Are Arab governments taxing the poor more? 11/04/2022

Two weeks ago, The Economist published the article “Arab governments are putting more taxes on the poor”, in which Jordan was mentioned among other Arab countries.

Unlike other articles by The Economist (which was established almost 180 years ago), as an economist, I found the piece incomplete in regard to Jordan (and it mentioned it a lot), and that it may have committed an error or two when analyzing taxes.

While one agrees with the conclusion that some Arab countries may be taxing the poor to increase revenues, based on the fact that the sales tax is regressive (it affects the poor more, proportionately than the rich), the first rule when assessing a type of tax is to relate it to all other taxes and not look at it in isolation.

For example, it would be incorrect to state that Jordan is better off than Finland because the general sales tax (GST) is 16 percent in Jordan and 24 percent in Finland. The reason is that unlike in Jordan, in Finland there is zero income tax on individuals and the tax rate on corporations is 20 percent. Both tax types are lower in Finland than in Jordan. Besides, it is rumored that Jordanians pay over 130 types of taxes, for TV, airport, border, asphalt, mobile, built space, university, etc. This was not observed in the article.

The analysis is also lacking when it does not compare the taxes paid to the benefits received in each country. After all, taxation is the tool by which the government endeavors to become a Robin Hood, taking from the rich to help the poor.

To compare the value received from the government, I would refer to the World Happiness Report, published by the Sustainable Development Solutions Network, which ranks 146 countries in terms of happiness. In 2022, according to the report, Finland came 1st and Jordan came 124th, to use the same country by way of comparison.

Furthermore, an article in The Economist referred to income taxes in Gulf countries as if they were the same as countries in the developed world. In the Gulf countries, the government owns the oil and distributes some of its revenues among the people. In the US, for example, a person can own their own oil well(s).

The article also failed to look into the size of fees that are being charged without being tagged as taxes. In Jordan, non-tax revenues (the vast majority of which are fees) are almost JD2 billion, or 25 percent of total domestic revenues. Had the authors of The Economist article bothered to look into the local story of the taxes and fees paid, I am sure they would have written a different piece.

When analyzing taxation in Jordan, I simply divide the government's domestic revenues (less revenues from its shares in corporations and interest it receives on loans) into the GDP. As it turns out, the ratio of taxes and fees to GDP is around 30 percent, and it has hovered consistently around this rate for some time now.

The main lessons to be gleaned from this article are: whenever possible when analyzing an economy, one should know the local story; rules and standards should not be sacrificed to justify an end or prove an argument; use simple tools, for, in spite of everything, good economics is based on common sense. No common sense makes bad economics.

https://www.jordannews.jo/Section-36/Opinion/Are-Arab-governments-taxing-the-poor-more-15447