Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities

PersonalIncomeTaxesintheMiddleEastandNorthAfrica:ProspectsandPossibilities MarioMansourandEricM.Zolt WP/23/34 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 FEB ©2023InternationalMonetaryFundWP/23/33 IMFWorkingPaper FiscalAffairsDepartment PersonalIncomeTaxesintheMiddleEastandNorthAfrica:ProspectsandPossibilitiesPreparedbyMarioMansourandEricM.Zolt* AuthorizedfordistributionbyRuuddeMooij February2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Personalincometaxes(PITs)playlittleornoroleintheMiddleEastandNorthAfrica,oftenyieldinglessthan2percentofGDPinrevenue—withtheexceptionoffewNorthAfricancountries.ThispaperexamineshowPITshaveevolvedinrecentdecades,andwhattheymightlooklikeinthenext20years.Topmarginaltaxratesonlaborandbusinessincomeofindividualshavedeclinedsubstantially,atrendthatmirrorsreductionsinadvancedanddevelopingeconomies.Taxationofpassivecapitalincomehaschangedverylittle,andtherevenueintakefromthissourceremainslowthroughouttheregion(lessthan1percentofGDPonaverageandconcentratedinoil-importingnon-fragilestates).Socialsecuritycontributions(SSC)haveincreasedinimportanceinnearlyallMENAcountries,andsomecountrieshaveintroducedadditionalpayrolltaxes.Thecombinationofreducedmarginaltaxrates,lighttaxationofincomefromcapitalandbusinessactivities,andincreaseofSSC,haveresultedinincometaxsystemsthatcreatedisincentivestoworkandincentivesforinformality,andcontributelittletogovernmentrevenueandincomeredistribution.Givendifferencesineconomicandpoliticalstructures,demographics,andstartingpoints,thepathtoPIT/SSCreformswillvaryacrosstheregion.CountrieswithrelativelymaturePIT/SSCsystems,whererevenueperformancehasimprovedinthepasttwodecades,willincreasinglyneedtobalancetherevenueandequityobjectivesagainsteffciencyobjectives(inparticularlabormarketincentivesandinfromality).CountrieswithnoPITswillhavetoweighwhetheraconsumptiontax/SSCsystemthatmimicaflattaxonlaborincomeissufficienttodiversifyrevenueawayfromoilandwhethertoadoptPITstoaddressrisingincomeandwealthinequality.Finally,fragilestates,whofacemorepoliticalvolatilityandweakerfiscalinstitutions,willhavetofocusonsimplicityoftaxdesignandcollectiontobeabletoraiserevenuefromPITs. RECOMMENDEDCITATION:Mansour,Mario,andEricM.Zolt.2023.“PersonalIncomeTaxesintheMiddleEastandNorthAfrica:ProspectsandPossibilities,”IMFWorkingPaper23/34,WashingtonDC:IMF. JELClassificationNumbers: H20,H23,H24 Keywords: Personalincometaxes;socialsecuritycontributions;payrolltaxes;fragileandconflictstates;MiddleEastandNorthAfrica;Gulf-CooperationCouncil Author’sE-MailAddress: mmansour@imf.org;zolt@ucla.law.edu *Respectively,DivisionChief,FiscalAffairsDepartment,InternationalMonetaryFund,andMichaelH.SchillDistinguishedProfessorofLawEmeritus,UCLASchoolofLaw,andExtraordinaryProfessor,AfricanTaxInstitute,UniversityofPretoria.Viewsexpressedaretheauthors’anddonotnecessarilyrepresentthoseoftheIMF,itsExecutiveBoard,orIMFmanagement.TheauthorswouldliketothankJulietaRaquelLadronisandFernandaMoralesforexcellentresearchassistance,andfortheircomments,MarwaAlnasaa,CristianAlonso,JuanCarlosBenitez,BrendenCrowley,RuuddeMooij,MichaelKeen,PriscillaMuthoora,RoseNyongesa,FadiaSakr,ElifeTure,andCharlesVellutini.AnearlierversionofthispaperwaspresentedattheCanadianTaxFoundation’sconferencePublicFinanceintheRealWorld:ASymposiuminHonourofRichardBird(April2022). WORKINGPAPERS PersonalIncomeTaxesintheMiddleEastandNorthAfrica:ProspectsandPossibilities PreparedbyMarioMansourandEricM.Zolt Contents GLOSSARY3 I.INTRODUCTION4 II.POLICYDESIGNCONSIDERATIONS5 A.TypesofPITSystems6 B.FactorsInfluencingtheSuccessofPIT8 C.PoliticalEconomyConsiderations10 III.ASSESSMENTOFPERSONALINCOMETAXES12 A.OverviewandEvolutionsince200013 B.TheRevenueContributionofPITs17 C.ArePITsintheMENAProgressive?20 IV.WHERENEXTFORPITINMENA?24 A.CompetingPITObjectives24 B.PossibleApproachesforDifferentCountries26 V.CONCLUSIONS28 REFERENCES30 FIGURES 1.EvolutionofTopPITRatesinMENA:1990-202015 2.ContributionofIncomeTaxestoTaxRevenuesinMENA19 3.StatutoryAverageTaxRatesinMENA22 4.StatutoryAverageTaxRatesinMENA,byCountrySub-Group22 5.StatutoryAverageTaxRatesinLibya,JordanandMorocco23 TABLES 1.FactorsInfluencingTaxCapacityandSpendingLevels9 2.SelectedEconomicandDemographicIndicatorsinMENA13 3.PITRatesandBracketsinMENA,2020vs.200014 4.TypicalTaxRatesonIncomefromCapitalinMENA,202016 5.TheSizeofPITRevenuesinMENA17 6.PITObjectivesandPolicyChoices25 ANNEXES I.ListofMENACountriesandSub-groups33 II.DeterminantsofPITRevenue34 Glossary CITCorporateIncomeTaxEATREffectiveAverageTaxRateFCSFragileandConflictState GCCGulfCooperationCouncil GDPGrossDomesticProductMENAMiddleEastan