The Middle East needs fairer taxes to help achieve growth and reduce inequality

The Middle East needs fairer taxes to help achieve growth and reduce inequality

Photo: Andrei Vasilev / iStock by Getty Images

6 July 2022

Increasing tax progressiveness and reducing exemptions will help governments meet urgent spending priorities and make societies more equitable.

The countries of the Middle East and Central Asia have a long history of using taxes to grow their economies and promote social inclusion. The first income tax can be traced back to ancient Egypt 5,000 years ago. The pharaohs used it to build grain sheds and feed the poor during times of need. As for zakat, a financial obligation similar to a progressive tax applied in the twelfth century, it is still being collected to finance social spending in Saudi Arabia and other countries.

Tax systems have evolved greatly over the centuries and involve major differences between countries, including between oil and gas exporters and importers. Despite recent progress, including the introduction of value-added taxes and corporate income taxes in some oil-exporting countries, efforts to develop modern, efficient and equitable tax systems remain a priority.

The ratio of tax revenue to GDP remains relatively low, despite the progress made in broadening tax bases in many countries. At the same time, governments are facing direct pressure to increase spending to protect the poor from, among other things, a sharp rise in food and fuel price inflation, improving health care and education, building resilience to future shocks, and reaching the United States. Nations’ goals for sustainable development.

A recent study by IMF staff examines the challenges and opportunities posed by the mobilization of more tax revenues in the Middle East and Central Asia, and provides new estimates of the amount of additional revenue that can be raised to boost growth and social prospects. to improve inclusion: the difference between actual and potential tax revenues is on average about 14% of GDP (excluding oil and gas). In other words, there is room for governments to mobilize more revenue by bringing tax rates closer to levels they can achieve given their economic structures.

We find in low-income countries in the region of the largest income gaps – which can often be attributed to the effects of fragility and conflict.

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Poor tax collection can be traced back to a combination of factors. The use of direct taxes — especially on personal and corporate income — is limited. And property taxes are relatively underdeveloped.

There are a variety of indirect levies on consumer goods that contribute to most tax revenues (except for oil and gas revenues), but exemptions from them are common and widespread. Among the reasons for the decline in the ability of governments to collect taxes are poor tax compliance and the proliferation of employment in the informal sector.

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More progressive taxes can also be levied. Personal income taxes in the region differ in terms of how high the average tax rate rises with income and their ability to redistribute from richer to poorer families. Several countries, including Algeria, Iran and Iraq, apply a relatively progressive tax on personal income. In some countries, however, their incomes are too low to enable them to redistribute incomes significantly. Other countries generate more revenue through personal income tax, but their rates are less progressive.

Income mobilization and improved inclusion

Our research shows that eliminating widespread ineffective exemptions and incentives will broaden tax vessels and make tax systems more equitable and transparent. Many countries have made significant progress or are expanding the tax base. Egypt, for example, intends to reform its income tax law to simplify its legal framework and rationalize exemptions.

Furthermore, through reforms to tax systems, such as the redesign of personal income tax and value added tax, and the further development of property taxes, income collection can be promoted, tax systems more progressive and inclusivity supported.

Modernizing revenue divisions and improving their efficiency will improve enforcement and compliance. Many countries already use electronic tax filing systems, including Algeria, Azerbaijan, Pakistan and Iran. However, more efforts need to be made to achieve several objectives, including the rationalization of organizational structures, the improvement of work procedures and the use of digital technologies. It will also be useful for closer international cooperation to improve the exchange of information across the various tax jurisdictions.

Income mobilization can also be supported by reforms aimed at reducing informality and encouraging diversification of economic activity, which includes measures taken in Egypt and Tunisia to discourage the use of cash and increase financial inclusion. Taking the necessary measures to combat corruption, improve governance and improve transparency will increase confidence in the tax system. Georgia and Tajikistan have made efforts to combat corruption by simplifying tax systems and procedures, helping to double tax-to-GDP ratios over the past 20 years.

The correct order of reforms is important in all countries, but especially in the low-income economies and fragile and conflict-affected states in the region.

Lasting improvements to mobilize more revenue can be achieved through continued political commitment, clarity in communication, and careful design and implementation of reforms. Built on these efforts, countries in the Middle East and Central Asia can use tax policies to promote economic development, increase social inclusion, reduce food insecurity, and continue the path of the Pharaohs long ago.

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Dr Jihad Azur Director of the Department of the Middle East and Central Asia at the International Monetary Fund, where he oversees the Fund’s work in the Middle East, North Africa, Central Asia and the Caucasus. Dr. Azur served as Lebanese Finance Minister from 2005 to 2008, coordinating the implementation of key reform initiatives, including the modernization of the Lebanese tax and customs systems. In the period before his work as Minister of Finance and thereafter the period thereafter, he held various positions in the private sector, including his job at McKinsey and Booz & Company, where he held the position of Vice President and Senior Executive Adviser. Prior to joining the fund in March 2017, he was a managing partner at Inventis Partners, a consulting and investment firm. He holds a PhD in International Finance and a Postgraduate Degree in International Economics and Finance, both from the Institut d’Etudes Politiques in Paris. In addition, he researched emerging economies and their integration into the global economy while pursuing a postdoctoral fellowship at Harvard University. Dr. Azur has several books and published articles on economic and financial issues, and has extensive teaching experience.

Priscilla Matur She works as a senior economist in the Middle East and Central Asia department, and joined the Fund in 2009, having previously worked in the Institute for Capacity Development, the Department of Public Finance and the Department of the Western Hemisphere of the Fund worked. Ms Matura holds a PhD in Economics from the University of Oxford, and her research focuses on policy, financial institutions and macroeconomic development for development.

Genevieve Verdier Head of Division in the Department of the Middle East and Central Asia. Prior to joining the fund, she was an Assistant Professor of Economics at Texas A&M University and previously worked as an economist in the Research Division of the Central Bank of Canada. Ms. Verdier earned her Ph.D. received from the University of British Columbia, and has to date published a number of studies in the International Monetary Fund’s Research and Policy Publications and a number of peer-reviewed books and publications. Its business covers a wide range of macroeconomic issues related to the efficiency of public spending, public investment, sovereign debt restructuring, economic growth and financial development.

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