Ever since Jordan started "fixing", among other things, the Income Tax Law and increasing the general sales tax, economic inequality (disparities among incomes and wealth) in the country has been rising. Other factors that contributed to the rise in economic inequality included an unwritten policy that stressed growth at any price. Given that inequality is a major cause of social unrest, a socially and politically sensitive government should focus on increasing income equality, which should be done, among other things, through a progressive income tax.

Article 111 of the Constitution states: "In imposing taxes, the government shall be guided by the principles of progressive taxation, coupled with the attainment of equality and social justice, provided that taxation shall not exceed the capacity of taxpayers or the state's requirements for funds." The merit of this article has been ignored over the years. Changes in the Income Tax Law have aimed at lowering the top tax rate such that Jordan is among very few countries around the world that has a higher sales tax rate than the income tax.

Government apologists and spokespersons defended Jordanian taxation as progressive by claiming that since the rich pay more tax than the poor, the income tax is progressive. However, a progressive income tax is a tax by which the tax rate rises progressively as taxable income increases. Thus, in a progressive income tax system, the higher the income the higher the tax rate (and of course the amount paid in taxes given that all else is the same). Their argument is obviously false and inconsistent with the meaning of the Constitution and the commonly accepted definition of a progressive income tax.

On the other hand, and according to the same cited and quoted article of the Constitution, the sales tax is unconstitutional because it is regressive. Let's demonstrate by example: suppose one person's income is JD500 and that it is all subject to the sales tax. Then she is likely to pay 16 per cent of the JD500, which is JD80. If her income rises to JD2,500, she will most likely increase spending and begin to save. If this person spends JD1,500 and saves the rest (JD1,000), her sales tax payment will be 16 per cent of JD1,500, which is JD240. It is true that she will pay more in sales tax than before when her income was JD500, but now she is effectively paying a lower tax rate relative to her income: JD240 out of JD2500, which translates to a sales tax rate of 9.6 per cent, almost half the rate she paid when she earned one-fifth of her new income. Hence, the sales tax is not consistent with Article 111 of the Constitution as the higher the income, the lower the tax rate.

It is empirically proven that the introduction of a progressive income tax, generally leads to a lower Gini Coefficient (a measure of income or wealth inequality that was devised by an Italian sociologist, Corrado Gini, a 100 years ago). Note that the higher the value of the Gini Coefficient, which ranges between 1 and 100 (or 0 and 1), the greater the economic inequality in a society. It is also well-established in the literature (and supported by evidence from the works of distinguished economists such as Paul Krugman and Emmanuel Says) that the faster the income tax rate rises, the greater the equality in society becomes.

In Jordan, the Gini Coefficient was 36.4 in 1997, before the Income Tax Law was reformed and when the sales tax was just being introduced at 6 per cent and covering few items. In 2002-2003, after 'fixing" the Income Tax Law and having raised the sales tax rate twice and expanded its coverage, the Gini Coefficient became 38.8; in other words, income inequality increased. In 2007, income inequality rose again to 39.7. Note that nations watch for the slightest change in the Gini, which usually indicates large or significant changes in equality — the world's best economy in terms of income equality is Sweden at 23. In other words, every time policy seemed to favour the rich in terms of income and sales tax, the poor became poorer and the rich became richer, and income inequality increased.

A policy advice could emerge from this scant evidence but I will refrain from giving it, and for a good reason: The whole tax burden should be evaluated and not only one or two types of taxation. Instead, a solid piece of research should be conducted to evaluate the progressivity (or lack thereof) of taxes in Jordan in light of the stipulations of Article 111 of the Constitution and the impact of the "reforms" on inequality. To safeguard the country a sombre and objective assessment should be carried out; otherwise, it is business as usual, a business that has wrought the current malaise.

Comments (0)

Write comment

Name

Comment

smaller | bigger

Add Comment Preview