Monthly Archives: September 2020

Some fundamental propositions

1. Tax as the main source of government income

Tax constitutes one of the most important items in government income. In modern economics, while classifying incomes in government budget accounts, tax come next to two other income resources; credit papers and other incomes. In some countries, where budget accounts control the major resources of society, the income made by selling resources or by taking added value in the aforementioned transaction is classified under government revenue. The tax on public or private benefit from this revenue is returned to the cycle of government income. In short, tax must constitute the major part of government’s revenue[3]. Policymaking in regard to taxation constitutes a part of monetary policy modern states are responsible for according to macroeconomics. The effects of taxation on national income are analyzed.

2. The purpose of tax collection: realization of developmental plans

What is the nature of tax? What items must be taxed? Tax incidence[4] is a topic very important in tax literature in analysis of public sector economics. Among important subject matters discussed in tax literature in economics are different types of tax, direct/indirect tax, tax on market subsidy, income tax, net profit tax, value-added tax, consumption tax, property tax, inheritance tax, and the like. Tax incidence and the analysis of the relationship between tax and public equilibrium models, growth and development have been discussed from the early days of economics as a discipline by its founding fathers such as Thomas Hobbes (1615), Thomas Mann (1664), Adam Smith, David Ricardo, and margin a lists such as Weichsel, Marshall, Edge Worth, Robinson, and Chamberlin. These theories concern aspects of human life in relation to the positive or negative effects of taxes. We mean by “positive” and “negative” effects those that are so evaluated on the basis of normative concepts such as justice and equality. So, the criteria by which an act or policy is assayed are the fundamental fixed values Islamic culture recognizes. These values are mind-independent and universally applicable to all times and locations. The impact of a policy or act is evaluated on this scale. In other words, like chemical medicine, economic policies may have positive impacts on some aspects of social life and negative impacts on some others. We gather from sayings of Imam Ali (be peace upon Him) that the main objective of tax collection by a Muslim ruler must be to enable the government to undertake developmental responsibilities hence a model of taxation must be adopted that leaves no negative effects. As Imam (AS) puts it, tax is one of the pillars of people’s livelihood. So, no measure taken by the government must put it in danger “since” He says,

“all people are considered as the beneficiaries of tax.”

Accordingly, in the society ruled by Imam Ali as well as a society He approves of, taxation must be viewed as a sort of public livelihood and a means for education of taxpayers and of all who benefit from taxes rather than a source for government income. This is illustrated in His letter to Malik Ashtar where He describes the improvement in taxation system as the improvement of the life of everybody particularly the taxpayers:

“Scrutinize the affairs pertinent to taxation in a manner that leads to its improvement since the improvement of taxation system and the agents involved in it leads to the improvement of all, and public affairs cannot be well organized unless tax agents’ affairs are well organized.

This saying by Imam Ali indicates that the main objective of tax collection must be the macro management of social life. It is, therefore, necessary to scrutinize how tax collection proceeds. The letter to Malik shows that the most important responsibility of a ruler is tax collection the three objectives of which are improvement of public life, development of cities, and founding for the establishment of security and defense.

3. The betterment of people’s livelihood as the main objective of development

It is important to note here that Nahj al Balaghah is not a book on economics. So, it does not discuss in detail how tax collection must be organized or how tax incidence must be studied. About the latter topic, it only refers to agricultural goods as subject of taxation. It is good to notice here that the society which Imam Ali ruled depended on agriculture only, and therefore, the agricultural sector was the only subject of taxation. The other sectors such as services in modern terminology were not productive hence no tax for them.

Naturally, when He speaks about the methods of tax collection, He concentrates on ethical issues only. We need to study history in order to realize what tax collection meant at the time. As a matter of fact, tax collection was a very simple procedure incomparable to what we understand now from this term. Therefore, the manuals concerning tax collection at the time mostly contained ethical advice. In Nahj al Balaghah, too, moral constraints laid on the activities of tax collectors are explained. From them, we can gather that, in Imam Ali’s administration model, the fundamental principle is philanthropy.

Tasks pertinent to tax collection are not confined in the activity of collecting. Negligence of moral and educational aspects of taxation may harm society. The main objective of taxation is said to be the improvement of people’s life. Taxpayers and those who benefit from taxes collected should be viewed when responsibilities concerning tax collection are defined.

As a moral principle governing economic policies, tax collection must aim at three objectives: the betterment of people’s livelihood particularly that of taxpayers, the management of economic affairs of the fraction of the society that depends on taxation, and the establishment of security. If any of these three objectives are left unrealized, the economic model must be considered as defective.

You must concentrate on development more than you concentrate on tax collection because you cannot continue collecting taxes unless you pay sufficient attention to development. Whosoever asks people to pay tax without helping them enhance their life nearly destroys societies and people and will not be able to rule but for a short time.

4. The Islamic government’s responsibility for the betterment of people’s livelihood and for development

As a prelude, we need to invoke the difference between drive and obligation. Drive is a kind of cause of action while obligation is a kind of reason for action. A ruler or government (or the public sector in modern terminology) takes steps in the direction of development, for instance, because of a drive. In the meantime, it is charged with an obligation to take those steps. The obligation is based on rationality and free choice.

Having illustrated the difference between drive and obligation, we can now infer from the sayings of Imam Ali that even if a Muslim ruler fails to have any drive, he is still charged with the responsibility and obligation to care for development. This is his social and political responsibility. All policies and executive procedures must be based on this. Hence, governments must pave the way for development and eradicate all obstacles on the way. The foundational principle in social and economic relations in Islamic society is justice, equality, freedom, and dignity for citizens. Consequently, the public sector must pursue plans for development as a matter of obligation. Tax collection must practically imply efforts for development. Measures taken by government in this field must carry a particular message for citizens; economic policies of the state aim at the betterment of their life. Otherwise, public opinion will see tax as tribute and the state as a bunch of bandits. This mentality contributes to loss of creativity on the part of the private sector, decline of efficiency on the part of the government, and overall damage to the nation’s wealth.

5. Development increases government’s revenue from tax

There is an important reference in the aforementioned saying of Imam Ali to the correlation between development and taxation. As taxation must be seen as a means of development, development must also be seen as the ground for an increase in the revenue of the state from tax. The general satisfaction of the public is, in itself, a public good. When it is the result of the comfort brought about by state-directed development, it functions as a psychological drive persuading people to see themselves in debt to the state. This facilitates their taxpaying. It also overcomes the incentives for tax evasion. So, negligence on the part of tax collectors of this aspect amounts to heavy damages to economy as well as citizens’ overall psychological satisfaction. We can say that the degeneration of cities, public anger, and unrest would be the final outcome.

Explication of the problem

Like education, management is applicable merely on human beings. The term management reflects the influence human beings exert or receive. Thus, it is of paramount importance to understand the factors contributing to the formation of human character and to realize the rules governing human behavior in order to found management as a discipline[1].

Much debate is going on about human nature in scientific and philosophical inquiries. Different approaches to human nature have given rise to different theories on the models by which human behavior is explained. What marks the difference between these theories constitutes their vision of the universe, their conception of the creator, their value system, and their theory of knowledge.

Adopting a systematic vision and supposing that the epistemological subsystem in Islam coheres with the Islamic social subsystem, we can presume that the administrative subsystem of the Islamic religion is founded on the pillars of Islamic vision of human nature. Therefore, it is necessary to discuss this vision as a prelude to understanding Islamic principles of management.

I would like to begin with the claim that philanthropy is the fundamental theoretical notion both in the Islamic conception of education and the Islamic vision of administration[2]. The subject matter of both is human being. We should discuss man in organization, organization of man, and human organization. The principle of philanthropy reflecting the fundamental notion of God-centeredness acknowledges freedom for man as an intrinsic right. This principle stems from two philosophical positions in theology as well as in our picture of human nature.

So for as theology is concerned, we can say Islam emphasizes the notion of monotheism. In regard to the Islamic picture of human nature, we can figure out that human intrinsic freedom stems from his exclusive capability of reasoning.

Islamic philanthropy rests on God-centeredness. In Islamic view, human beings search for God by nature. Their ultimate perfection is realized through their proximity to God. Human beings can reach the highest possible rank. Still, they remain creatures. Therefore, they need to develop towards perfection. Human perfection involves human reason and freedom. In order to stand for the responsibilities freedom requires, human reason must develop.

The principle of philanthropy, as a fundamental hypothesis in management and education, is comprised of the following elements:

1. Human dignity and freedom bestowed on man by God and built in his nature;

2. Both behavior and the theories constituting the content of thought must protect human dignity, freedom, and value both in education and management. They must not clash with the rank given to man exclusively by God;

3. Organizations must be formed with humanitarian frames and structure. As the most important element of an organization, human beings must enjoy freedom of choice as well as the possibility of spiritual elevation and the right to dignity;

4. Both the trainer and the trainee, the boss and the folk, are imperfect human beings in need of advancement but equipped with the faculty to understand God, discern good, and keep tranquil. The main objective in life is to attain proximity to God via climbing the spiritual ladder through developing the faculty of reason in order to achieve divinity and become capable of taking responsibility and making free choice.

Our main objective of this paper is not to prove that philanthropy is recognized in Islam. To take it for granted that philanthropy is recognized in Islam, it suffices to take a glance at Imam Ali’s sayings. We shall focus on those things that highlight the Imam’s attaching importance to philanthropy. It goes without saying that the subject matter can be studied from so many different angles. In this paper, we shall confine our discussion to sayings concerning economic management. In other words, we shall see that precepts issued by Imam Ali as the leader of Muslim community in regard to tax collection reflects an especial mentality He retained when He administered human society and managed the activities pertinent to tax collection. In this way, He employed everything and every move He had in the course of training human beings and educating society.

To treat the problem, we shall concentrate on the subject matter of tax as one aspect of economic management of human society. We shall mention a number of textual evidences proving that philanthropy constitutes the axis of management in Imam Ali’s model. We shall try to formalize suitable concepts and express them in the form of functional propositions.

A Philanthropic Approach to Tax Management in Imam Ali (AS)’s Tradition

Alireza Rahimi Boroujerdi Ph.D

Abstract

In this paper, we study Imam Ali’s way of management in order to derive some principles common to education and administration. Our hypothesis is that philanthropy constitutes the pillar of His thought, words, and behaviors. We shall give reference to His sayings in Nahj al Balaghah to establish our point. We shall concentrate only on a number of Imam Ali’s sayings concerning economic administration of society. We take it for granted that Nahj al Balaghah contains His words.

Effects of tax payment in the Islamic system

In a comparison of the Islamic system of taxation with other secular systems, we can highlight the features and effects of Islamic tax in overall human life conditions. In the Islamic taxation system, tax payment is initially voluntary. Historically speaking, Muslims made their obligatory payments such as zakat willfully, freely, and voluntarily. Through education and promotion of moral values by Imams and holy religious leaders, they are brought up in a way that an internal drive motivates them to comply with divine law. Even at the times when Islamic state was not in place hence no external force was exercised on them, still they paid the tax due religiously.

Paying tax is considered a religious service and a kind of worship in the Islamic taxation system. Most economic issues are interwoven with matters pertinent to religious service and worship. If one pays zakat or khoms without the intention to obey God, they are not clear from obligation.

Taxation in Islamic system pursues the same goals other secular systems pursue such as financing the projects and schemes governments intend to implement in rural and urban development, cultural and public education, and paying public servants’ salaries etc. But Islamic taxation pursues an additional end too. Islam intends to provide an opportunity for every individual to realize sublime values in their life and to attain ethical perfection when they discharge their social duties such as tax payment. Therefore, the regulations concerning tax are so arranged that people exercise the feeling of detachment to worldly treasures. By paying zakat and khoms, they enhance these moral traits in their inner world.

In secular systems, tax is first collected by government and deposited in the treasury then spent by the governmental bodies in proper expenditures legally determined. Citizens have no direct involvement in spending. Naturally, they do not personally involve in the process of redistribution of wealth and do not directly experience the positive results of their financial contribution to the betterment of life of the lower class society. In Islamic taxation system, however, provision is made for direct and personal indolence of citizens in redistribution of wealth. Some parts of tax may be spent by individuals personally without having been first collected by the government and piled up in the treasury. Consequently, tax payers personally see where their money is spent. This helps construct a positive psychological bound between social classes. The rich get acquainted with hardship the poor undergo and the poor come to personally know their fellow benefactors. This has proved effective in controlling both the economic gap and the ensuing social clash between the upper class and the lower class.

Islamic taxation covers a broader area of social needs compared to secular systems. Material, spiritual, emotional, and psychological needs of society and individuals have been addressed in the Islamic taxation system. Non-compulsory taxes are introduced by Islam to cope with these various needs. The factual effect of these taxes surpasses those of obligatory ones. In secular systems, no such provisions are made because moral issues are not considered in tax legislations.

While secular systems spend much on collecting tax because of grand and complicated bureaucratic organizations involved, the Islamic system of taxation enjoys the advantage of simplicity and economy. Trust is a great factor here. Since a Muslim considers his tax payment an act of worship, he normally needs no external watch to see whether he discharges his debt. This decreases the cost of tax collection considerably.

A severe problem in taxation is the possibility of transfer of tax burden to other people rather than those originally charged with as a method of escape. This transfer harms social justice because it amounts to the consumers being the ultimate tax payer. This way of escaping tax is easier and more common in indirect taxes. In the Islamic taxation system, therefore, two mechanisms are deployed to block this escape; first, all taxes are direct so as to minimize the possibility of the transfer of tax burden; second, paying tax is not only a public obligation but also a religious duty. It goes without saying that a believer understands that it is impossible to cheat and deceive God.

Redistribution of wealth and the adjustment of the share of different social groups and classes from the total national income in a fairer way are two important ends in the Islamic taxation system. These goals are better achieved by people directly with the minimum intervention of the state. The Islamic system of taxation guarantees this process by allowing voluntary active involvement of citizens in tax spending and by covering the maximum possible scope of adjustment through the variety of taxes obligatory and otherwise while minimizing the costs of the entire process by excluding the state’s interference. In the secular systems of taxation, however, redistribution of wealth and adjustment of share are not included in the objectives of taxation and if they are in some very rare cases, they can be carried out by the government rather than people. So, tax in Islam partly aims at treating the problem of poverty and preventing huge class gaps.

Through its positive effects on economic stabilization and growth[32], Islamic taxation system helps in better distribution of wealth. We can sum up these positive effects in the following respects:

– Just distribution of total national income

Islam pursues two aims in economics simultaneously; growth and justice. Legislation of tax laws must guarantee a fair distribution of wealth in society at the same time as it helps economic growth. Neither of these two aims is subordinate.

– Betterment of production factors

The immutable taxes which Islam imposes lead to the increase of production factors.

– Facilitating saving

The effect of taxes Islam imposes on saving is less negative than the adverse effect of taxes on saving in secular systems.

– Encouraging investment

In the Islamic taxation system, there are elements that encourage investment. We may mention some more important ones here: certain tax reliefs and exempts in the system, mechanisms for the reduction of loss probability via comprehensive sharing, and the rate of economic profit being low.

– Labor supply

The positive effect of taxes on the optimum efficiency of the labor force plus the increase of working hours contribute to the increase of labor supply.

– Consumption equilibrium

Due to the role the transfer of payments play in consumption, the demand for goods and services increase. As the result, the increase in total demand and supply in the entire economy as a whole reaches equilibrium at a higher level.

Effective factors in the formation of Islamic taxation system

1. The fundamental factor shaping the Islamic system of taxation is the quest for social justice and economic balance. Islamic state must be concerned with social injustice and class discrimination.

2. Combating stagnant capital and obstacles to economic creative activity is a factor present in the Islamic taxation system. As one withdraws his capital from investment, one gathers kanz. It is prohibited to do so and khoms is imposed as discouragement.

3. Utilization of natural resources such as mining, diving for voluble natural stones and treasures plays a significant role in imposition of tax.

Conditions and characteristics of Islamic taxation

Islamic Sharia has considered several principles in determining the taxation system it adopts. We can highlight seven principles here.

1. The tax imposed must be proportionate to the buying power of tax payers.

2. The tax due must be precise, obvious, and fixed with the payment time exactly determined.

3. Maximum facilitation of tax payment must be planned and complications and problems leading to tax payers’ discontent minimized.

4. The cost of tax collection must be minimized.

5. Tax role and function must be premeditated.

6. Tax must not leave adverse effects on economic activities for wealth production.

7. Taxation system must pursue social ends.

Classification of taxation

Taxation can be classified on two different bases. Sometimes, we classify taxes on the basis of rate and amount. Sometimes, we classify them on the basis of the items liable to taxation. From the first point of view, they can be divided into the following four groups[26]:

1. Fixed tax includes zakat fitrah and some cases of jezyah and kharaj. In all these cases, there is a fixed amount due to be paid.

2. Proportional tax is a fixed percentage of property one ought to pay. No increase or decrease of the value of the property one owns affects the rate of the tax. Khoms is a kind of proportional tax.

3. Progressive tax is not legislated in Islam.

4. Retrogressive tax [27]is when the decrease or increase of the amount due to be paid bears a reverse relation to those of the revenue on which tax is imposed. As the revenue increases, the rate of tax decreases. An instance of this kind is seen in tax on camel, cow, and sheep in some required minimum limits (nisab).

Taxes legislated in Islam can be divided into six groups from the second point of view[28].

1. Tax on revenue includes zakat on wheat, barley, date, and raisin;

2. Tax on property (wealth) includes zakat on gold and silver;

3. Tax on savings such as khoms;

4. Tax on utilization of natural resources such as khoms on mining, zakat on camel, cow, and sheep;

5. Capitation such as zakat fitrah;

6. Tax on consumption, when one consumes more than their average needs, they must pay one fifth of the price of the goods and services consumed as tax.

Mutable taxes

Mutable taxes are those taxes the Islamic ruler decides to impose in order to meet particular expenses of the government in exceptional cases without prior legislation by divine lawmaker hence no fixed terms for them[22]. These taxes are called state-imposed tax. They are limited and exceptional. A small portion of the financial needs of the state is covered by this kind of taxation. They are introduced as means of crises-solving by the state[23]. Historical instances of these taxes are the zakat imposed on commercial goods by the holy Prophet and some Caliphs as well as temporary taxation on horses during Imam Ali’s reign[24].

In Islamic Sharia, there are other payments obligatory or supererogatory much resembling tax but are not considered as tax because government does not collect them or law does not make them compulsory. They, however, leave impacts similar to those taxes do. Financial fines religiously due as compensation for some sins one has committed and would like to repent from (Kaffarat Mali) and self-imposed obligations to give a gift or pay alms (nudhurat) are obligatory payments. Alms (sadaqat), gifts (hibah), souvenir (hadyeh), endowment (waqf), remission of debt, and feeding the hungry (it’am) are supererogatory desirable payments considered as religious service if performed with the intention to seek Divine satisfaction[25].

Different kinds of Islamic Taxes

In a general division, we may divide Islamic taxes into two main groups; the immutable and the mutable. The immutable include those determined by the holy lawmaker primarily and directly. The quantity, the proportion, and the items taxable are thoroughly determined[9]. This group includes the following items:

Zakat

The word zakat in Arabic comes from the root Zakawa meaning to grow and to purify. The Islamic religion pays close attention to zakat. In several Koran verses, zakat is mentioned after salat as two important religious services[10]. According to the Koran and many hadiths, zakat is some money payable by an individual in order to purify him, help him with his deliverance, and help the needy financially. It brings about the betterment of one’s livelihood, increase of wealth, and economic security in society[11]. There are two kinds of zakat; Fitr zakat and possession zakat. The former means that every individual who is not a slave or poor and is of age, of sound mental state, and sober must pay around three kilograms of wheat, rice, corn, barley, raisin, or similar food staff to the needy at the nightfall of the last day of the month of Ramadan for himself and for every individual whom he has to support financially[12]. The latter means a percentage of the property one has must be paid as religious tax annually[13]. Nine kinds of property are included among what must be taxed: wheat, barley, date, raisin, caw, sheep, camel, gold, and silver[14]. The Koran[15] mentions eight categories on which zakat must be spent: the needy, the poor, the taxmen, the promotion of affinity, the emancipation of slaves, the indebted, in the path of God, and those travelers who need help in order to get back home[16].

The second immutable tax is called khoms. The word khoms literally means one fifth. This tax is so called because the rate of taxation on seven specified items is twenty percent. They are: annual surplus profit, mining, treasure, legal money mixed up with illegal, the jewelry fished from sea by diving, booty, and the price of real property bought from a Muslim by a non-Muslim. A part of the expenses of the Islamic state is covered by khoms[17]. Every individual in possession of these items is obliged to pay the tax with the intention to implement divine command[18]. The Koran portions out this collected tax to six shares: one share is God’s, one share is Prophet’s, one share is allocated for the immaculate Imam, one share goes to the orphans, one share for the poor, and the last belongs to travelers who need help in order to go back home[19].

Jezyah [20] is the third kind of taxation. It is capitation on non-Muslims living within the jurisdiction of the Islamic state that protects them or living without but under its pledge of protection. The Koran defines this kind of taxation in verse no. 29 of Sura Tawbah. It is the right of the Muslim government to level the tax on individuals or on their estates and production as the situation requires. The amount payable is negotiable. This tax is in lieu of zakat and khoms which non-Muslims do not pay.

Kharaj[21] is the fourth kind of tax that was collected from land. It constitutes a very important source of income for Islamic state throughout history. As Muslim conquests went on in early decades, the ownership of land underwent drastic changes. Four different types of land can be distinguished. In some cases, the inhabitants of a region accepted Islamic call freely and willfully. Their ownership of their property moveable or immovable was recognized. In some cases, they fought the Muslim army but were defeated. Their immovable property was confiscated. This type of land was called conquest (or maftuhato onwatan). Sometimes, the non-Muslim inhabitants entered into a peace agreement with the Muslim army. Their lands were called peace lands. The fourth kind of land was the one either abandoned by owners without fighting or left to the Islamic state by them or left unattended because the owners had perished. This type of land belonged to the state. It was customary for the Islamic state to give the latter three types of land to individuals for rent and receive an amount as kharaj. The rent due to be paid was fixed through negotiation and varied depending on the fertility and the kind and level of production expected.

The differences between Islamic taxation and ordinary taxation

1. Islamic tax-paying is considered as a kind of religious service unlike the ordinary tax–paying that lacks that dimension. A religious person evaluates escaping religious tax as a sin while a law-abiding person considers tax evasion as illegal only.

2. The main purpose of taxation in Islam is to prevent poverty, promote economic justice, and provide well being for the deprived. This can be understood if we focus on how the tax collected (especially zakat and khoms) should be spent according to Islam. The forms of taxation recognized in Islam do not allow taxation to be a mechanism for allocation policies or stabilization policies.

3. Tax income from agricultural production is not cash. It is collected in form of goods and distributed in the same form. Therefore, it does not affect the overall demand or bring about collateral economic bad effects such as inflation. It goes without saying that ordinary taxation such as tax on consumption (purchase or unit tax) brings about tax burden and social loss leaving adverse effects on income level, firm costs, and inflation leading to welfare reduction.

4. Classical economies resort to progressive tax increase in order to achieve faster adjustment of income distribution. But this method has proved ineffective because the legal provisions for progressive increase of taxes have usually been neutralized by opportunities for evading tax payment distributed unevenly among tax payers leading to great horizontal inequality. The distributive effect of Islamic taxation system seems greater than the ordinary systems despite the fact that the tax rate is uniform in the Islamic system of taxation. The reason is that the progressive increase rate is mild due to provisions for tax exempts and tax reliefs.

5. In ordinary system of taxation, it is the state that collects and spends taxes. In Islamic system, however, tax payers are allowed to personally spend the tax where it should be spent without the mediation of the government with prior permission of the Muslim ruler or Islamic Authority. Of course, when the Islamic government ordains that taxes be paid to it, then no one can spend it as they see proper.