Taxing questions about democracy in the Middle East

By Khaled Diab

In the Middle East, there appears to be a link between autocracy and low taxes. Would higher taxation lead to greater representation or repression?

Tuesday 18 August 2015

The only certainties in life are death and taxes, sages, from Benjamin Franklin to Daniel Defoe, have been informing us for centuries.

In the Middle East, death is becoming an ever-more probable prospect of increasing ugliness and savagery. But taxes are a very different matter. Compared with Europe, America and other highly industrialised economies, most of the region's taxation levels and tax revenue are very low.

The most extreme example are the petroleum-producing states. For example, Saudi Arabia's total tax revenues account for around 5% of its GDP, while Oman's is an even lower 2%. This is because most Gulf countries, flush with oil revenues, impose little-to-no taxation on their citizens and corporations.

Even in countries which are not rich in oil, governments impose and, more importantly, collect surprisingly little in the way of taxes compared with their Western counterparts. In Egypt, for example, tax revenue hovers at around 13-14% of GDP, even though the country possesses no sizeable natural resource wealth.

The inability or unwillingness of countries in the region to tax their citizens has far-reaching implications. Although everything from religion and the patriarchy to the deep state and corruption have been explored as causes behind the ongoing failure of the Arab revolutions, the issue of the economic bottom line has received surprisingly scarce attention.

The imposition of taxes by the state was a major factor in the emergence of democracy in Britain and Western Europe. Though it may be largely forgotten today, democratic participation was once contingent on the state's financial dependence on its citizens. In fact, in its early days, rather than one person, one vote, the democratic system in place resembled more a Democracy Inc, with shareholders instead of equal voters.

For instance, from the 15^th century, voting in England was limited to people holding land worth 40 shillings or more, and property was the defining feature of the electoral system until after World War I.

Reflecting how common the notion was that only those who could pay were allowed to play, the prominent Victorian liberal John Stuart Mill argued: “The assembly that votes the taxes, either general or local, should be elected by those who pay something towards the taxes imposed.”

In a way, this is the stage much of the Arab world is at right now, albeit informally. Through backdoors and informal channels, the wealthy and the upper-middle classes can influence the direction of the state and have their rights protected ­– at least far more so than the masses.

Today, the West lives in a more enlightened age and every citizen – whether rich or poor, male or female – possesses an equal right to vote. But the basic premise remains unchanged: the government takes money from the citizenry and so citizens have the right to choose the government and hold it to account.

If taxation is at the core of representation, does the inverse hold: that without taxation, there is no representation?

While numerous complex factors affect the level of authoritarianism in the Middle East, I'm convinced that it is no coincidence that political participation and democracy seem to be (loosely) correlated to the level of taxation.

Viewed in this light, it is unsurprising that the oil-rich states tend to be the most autocratic. This is both because the rentier state, as it is known, is not beholden to its citizens for its survival and because it can use the wealth it has accumulated to purchase influence and silence or ignore demands for reform.

Even non-petroleum countries often depend on resources other than taxes, including foreign aid, mining rights, or revenues from national assets such as the Suez Canal. This results in a situation in which governments are more concerned aabout pleasing foreign corporations and states than their own citizens.

“A basic feature of the social contract in the Arab countries is that the citizen accepts limitations on public representation and state accountability in return for state-provided benefits,” explained the Arab Human Development Report in 2009. “Such a contract is only possible when states have sources of revenue other than direct taxes, such as oil, to finance public expenditure.”

However, in the poorer Arab countries this tacit social pact has broken down, and it is teetering on the verge of collapse in the wealthier states. In fact, it would not be a stretch to say that in the poorer countries, the state plays little to no (positive) role in the lives of its underprivileged citizens.

In Egypt, for instance, the state once provided free education and healthcare of adequate standard, and attempted to guarantee full employment, at least in theory. Today, state schools are ignorance factories, state hospitals are death incubators, and with the public and private sectors in tatters, people are increasingly relying on the informal economy for employment and sustenance. That is why “bread” and “social justice” were two of the revolution's main demands.

This raises the intriguing question of why it is that, though higher taxation is in the interests of both the state and its citizens, neither side seems terribly interested in broadening the tax base.

On the part of the government, Middle Eastern regimes do not have the authority or credibility to collect more taxes. More importantly, it appears they would generally prefer to enjoy a monopoly on power in an emaciated and failing state than to share power with citizens in a more vibrant, powerful and robust political partnership.

The motives of citizens are more complex. Naturally, taxes are unpopular almost everywhere. In the Middle East, more so. In much of the Ottoman Empire, peasants and workers were heavily taxed under a system known as Ilitizam, or “tax farming”. This double taxation had a devastating effect, such as depopulating entire villages in Egypt.

The situation did not improve with Western rule. After European lenders had helped to bankrupt Egypt during the construction of the Suez Canal, Britain formally occupied Egypt. In a 19^th-century version of the Greek debt crisis, Britain handed over Egypt's public treasury to European banks who swallowed up two-thirds of the state's revenue.

With high taxation generally leading to no representation, not to mention a great deal of repression, persecution and corruption, it is unsurprising that the people of the region have such a cavalier attitude towards paying taxes. And native governments, with their high level of corruption, mismanagement and incompetence, have not helped raise the credibility of paying taxes in the public eye.

But there are some initial signs of change. Governments across the region are looking to increase their revenues by broadening the tax base. These efforts have mostly focused on indirect taxation, such as sales and consumption taxes, which are easier to levy and require less accountability.

However, indirect taxation is reaching its limits. Egypt, for one, has raised its low income tax level to try to shore up its deficit, especially as aid from its Gulf patrons gradually dries up. Even in the Gulf, a robust debate has begun about the need to raise tax levels to compensate for fluctuating and falling oil revenues. Additionally, it is time for the region to find a new ownership model for natural resources which boosts accountability and places control in the hands of citizens.

While governments are bound to try to impose taxation without real representation, in modern economies, this would require the kind of coercive ability no state in the region possesses. In addition, it will undoubtedly lead, like in the 19^th century, to falling tax receipts, as taxpayers collapse out of exhaustion or find ever-more creative ways to evade taxation.

Although taxation alone will not bring about fair representation, manipulated cleverly by the citizenry, it will force the region's governments to become more accountable and, eventually, more democratic.

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This is the extended version of an article which appeared in Haaretz on 11 August 2015.