High taxes help to build an effective state. That many Middle Eastern countries don’t have them tells us much

By Brian Whitaker

Source:

August 23, 2010

The Islamic Republic of Iran conjures up many images, but “tax haven” may not be one that immediately springs to mind.

The other day I was chatting with an Iranian friend who has just moved to Britain and had his first encounter with the British tax system. He was wondering: “Do I really have to pay?”

Back in Tehran, they have a kind of council tax, though my friend’s family, in common with many others, hasn’t paid it for years and the authorities haven’t seriously tried to collect it, either.

Last month, Tehran’s grand bazaar in protest at government plans to increase taxes there. But it’s not just the money: the merchants don’t fully accept the idea of letting inspectors .

In Yemen, too – where there is a permanent economic crisis – the government is battling to enforce a sales tax in the face of fierce resistance. Currently, Yemeni businesses cough up of what they are supposed to pay.

Low taxes, and the erratic collection of them, are common features of life in most of the Middle East. Among the Arab oil producers, for example, taxation accounted for only 5% of gross domestic product in 2002, rising to 17% in the non-oil countries – which is still very low compared with Germany (39%), Italy (41%) and Britain (37%).

The main reason, of course, is that many of them are where the government has sources of income other than taxes. Oil is the classic example but there are others: Egypt benefits in a similar way from the Suez canal and several of the poorer Arab countries receive substantial rent in the form of foreign aid. Overall, slightly less than 20% of Arab governments’ revenue comes from taxes.

Taxation is an often-overlooked factor in the internal politics of the Middle East: it helps to explain why undemocratic regimes stay in power for so long. Governments that have substantial non-tax income can buy themselves out of trouble by showering largesse on the population, often keeping prices low through subsidies (as happens in Iran).

Taxes are never popular, and the higher the taxes are the more likely it is that people will demand a say in how the money is spent. It was the cry of “no taxation without representation” that spurred the American revolution in the 18th century, and a quarrel between King Charles I and his parliament over tax that helped to trigger the English revolution in the 17th century.

As a rule of thumb, high taxes can act as a spur towards democracy and accountable government. Conversely, where taxes are low the pressure for democracy and accountability is usually less.

The type of taxes also affects pressure for accountability. In general, Middle Eastern governments rely heavily on indirect taxes – goods, services and customs duties – rather than the more politically sensitive direct taxes. In 2006, for instance, direct taxes accounted for less than 6% of Arab governments’ revenues. A noted:

“This type of tax structure also minimises the opportunity for citizens to protest against their government. Direct taxes, in particular income tax, are viewed as the category of tax that gives citizens most proof that they are contributing to the public purse. “In Arab countries, the majority of tax receipts are derived from indirect sales and customs taxes hidden in the price … These types of tax typically conceal the direct link between tax payments and funding of the public purse, thus weakening public pressure for accountability.”

But taxes are not just about raising money. The kind of tax system a country has tells us a lot about the relationship between the people and the state.

As the World Bank last year:

• Raising taxes efficiently requires political effort to secure taxpayer consent.

• Raising taxes effectively requires the development of a competent bureaucracy.

• Raising taxes equitably requires political concern for the fair and equal treatment of citizens by the state.

“Taxation,” the report continued, “is at the centre of good governance and state-building. The perceived fairness of the tax system is crucial to building an effective state based on citizens’ consent. Willingness to pay taxes is a good indicator of the legitimacy of the state.”