Imposing Consumption Tax

Introduction

Saudi economy mostly relies on oil industry and its government has much control over natural resources and main economic activities in the land. Ultimately, the economy of Saudi is centrally planned and therefore has free market economy. As it can be affirmed, oil industry contributes to approximately 45% of the total budget revenue hence making it imperative to the growth of the country. Till now, Saudi Arabia does not think that there is any need for consumption tax however, the country may face many problems in the future what may affect the economy if the oil dry out.

A recent analysis from Citigroup has raised the alarming possibility that Saudi Arabia might become a net oil importer by 2030[Could Saudi Arabia’s Oil Exports Dry Up?, 2012]. However, in order to Find a Solutions to contribute in raising Saudi Arabia economy for long run, and Focusing in another source rather than oil.  In order to maintain economic stability, we want to study the possibility of imposing consumption tax beside zakat on Saudi consumers and how it will contribute in promoting economic growth.

Basic concept

According to the dictionary, Zakat iscalled (Islamic tax) or (religious tax), it is an annual tax on Muslims comprising percentages of personal income of every kind to aid the poor in the Muslim community.[zakat]

Research aim

The research aim is to determine the possibility of imposing consumption tax on Saudi consumers beside zakat and how it will contribute in promoting economic growth

Sub problems;

1. How consumption tax contributes in promoting economic growth.
2. A)     Why consumption tax.
3. B)     Mechanism of economic growth.
4. C)     Identify mechanism of promoting economic growth by consumption tax.
5. The possibility of imposing consumption tax on Saudi consumer.
6. A)    Analyze tax system for promoting economic growth.
7. B)    Analyze Zakat system for promoting economic growth.
8. C)    Compare (a) and (b) to determine the possibility of imposing consumption tax (the importance or how valuable is the consumption tax).
9. Determine the possibility of using consumption tax for promoting economic growth of Saudi Arabia.

Research Objectives

As noted in the above information, the main aim or purpose of conducting this research is to investigate the possibility of imposing consumption tax on Saudi consumers beside zakat and how it will contribute in promoting economic growth. The following information provides the objectives and research questions for the study.

• To determine the importance of tax particularly in promoting the growth of economy
• To analyze all best and possible means of imposing consumption tax on Saudi consumer
• To determine the possibility of using consumption tax for promoting economic growth of Saudi Arabia

Hypothesis

Various studies conducted on consumption tax have revealed that consumption tax has a major effect on the country’s economic activities which can greatly affect economic growth, so in this paper we investigate how consumption tax contributes in promoting economic growth. We hypothesized that imposing consumption tax contributes in promoting the growth of Saudi Arabia’s economy.

We also hypothesized that the difference between tax system and zakat system will contribute in determine the importance of the consumption tax.

Literature review

Essentially, previous research indicates a close relationship between introduction of consumption tax and economic growth in a country. Many economists argue that imposing a consumption tax implies increase in government revenue and thus increase in the country GDP which is essential in reflecting the country’s economic growth. There are limited studies tried to identify the relationship between tax structures and economic growth, Here is some of the related literature:

Arnold, J. (2008) has focused in studying and analyzing   the relationship between tax structures and economic growth by enteringindicators of the tax structure into a set of panel growth regressions for 21 OECD countries; he found the following results:

1. Income taxes are associated with significantly lower economic growth and lower levels of GDP per capita than consumption tax and property tax.
2. Respectively, property taxes, and particularly recurrent taxes on immovable property, then consumption taxassociated with the highest levels of GDP per capita. Therefore, these taxes are the most growth friendly taxes in economic growth.
3. Corporate income taxes have morenegative effects on GDPthan personal income tax. In general, the relationship between the income taxes and growth is negative relation.
4. The progressivity of income taxes and growth are negatively related.

Also, Widmalm (2001), Padovano and Galli (2002) studied the relationship between progressivity of income taxes and economic growth in 25 countries, they reached the same result, the progressivity of income taxes and economic growth are negatively related.

Various studies conducted on consumption tax have revealed that consumption tax has a major effect on the country’s economic activities which can greatly affect economic growth. Brys (2010) in his book ‘OECD Tax Policy Studies Tax Policy Reform and Economic Growth’ outlines the various effects consumer tax can have on economic activities of a country.In the book, he states that consumer tax will affect employment and working hours, affect international trade and regulate the activities of the underground economy. Brys continues to state that differentiated consumer tax will encourage people to work, lead to a yield in environmental benefits and reduce inequalities in income. When all these factors are brought together, economic activities of a country are likely to be affected in various ways.

Methodology

Research approach

A good research is the one that provides answers to the research questions, validity, objectivity, accuracy, and economy. A research design is the plan and structure of investigation to obtain answers to research questions. The study adopted a qualitative survey structure. Qualitative research is also adopted since it investigates the social constructivist paradigm and relies on the socially constructed reality nature.

 It aims to fundamentally record, analyze as well as determine the significance and meaning of imposing consumption tax on Saudi consumers and its contribution in promoting economic growth. The approach is not initially based on any data to be compared but on the perceptions of those who have experience and knowledge based on consumption tax and its potential in enhancing economic growth of a country. The qualitative research approach here supports positivism whereby although there is no data to be compared as part of quantitative research, the fundamental construct of the research is based on a reality that cannot be changed.

The type of this study requires to use qualitative research, in this study we will gathering data from the past studies related to our theme (about the effect of tax on economic growth and then, we will analyses this data And weight all the Pros and Cons, advantage and disadvantage of all type of taxes and decide which type is best for the growth of the economy.

We will analyze both of tax system and zakat system and their relation with economic growth, then comparing both system and find the similarities and difference between them. Then study those differences and find solutions that may contribute in the economic growth of Saudi Arabia.

Data analysis and discussion

The raw materials were collected in a systematically organized manner that facilitates the analysis. To permit qualitative analysis, the data received was edited to ensure completeness, consistency, and uniformity before being analyzed to make it meaningful information regarding the study theme which is implications of imposing consumption tax in Saudi Arabia. Collectively the data analyzed enables the study to establish the relationship of consumption tax and economic growth.

Schedule

References

Brys, B., & Organization for Economic Co-operation and Development.(2010). Tax policy         reform and economic growth. Paris: OECD.

Could Saudi Arabia’s Oil Exports Dry Up? (2012?october?3?). ???: nvesting daily:http://www.investingdaily.com/15734/could-saudi-arabias-oil-exports-dry-up

almohainykhaledmohammed. (2003). The role of the tax in the process of economic and social development. Damascus University Journal , Volume 19 – Issue II.

zakat. (????). ???: dictionary: http://dictionary.reference.com/browse/zakat

Arnold, J. (2008), “Do Tax Structures Affect Aggregate Economic Growth?: Empirical Evidence from a Panel of OECD Countries”, OECD Economics Department             Working Papers, No. 643, OECD Publishing.

Bleaney, M.F.; N. Gemmell and R. Kneller (2001), “Testing the Endogenous Growth      Model: Public Expenditure, Taxation and Growth Over the Long-Run”, Canadian        Journal of Economics, Vol. 34(1), pp. 36-57.

Schwellnus, C. and J. Arnold (2008), “Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-country Evidence from the Amadeus Dataset”, OECD Economics Department Working Papers, forthcoming.