Some important points of the last article of Yusuf mansur, published today in the Jordan Times.

It really is baffling how lack of vision and expertise plague economic policy in Jordan today.

Not only do we have failure in dealing with the self-imposed and created negative impact of the global credit crisis, we also come up with major policy proposals that are not warranted at this stage, ineffective in dealing with the current slowdown, and which, even when implemented, will be too late in coming and may worsen the situation.

...[M]ost recently, the new minister of finance decided to merge the income and sales taxes into one piece of legislation of over 800 articles. Not only is this new law in contradiction with the dictates and vision of the leadership, it also brings into focus a practice that is utterly unconstitutional.

The proposed law lowers farmer income tax exemptions by half, from JD100,000 to JD50,000. This comes in a country where 86 per cent of all food items are imported, and the Ministry of Agriculture budget is insignificant, R&D on farming lacks funding, subsidies are non-existent, water is scarce (Jordan is among the five water poorest countries in the world), and farm labour and land are expensive [...]

In addition, the draft law proposes that the first JD24,000 of household income is fully exempt, the next JD10,000 is taxed at 6 per cent and for the remainder, there will be an income tax of 12 per cent. Thus, the writers of the draft law believe they have achieved consistency with Article 111 of the Constitution, which requires the tax burden to be progressive (rises as income rises).

Moreover, the sales tax is kept at 16 per cent and its spread is further increased, making its impact on prices, consumption and production even more worrying.

There is a basic rule in economics: tax burden on an entity (citizen or corporation) is analysed taking into account all taxes paid by the entity, not one tax alone [...]

A quick reading of the draft law shows that it is definitely unconstitutional. This can be demonstrated as follows: let’s assume, for simplicity, that there are two citizens, one with a salary of JD6,000 per year (JD500 per month), the other earning JD60,000 yearly (JD5,000 per month). Neither salary is outrageous in Jordan. The tax burden on the person making JD500 per month is simply the sales tax, since his/her annual income (JD6,000) is less than JD24,000. Since he/she will consume all the income, the tax burden is 16 per cent of the income, which is exactly the sales tax burden.

The wealthy (the person making JD5,000 per month), having the luxury to save, will spend only JD2,000 per month (JD24,000 per year) and save the remaining JD3,000 per month (JD36,000 per year). His/her tax burden is 16 per cent in sales tax on the JD24,000 spent annually, 6 per cent income tax on the JD10,000 that follows, and 12 per cent on the JD26,000 that follows. In total, the rich person has a tax burden of JD7,560 per year, or 12.6 per cent of his income. Thus the poor person pays 16 per cent of his income, while the well off (who makes ten times the poor person’s income) only pays 12.6 per cent of his income in sales and income taxes. This is the very definition of a regressive tax. Surely this is neither humane nor acceptable, and it is outright unconstitutional.

Now, to practices around the world. The vast majority of countries have their sales tax at almost half the income tax - one can easily verify this with a quick Internet search. They do so in order to ease the tax burden on the poor.

The government in Jordan is introducing legislation under the guise of helping the poor. If best practice around the world, simple economic analysis and long-established doctrine show how unreasonable the proposed law is, wisdom dictates that we should refrain from looking and sounding wrong to the world and in history.

[...] Furthermore, this law has an impact on investment and business planning, and it should not be callously suggested every time we change guard. It destabilises, impoverishes and humiliates the very core of economic reform we have espoused since 1989.

But the single most significant flaw in the suggested piece of legislation is its arrogance. It is probably the most important piece of legislation to be introduced in the Jordanian economy, yet it emerges with no assessment of the short- and long-term effects on the various groups of society, especially the disenfranchised.

Labels: Jordan, Politics