Importantly, this paper will analyzed how UAE provides services to its citizen without collecting income tax. Generally, UAE does not charge both income tax and corporate tax to its citizens and businesses respectively. Notably, only a small number of businesses that operate in the petrochemical sector are taxed. Normally, these companies pay a tax of 55%. In addition to this, foreign banks are charged 20% income tax on their profit. With regards to personal income tax, citizens are only required to contribute 5% of their income to the government pension scheme (PWC, 2015). Notably, there are municipal fees charged to individuals living and working in UAE. Basically, residents are charged between 5% and 10% on foods purchased in a hotel. Similarly, a hotel tax of between 5% and 10% is charged for the room rate.
Revenue from government businesses are the main source of government income. Notably, oil revenue exceeded $120 billion in 2012 and provided a reliable source of government income (Oxford Business Group, 2013). Importantly, the UAE government also has significant control over state owned enterprises that pay royalties to the government. Essentially, these institutions enable the country to successfully generate revenues without the need of taxing citizens (Kowalski, Buge, Sztajerowska, &, Egeland, 2013). Noteworthy, however, the UAE is planning to introduce value added tax VAT by 2018. Generally, this has been brought about by the low oil prices. Additionally, the VAT tax will ensure there is a more predictable revenue stream for the country. Moreover, it will increase the countries tax bracket. Consequently, this will result in higher government revenue. Importantly, the country has promised that it will not introduce corporate tax to businesses that are not in the oil or banking sector.
For the country that you have chosen, determine whether or not the U.S. could adopt their taxation model without reducing its total amount of revenue generated by collecting personal income taxes from individuals and business. Justify your response
Importantly, the US cannot implement this policy without affecting its budget. Evidently, the income tax proportion is the highest contributor of the federal government revenue. In brief, the government tax allocations are as follows:
- Income tax 47%
- Pay roll tax 33%
- Corporate tax 11%
- Excise, estate, and other taxes 9%
Notably, the US government does not collect a significant proportion of its revenue from state owned enterprises. On the contrast, state owned enterprises are the main contributors of government revenue in UAE. Further still, if the US government were to replace the income tax portion of its revenue it would need to earn the revenue through the government enterprises, or increase the tax rate on other taxable goods and services.
Further, in the USA less than 10% of the enterprises are state owned. On the contrary, in UAE more than 80% of the enterprises are state owned. Moreover, they contribute more than 80% of the national GDP. In comparison, the USA state owned enterprises contribution to the GDP is insignificant (Oxford Business Group, 2013). Correspondingly, their revenue contribution is also very small. Consequently, state owned US cannot successfully implement the revenue generation method used by the UAE government.
Suggest at least two (2) advantages and two (2) disadvantages of the U.S. adopting a zero income tax model. Provide a rationale for your response.
Notably, an adoption of zero tax rates ensures that citizens have more income to spend. In essence, this is an important method of increasing consumers’ purchasing power (Kowalski, Buge, Sztajerowska, &, Egeland, 2013). Consequently, consumers are able to buy more good than they would have purchased had they been taxed. Correspondingly, an increase in demand acts as an important tool in stimulating economic development. In light of this, the reduction in income tax stimulates economic growth by creating local demand for goods and services.
Importantly, states with no taxes are equitable in the sharing of social responsibility. Essentially, taxes are meant to provide social services to the public. Consequently, if individuals do not pay taxes, they have to privately purchase these services and goods. As a result, these states are able to eliminate the “free-rider” problem, since social goods and services are provided by the private sector at a fee (Arnold, 2008). Notably, services that are provided freely by the government, yet financed through income tax, as well as other taxes have high chances of having the “free-rider” problem.
Notably, adoption of zero income tax means that the government will have fewer areas of collecting income tax. Consequently, unless the government derives other sources of income, it will be unable to finance its budget. As a result, this may lead to lack of necessary social facilities such as schools and hospitals. Importantly, some social facilities provided by the government are not profitable and private investors would not invest in such projects.
Additionally, the lack of income tax leads to the establishment of state owned enterprises. While state owned enterprises are not bad per se’, they usually have administrative problems. Noteworthy, is corruption and unnecessary bureaucracy. Further still, some are used as political machines to popularize the ruling government policies. Consequently, most of them are not able to collect the desired revenue, or establish economic and social development in the country.
Create a proposal for where the revenue would be derived if the U.S. were to adopt a zero income tax model.
Essentially, in order for the government to maintain its revenue collection levels, it must formulate new avenues of collecting taxes. Basically, the most appropriate method would be adjusting the taxes that affect all members of the society. Consequently, I would increase the value added tax. Importantly, most goods are taxed; as a result it would be difficult for any person to avoid this form of taxation.
Notably, I would create zero rate taxation on essential commodities. Generally, these products include medicine, wheat flour, milk, and cereals. On the other hand, I would increase the value added tax on luxury goods, and cosmetics by a margin greater than that of the eliminated income tax. Further, for ordinary goods such as cloths, and household goods I would increase the taxation by a margin equivalent to that of the income tax. Basically, the zero rating of the value added tax on essential commodities would make them cheap and affordable for the low income groups. Accordingly, charging tax on luxury goods with a rate greater than the value added tax plus the eliminated rate of income would ensure that the government collects maximum revenue from these commodities. Finally, increasing the value added tax on ordinary goods by a margin equal to that of the income tax would ensure equal transfer of tax burden.
Primarily, I would propose for the issuance of a bond if the government is unable to collect enough revenue. Notably, the use of the bond for internal borrowing would be successful since the public would have a lot of disposable income which was not taxed. Importantly, the bond would mop excess liquidity in the market leading to a reduction in inflation rates. Additionally, it would ensure that the government has enough capital for economic development. Consequently, the bond would ensure that the government attains its fiscal and monetary policies.
Arnold, R. (2008). Economics: 8e. Mason, OH: The Thomson Corporation.
Kowalski, P., Buge, M., Sztajerowska, M, &, Egeland. (2013). State-Owned Enterprises: Trade Effects and Policy Implications. Organization of Economic Co-operation and Development 147, 1-99. Retrieved from < http://www.oecd-ilibrary.org/trade/state-owned-enterprises_5k4869ckqk7l-en>
Oxford Business Group. (2013). The Report: Dubai 2013.Retrieved from http://www.oxfordbusinessgroup.com/uae-dubai-2013
PWC. (2015). Doing Business in the UAE: A Tax and Legal Guide. Retrieved fromhttps://www.pwc.com/m1/en/tax/documents/Doing-Business-Guide-UAE.pdf