ARAB WORLD: The absent debate on progressive taxation

With the revolts in many Arab countries, the subject of taxation in the Arab world should be urgently tackled. Taxation is not a financial issue in advanced democracies but rather a socio-political matter with various implications. Those same implications apply to the future economies and societies of Arab countries undergoing political revolutions.

In developed countries, taxation shapes the contours of the social contract that governs the relationship between the state on the one hand and all components of society on the other, whether individual citizens, businesses or social interest groups. As a result, it is a fundamental pillar of democracy and accountability. Taxation determines the size of state revenue, and thus its ability to spend on vital matters—that is, the basis of states’ competency, legitimacy and its ability to achieve.

In the Arab world, there are two groups of states. The first group, the Gulf states—which take in oil revenues—redistribute part of these revenues to citizens and do not impose taxes. The second group, the non-oil Arab states—which have much lower per-capita incomes, depend on foreign markets or some foreign sources of income such as aid and workers’ remittances (Tunisia, Lebanon and Jordan, for example) or a mixture of aid and rent sources, such as in Egypt, which contains natural sources and the Suez Canal.

The common denominator among the second group states is that they have not resorted to complex regimes for progressive taxation on individual incomes and corporate profits. Rather, they have primarily used indirect taxation. This approach does not greatly distinguish between the rich and poor but instead uses taxes—such as the value-added tax (VAT), which is a fixed percentage imposed on goods and services consumed inside a country irrespective of who the consumer is, custom fees on imported commodities, and additional fees sometimes imposed in a haphazard way, such as land fees, education fees, etc.—to generate state revenue.

Such indirect taxes are easy to collect and assess and do not require specialized tax staff. Furthermore, this kind of taxation, due to its wide base, normally does not worry or vex the traditional power centers in these states. In fact, the burden of such taxation on consumption favors the rich when one considers the difference between their income and consumption levels.

Indirect taxes also reduce political tensions. With direct taxes, the income tax goes right from the citizen’s pocket to the state’s treasury. The citizen therefore feels the loss of money and begins to question the legitimacy of these taxes and how they are spent.

Indirect taxes, however, do not normally generate such a response, perhaps because they are not paid at once but are linked to sporadic consumption throughout the month or year. These factors have motivated pre-revolution autocratic Arab states to implement indirect taxation while claiming their intentions of transitioning to direct taxation in the future.

More importantly, as long as sources of rent and other additional sources of income accrued directly to the state were available, they did not want to create any political opening that welcomed this taxation.

With winds of change blowing throughout the region, accompanied by talk of comprehensive political and economic reform, the lack of dialogue about how progressive taxation can open the door to political change and social justice is shocking. It is, rather, currently focused on the subjects of corruption, the privatization of public-sector enterprises, and social subsidies. Taxes—which could form the first step of the new social contract—are almost entirely absent from this discussion.

In conversations at the elite level, taxation does not receive sufficient attention. Perhaps it is because of its technical aspect or a collusion of some sort between elites and the official sectors collecting taxes. They neutralize the subject and keep it out of public dialogue. They do so because imposing direct taxes could increase accountability regarding justice in taxation and expenditure as well as the need for progressive taxation: redistributing income and improving the chances of those with limited income to benefit from taxes imposed on the rich.

One expert offered one of the best expressions on taxation in the Arab region explaining that non-oil Arab states are trying to achieve the “welfare of the Scandinavian states with African tax levels.”

Egypt took an important step in its 2011-12 budget by suggesting a capital gains tax on profits from capital operations, such as stock and real estate profits, raising taxes on the highest income bracket by 5%. This marks the founding of a new stage, perhaps one in which the government prioritizes the middle class rather than the rich.

The significant question now is how this concept of taxation as a political means can be introduced within debates in the Arab countries. What role can the international community play and how will local economic and political elites of each country address a topic that so far has been unwisely and critically ignored.

--Ibrahim Saif in Beirut

Saif is a resident scholar at the Carnegie Middle East Center in Beirut, specializing in the political economy of the Middle East.

Editor’s Note: This post was from an analyst with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the political positions of The Times or its blog.

Photo: Carnegie Middle East Center logo. Credit: Carnegie Middle East Center website

 

TUNISIA: Court sentences 25 relatives of Ben Ali and his wife to prison

When the 23-year reign of ex-Tunisian President Zine el Abidine ben Ali crumbled this year after nationwide popular protests that forced him into exile on Jan. 14, dozens of his relatives and those of his wife, Leila Trabelsi, rushed to the Tunis airport on the same night to try to flee the country--allegedly with pockets stashed with cash and jewels.

Most of them didn't get far though, partly because one pilot is said to have refused to take off after he found out that members of the group were among the passengers.

Their escape plan had apparently also been foiled by the Tunisian police. Earlier this week, a Tunisian police colonel claimed he and a group of police officers caught 22 of the group on a bus driving them to a private plane on the airport tarmac, reported Agence-France Presse.

Ben Ali and Trabelsi managed to leave, however, and were granted refuge in Saudi Arabia.

On Friday, a Tunis court sentenced 25 relatives of Ben Ali and his wife to prison terms in the so-called "Tunis-Carthage Airport Case" with jail sentences ranging from a couple of months to six years and fines totaling 200 million Tunisian dinars ($140 million) for illegally trying to escape the country with money and jewelry, according to the official Tunisian news agency TAP.

SYRIA: Crisis may hurt economies of Turkey, Lebanon, Jordan, Iraq

Editor’s note: This post is from analyst Ibrahim Saif, below left, with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.

Current events in Syria are expected to impact other states economically, especially neighboring Turkey, Lebanon, Iraq, and Jordan. The first potential effect is on bilateral trade between Syria and its neighbors. Turkey comes to the fore here, since its trade to and from Syria was valued at $2.27 billion last year.

The situation in Syria affects Turkey in two ways. The first is the potentially large drop in trade volume, especially since demand for imports and Turkish commodities –- which used to be high –- has dropped sharply since the beginning of the events. Some sources estimate that trade volume has dropped between 30% and 40%, and that these percentages could drop even lower with the expiration of prior arrangements and the continued state of chaos.

Meanwhile there is an absence of desire on both sides, Syrian and Turkish, to renew these contracts before matters become clearer. During 2010, Syrian exports to Turkey were valued at $1.6 billion, while Syrian imports from Turkey were around $630 million.

ISRAEL: Is the Arab Spring spreading to the Jewish state?

When the protest for affordable housing began, some dismissed the campaign as a "Woodstock" of college kids on vacation. By the time Saturday night rolled around, tens of thousands demonstrated in Tel-Aviv and what started as a students' summer protest became a nationwide push for change and a political headache for Prime Minister Benjamin Netanyahu.

A few months back, citizens' protests targeted the pricing of specific commodities like gasoline, water and cottage cheese. Now, protest is everywhere. Students are camping out in the streets in tents. Dairy farmers are blocking roads with cows. Doctors are striking, the head of Israel's medical association is on a hunger strike. The latest is a Facebook call not to show up for work on Aug. 1.

Israel's economy is strong, the public is constantly told; the country has money, the economy is growing.

Then why is everyone angry? First of all, because they can be. A quick look around the neighborhood has reminded people they have power and can use it to rework priorities and redistribute resources.

Beyond that, some numbers (from a story by Sever Plocker, a financial journalist): Over the last five years, the average income in Israel has increased by 17% and food prices by 25%. Water rates have gone up 40% and gasoline by 23%. The average apartment price has gone up 55% and rent by 27%.

That last item, housing, sparked the protest sweeping the country. But it's not only the last five years, Plocker writes. Real wages haven't increased since 2000, while companies traded on the stock exchange have grown by 300%. The rich are getting richer, the middle class is treading water and "this unusual prosperity has passed it by," Plocker noted.

ARAB WORLD: Why social expenditure in the Arab states isn’t working

The major challenge facing Arab states transitioning from totalitarian regimes to democracy is how to manage social expenditure: that is, state spending on health, education, direct subsidies to poor citizens, cash support for poor families, pensions and social security for those working in the private sector. Even though these states face different situations, such spending shares a number of traits.

The amounts spent on social expenditures -- about 40% to 50% of GDP -- are high in the Arab states, including Morocco, Tunisia, Egypt, Jordan, Lebanon, and Syria. This means that the chances of allocating additional resources for social expenses are slim.

In addition, social spending is distinguished by low levels of competency, especially in healthcare and education -- the two sectors that capture the greatest share of social expenditure. These sectors are usually not subject to oversight and lack indicators to measure their operational efficiency. Most of the expenditures go to wages and salaries, rather than to areas such as research and development, which could help improve competency and reduce waste.

MOROCCO: What a GCC membership would mean for the economy

The Gulf Cooperation Council’s unprecedented decision to invite Morocco and approve Jordan’s request to join its ranks came as a surprise to political observers in the region and outside. Since its inception, the council has been reluctant to grant membership to other states in the region.

Even though Yemen represents a natural geographic extension and strategic depth for the Gulf states, the council has always refused its membership request. It has also dealt cautiously for a decade with Jordan’s application for a free-trade zone agreement.

Political uprisings and new security concerns that surfaced in the Middle East and North Africa over the past few months explain the unexpected move by the GCC. Gulf countries are in the process of building new strategic alliances to face the Arab Spring’s ramifications on both domestic and regional politics. Yet, Morocco’s membership in the GCC does not seem to be the right option. The cost of its membership may be incommensurate with the expected benefits for both parties.

ISRAEL: As turmoil in Libya is expected to raise gasoline prices, officials urge breaking the oil addiction

As troubled regimes continue to go down, oil prices are moving up everywhere. The violent turbulence in Libya is expected to raise gasoline prices in Israel within the coming days.

The regional upheavals and energy issues barged into an open door in Israel, as gasoline prices have been a matter of public concern in recent weeks. A taxation tweak resulted in a series of price hikes that brought the price of gasoline to new highs in recent weeks and sent Israelis into a rage, with Facebook campaigns as well as less advanced modes of protest, such as a horse-and-carriage in the streets of one city.

It also put politicians on guard. After warnings that this could ultimately bring down the government, Prime Minister Benjamin Netanyahu announced a perk-package to the public to offset rising prices and stave off the threat of a general strike. Now it looks like gasoline prices will go back up and Israelis will have to blame another leader for it.

The recent unrest throughout the region has made energy the topic du jour. The pipeline supplying Israel with natural gas from Egypt was shut down after it was sabotaged. To compensate for Egyptian gas -- 40% of Israel's consumption -- the country has doubled pumping from its one operational natural gas field, approaching depletion. If Egypt doesn't renew the gas supply, Israel will have to switch to other sources for energy, which will raise the price of electricity.

Between Egypt's gas-out and the Libya effect on oil, Israelis may soon be feeling the pinch as the price of instability makes its way up the food chain to transportation prices, commodities, airfares and the tourism industry.

The government has already been giving energy diversity much thought, with a national plan to develop alternative sources to wean transportation from its dependence on oil. Unlike electricity, largely produced oil-free, transportation in Israel relies nearly exclusively on oil.

In addition, Israel has its sights on producing 10% of the country's energy from renewable sources by the end of the decade. Next stop is solar energy, a logical move for a country with more than 300 sunny days a year.

The Renewable Energy Conference held this week couldn't have been a more timely opportunity to tie it all together.

Every time we stop for gas and pull out our wallets, part of our money goes to terror organizations, said Minister of National Infrastructure Uzi Landau at the conference Wednesday. "The money goes to Al Qaeda, Hamas and Iran," said Landau, equating buying fuel with fueling the enemy. But if part of the Arab world is hooked on the money, others must kick the habit. Oil is a powerful weapon in the struggle for the democratic world's future, and the way to win this battle is to become energy-independent.

Other officials have made a similar connection between turmoil and oil in recent days. This week, Minister for Regional Development Silvan Shalom said the real battle being waged is over hegemony in the Middle East and who gets to be the "landlord." The world needs to unite to prevent Iran from turning the Middle East into a hostile region and "taking over the world's oil reserves for the next 150 years," he said on radio.

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"We all want to see freedom and democracy flourish in the Arab world," said Netanyahu this week. "We do not want to see tyranny that will trample human rights, block democratic reforms and threaten peace. Nothing would make us happier than advancing democracy in our area; this is good for peace, prosperity and security," he said. Supporters of democracy everywhere needed to be strengthened, including in Iran, which -- the prime minister warned -- might exploit the earthquake shaking the entire region to destroy any chance of democratic reforms "and turn out the lights."

 

-- Batsheva Sobelman in Jerusalem.

 

 

 

ISRAEL: A controversial shale project and energy security

The suspension of Egyptian gas supply to Israel has lighted a fire under the feet of Israeli officials, businessmen and shareholders trying to assess how events in Egypt will affect Israel's energy economy.

Initial assessments that it is in Egypt's interests to keep the lucrative gas deals with Israel may prove right when the dust settles. But the shake-up in Egypt is a wake-up call for Israel, too.

Minister of National Infrastructures Uzi Landau urged hastened development of the Tamar gas field Sunday. Meanwhile, Israel can increase quantities from its southern reserve and may have to compensate for the loss of Egyptian gas by using more coal and oil-based fuels to produce electricity.

Israel was hoping to move away from such dirtier energy sources for various reasons, including a pledge to reduce greenhouse emissions. Recently the government approved a national plan to develop technologies to reduce global use of oil in transportation. Global dependence on oil and the countries that produce it is bad for both the environment and economic stability, Prime Minister Benjamin Netanyahu said.

But industries and economies still rely on fossil fuels. Increasing costs and depleting reserves are driving new technologies that, well, scrape the bottom of the barrel to produce energy.

And surprise (OK, maybe not to geologists) -- Israel is sitting on a potential fortune.

EGYPT: Coca-Cola shuts Cairo operations, blames deteriorating security situation

Atlanta-based Coca-Cola Co. announced Monday that it has shut its Cairo office because of the deteriorating security situation in Egypt after a week of anti-government protests.

The world's largest soft-drink maker won't resume operations in Egypt until the security situation improves, Coca-Cola spokesman Kenth Kaerhoeg said in a statement.

Coke's cessation of operations followed decisions by numerous other international companies to halt deliveries, shut plants or suspend services amid the disruptions caused by demonstrators demanding the resignation of President Hosni Mubarak.

German carmakers Volkswagen and Daimler and Japan's Nissan Motor Co. have held up deliveries and production at their factories in the country.

Foreign airlines serving Cairo, Alexandria and other major Egyptian cities have either suspended service to the restive country or drastically revised flight schedules to operate within the narrowing window left by an expanding curfew. The government has imposed a 3 p.m.-to-8 a.m. order against people or traffic on the streets.

The business disruptions are expected to worsen Tuesday, when protesters plan a million-man show of force behind their calls for Mubarak's ouster.

Foreign telecommunications companies stepping in to connect protesters to Internet

Egypt's police return; foreigners try to evacuate

Photos: Unrest in Egypt

-- Carol J. Williams

Photo: Coca Cola bottles are shown on the shelf of a New York store in 2006. Credit: Andrew Harrer / Bloomberg News.

SYRIA: Uncertainty reigns over mysterious Damascus casino

A gambling casino opened  Christmas Eve in the Syrian capital without much fanfare. But as patrons have started to pour in, it has begun to stir controversy among pious Syrian Muslims who view gambling as sinful.

Plans to open the Ocean Club casino on the highway next to Damascus International Airport largely fell under the Syrian media's radar. Now members of Syria's parliament are beginning to grumble. They're seeking to have the casino closed and questioning its legal status and whether it has government support.

The Ocean Club was packed to capacity on opening night, reportedly taking in 38 million Syrian pounds, or about $800,000. Despite calls to have it closed down, the casino remained in operation as of Sunday night, with a steady stream of patrons beginning early in the evening.

UNITED ARAB EMIRATES: Government plans to charge Canadians up to $1,000 for visas

Don't expect a lot of Canadians at the annual landmark Dubai Shopping Festival next year unless they're willing to plunk down serious cash to enter the country.

The United Arab Emirates is set to begin charging Canadian travelers up to $1,000 for entry visas starting Jan. 2.

They would need to pay a $250 fee for a one-month visa, a $500 fee for a three-month visa and $1,000 for a visa valid for up to two weeks at a time over a six-month period, according to the website of the UAE Embassy in Ottawa.

Canada was previously among 30 countries whose citizens could obtain entry visas upon arrival at UAE airports. The new guidelines come amid a growing battle between the UAE and Canada over landing rights for commercial flights.

EGYPT: An economy haunted by inflation, tax shortfalls, unemployment, poverty and corruption

Beyond the political uncertainty that increased with recent parliamentary elections, Egypt faces many economic, social and institutional challenges undermining its future.

Addressing these challenges is imperative; otherwise, the spread of poverty to large segments of the Egyptian population, cloudy economic prospects and feelings of marginalization after the election could lead to greater social upheaval.

Five challenges pose the most immediate threats to Egypt.