation is the most important source of revenue 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, is collected in tax, whilst Britain’s tax base is over 50% of its economy.
The yearly budget as well as setting the types and modes of taxation, has a massive knock on effect on the economy. Consumer spending, saving and investment to a large extent will be influenced by the rates and types of taxation, alongside the new polices introduced in each budget. Such impact means a yearly budget by a government with a term of usually around 4 years, with many countries having mid-term elections – most governments are heavily influenced about remaining in power when they construct their budgets.The stress of the yearly budget is heightened by the fact that regular and random changes, which include new taxes cause much uncertainty which has a knock on effect on the wider economy and the choices a society makes with regards to their income and savings.
The Recent budget by the ConDem government included a pay freeze for all public sector staff for two years, it should be remembered that the public sector is one of the largest employers in the UK, a pay freeze for public sector staff in the midst of a shaky recovery will impact the UK’s recovery.The George Osborne constructed budget also included a hike in VAT and Capital gains taxes which are taxes on spending and profits, all those looking to make purchases or sell assets will need to think twice considering the additional tax due on them now.This is all taking place when the British economy needs increased spending to stimulate economic activity and create jobs. This lack of certainty and consistency is half the problem, taxation in the UK and the wider Western world is the real monster.
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.
Alongside taxation on income, consumption taxes have come to 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.
TAX BURDEN
The level of taxation in any nation will affect people’s spending 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. The average salary currently in the UK is £24,000, and the tax burden on this salary is 31% (income tax – 20% and National insurance contributions – 11%), which is just under £7,440.This alongside indirect taxation (that is taxation on spending rather than income) as well as council tax, road tax, general sales tax (VAT) and so forth, means that the real tax burden falls in excess of the 50% mark.This means that the average person in this country is losing between £11,000-13,000 to taxation!
Such high levels of taxation heighten the problem in the UK and the West as governments rely on income based taxation in order to fund their spending. In an income based tax regime the more one earns the more that is due, whilst in a wealth based tax regime irrespective of income only that which remains at the end of the tax year is taxed.Wealth taxes which tax wealth that remains at the end of a tax year in most cases results in investment across the economy to avoid it being taxed, whereas income taxes as well as VAT are taxed at source. Income taxes are taken before one even receives their payment packet irrespective of everything else.
ISLAM AND TAXATION
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 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.As explained on the average UK salary of £24,000, the tax burden falls at over 50% with the average person in the country losing between £11,000-13,000 to taxation.
In Islam although simplified, the wealth tax falls at 2.5%.This means that within one year, the average a 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 they will not be taxed on their income. If this tax was applied in the UK with a workforce of approx 31 million this means that the extra money flowing around the economy would be £240 billion.The replacement of income taxes with a wealth tax would actually lead to extra money in the economy.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, thereby creating a natural boost to the economy and a sound way out of recession.
Alongside defining the types of taxes that can be collected Islam also directs areas of government expenditure. Islam restricted the areas the government can intervene in. Islam clearly defined the categories of those who are liable to receive Zakat, this takes away the political uncertainty around government expenditure as was seen with the world’s governments bailing out their banks, rather than punishing them for their misdemeanours. Similarly this also ensures the government doesn’t pursue politically aimed projects or get involved in riba (interest) based deals. Due to Islam defining this area, this has removed the uncertainty and inconsistency as found with the Western yearly budget cycle.
CONCLUSIONS
As many of us calculate our wealth during Ramadhan in readiness to pay their zakat, we should remember that Zakat has a significant effect on the economy like any tax. However for us Zakat is not an economic tax but represents one of our spiritual values. It is where we give our due, which are then distributed to those who are needy, poor, indebted or instructed with organising the collection and distribution of zakat. Zakat fundamentally is one of the key pillars not only of Islam but also of the Islamic economy along with Kharaj/Ushr (based on the productive capacity of the land). With not only the scale but usage of tax defined by Allah (swt), and Muslims eager to pay, this economic mechanism is sorely missing in the West. (Ends/)
