Written by: Moayad Afana
The tax system in Palestine consists of direct and indirect taxes. The Palestinian government imposes direct taxes on profits, salaries and similar incomes of individuals and companies, which include income tax and property tax. These taxes are labelled as "relatively fair" since they are collected according to the taxpayer’s level of income and the properties they own such as buildings and lands. At the same time, indirect taxes are taxes imposed on consumption, production and import activities including value-added tax, fuel tax, customs duties and excises.
According to the Palestinian Ministry of Finance data, the total tax revenues in 2021 was 91.5% of the total net revenues of the Palestinian National Authority. These revenues included local tax revenues and tax revenues through “revenue clearance” with Israel.
By analysing tax revenues in Palestine, we surmise that direct taxes amount, including income and property, was only 8% of the total tax revenues in Palestine in the same year. In contrast, the percentage of indirect taxes, including value-added, fuel, customs and cigarettes that the consumer pays, was 92% of the total tax revenues. Thus, direct taxes constitute a small percentage that do not exceed 10% of the total tax revenues. In comparison, indirect taxes are the vast majority of the tax revenue.
The philosophy of tax systems is based on social, financial and economic foundations. Its social function is to re-distribute wealth to ensure social justice, employ tax revenues to achieve social stability and provide social services and social protection for marginalised, vulnerable, and poor groups. The tax systems’ financial function is to secure revenues for the State's treasury to cover public expenditures. Meanwhile, its economic function serves the State's fiscal policy that is used to stimulate economic growth, reduce inflation or protect the national economy by imposing certain taxes or tax cuts.
From these principles, the Palestinian tax system must achieve the philosophy of tax systems by applying the following:
1. Revenue maximisation
2. Protecting the national economy
3. Achieving and enforcing social justice
However, the previous quantitative analysis illustrates that the tax system mainly relies on indirect taxes rather than direct taxes, which contradicts the concept of social justice.
For instance, the income tax contributions to the tax revenue in 2021 were at most 8% of the total tax revenues. However, this direct tax plays a significant role in re-distributing wealth between the rich and the poor in order to enforce social justice. Currently, companies and individuals do not contribute the required tax revenues compared to different countries in the world. Internationally, the percentage of income tax contributions to the total tax revenues is much higher than in Palestine.
In addition, when we examine the principle of progressiveness in the income tax which is considered to be one of the foundations of tax justice, we conclude that its rate in some countries in the world range to be about 42% or more. However, Palestine lacks the principle of progressiveness. The maximum percentage is 15% for individuals and 15% for companies. An exception is in the cases of monopolies which reach about 20%. The irony is that the same institution, especially in the banking and commercial sectors, operates in Palestine with an income tax rate that is much lower than the tax imposed on it in other countries where the same institutions operate.
As for indirect taxes, the figures contradict social justice which include the value-added tax (VAT). The percentage of tax revenues in 2021 was 26% even though it affects society without discrimination and amounts to 16% of the sales’ value.
The issue with the VAT is that the poor and marginalised groups are forced to pay it because it is imposed on goods and services without discrimination. For instance, the VAT is collected even on essential commodities such as bread, milk and basic services such as communications and electricity. VAT is applied at the same rate on luxury goods and services such as luxury sweets or perfume. The same cost is enforced despite the necessity of the first goods for the poor contrary to the luxury services.
In light of what was discussed, we need a fairer Palestinian tax system that has less pressure on the poor. This is especially the case since tax revenues are the pillars of collection in the Palestinian National Authority. The current tax system suffers from loopholes that are inconsistent with the philosophy of social justice. It needs fundamental and revolutionary amendments towards positive discrimination in favour of the poor by applying the following:
1) Amending the Income Tax Law to enforce the principle of progressiveness
2) Upward vertical expansion by adding segments with high rates of capital and companies with large profits
3) Horizontal expansion of tax collection to include liberal professions scientifically and systematically
4) Expanding the tax exemption bracket for lower-income groups
If the above points are implemented, it will enhance the state's general revenues.
Additionally, we must include social justice issues in the draft of the value-added tax law. This includes a gradation of tax rates on goods and services according to their necessity or completeness. Tax laws must consider zero or close to zero per cent on essential goods and services. A rising percentage must be applied according to the level of commodity welfare. By this, we support essential commodities, contribute to social justice and provide social protection to the poor and marginalised groups.
In conclusion, a society that seeks "freedom" must have the strength to resist. It should not suffer from social injustice. The social contract between the State and the people enhances the sense of citizenship and belonging which includes the strength to resist and achieve social justice.
The opinions expressed in this article are the author's views and not necessarily the Association's or donor's opinion.