We Need a Time Out on Taxes

Further taxes and tax rises will only exacerbate the grave economic problems facing Jordan.

During the mid-1970s and early 1980s, it was widely believed that Jordan suffered from the Dutch Disease, in that it had a strong currency but a weak economic structure—especially when the strength of its currency was derived from an external windfall of cash.

That was our case when part of our share in the oil boom was receiving a flow of windfalls that included foreign assistance and expatriates’ remittances. Both sources were directed either towards the development of economic infrastructure or mega projects and all types of real estate projects.

Nowadays, Jordan is creating a new economic epidemic that I would like to call the Tax Disease. It’s when governments decide to pursue the easiest way of collecting money to cover the chronic fiscal deficit that initially resulted from some structural distortions in the economy.

Over the last decade, Jordan’s fiscal deficit has led to unprecedented levels of public debt. Although in percentage terms the debt to GDP ratio today is almost half of what it reached back in the late 1980s, the problem today is that the public debt structure is much more dangerous and harmful.

In the late 1980s debt was noncommercial, and was mainly a result of development projects that led to the strong infrastructure that we enjoy today. However, our recent debt plague is a result of mismanaging government financials over a decade or so, particularly after graduating from the IMF program in 2004. This mismanagement ranges from over-spending, to establishing unnecessary non-productive economic units, to irrational government spending and to lack of government fixed capital formation projects.

The problem was exacerbated after the government lost some of its sustainable income sources and proceeds like the publicly owned projects and investments. Such as the case when the government sold its share in Jordan Telecom in the second wave of the company’s privatization, losing its share in the dividends which used to generate over JD50 million annually.

In the absence of external windfalls, the evaporation of the privatization proceeds, and mismanagement of public funds through distorted subsidies and non-transparency in public spending, fiscal deficit escalated to unacceptable levels of both absolute amount and percentage to GDP.

Consecutive governments sought to increase tax revenue through increasing tax rates and introducing new taxes or non-tax government fees. The Tax Disease hits governments when they get away with applying a policy based on collecting more money through increasing tax rates or introducing new fees. With time, it becomes an addiction. Governments can chose to expand the tax base through better tax representation, wider tax structure, or through enhancing economic growth so that businesses become more profitable, thus create more jobs, and the country attracts new investments.

This long route of supply side expansion is tricky because it needs genuine effort and serious work on the ground to improve the country’s economic competitiveness. However, the easiest way is to introduce new, higher tax rates and try to collect more money from the same group of people and firms who are already burdened with taxes and public fees.

This embodies the definition of Tax Disease. With its tax structure of over 29 percent of GDP, Jordan is considered to have one of the highest tax burdens in the region. If measured as an effective tax burden, i.e relative to per-capita income, Jordan is probably one of the highest worldwide. To this end, economic theory and practice stipulate that government policies that focus on economic growth lead to job creation, higher consumption, expanded investment spending, and higher government taxes and non-tax revenue. However, the Tax Disease, i.e. focusing on more taxes or higher tax rates, will never guarantee any of the above.

The Laffer Curve says there is a limitation to tax rate increases. This means after a certain point more taxes will lead to less tax proceeds. I believe we have already reached that ceiling in Jordan.