Comments on the Objectives of Fiscal Policy

Dr. Salama has made a successful analysis of such a crucially important subject of economics. But, if I may be permitted to say, the following points might increase and improve the high quality of this valuable paper.

The author first sets out the objectives of current fiscal policy as allocation of resources, stabilisation, economic growth and distribution. In the same section he tries to show how these objectives will suit the Muslim countries. But the two points are mixed with each other. To my mind, it would be better to write this section in the following manner:

1. First, set out the objectives of modern fiscal policy of industrial nations.
2. Then show by comparison the objectives of fiscal policies of the present Muslim countries in transitional period.
3. Then set out the objectives for an ideal Islamic state.
4. Then compare, if it is possible to do so, with these ideal objectives, the current practice of Muslim countries with those of other industrial nations and try to show, if possible, the one which is closer to the ideal objectives. In this paper, it is difficult to have a clear picture of these three categories.

In the second and third sections he has analyzed the sources of finance. There he has emphasized mostly the past experience, particularly on Kheraj levy. He has devoted little space both to the other financial sources of the past and to the policy of the present states. He has not made any distinction between the transitional and final stages of Islamic economies. Two- thirds of the section is devoted to the explanation of Kheraj. All other sources, like taxes on trade, Jazia, (personal tax), El-Mustaglat (government investment), sale taxes etc., are briefly summarized on one page.

The third section related to the financial sources of the present Muslim states and supposed to be the most important part of the paper, is very brief and half of it is related to historical explanation which covers the topics of: (a) the scope of taxation; (b) designing an optimal tax structure; (c) government expenditure; and (d) distributive expenditure in an Islamic state. Here again there is no distinction between the policies of transitional and ideal stages of an Islamic state.

The core of the subject of this paper is related to the third and fourth sections. The first two are introductory. Up to that point the paper is not well-balanced.

Perhaps due to the shortage of time and facilities, the author could not go deep enough into his subject. Realizing this shortcoming, he himself has mentioned at the end of the paper that more time and efforts were needed for a detailed fiscal policy, which would outline in great depth various financial, social welfare, government expenditure, public enterprise operations, and public debt distributive policies of an Islamic state.

It might be desirable that each section of this paper be studied by independent Ph.D. candidates. If we had such documents in our hands, then specialists could go through them and try to reach operational models of related subjects.

At this stage, I am afraid, we have to satisfy ourselves with the already known sources, elaborated by some other authors.

Beyond these general points, I would like to add a few remarks:

1. It is stated in Section I that in secular economics, no regard is given to the spiritual needs of Man. If we take the SECULAR ECONOMICS as a theoretical model, it may be relevant. But if we take the policies of the Western economies, this statement might be an over-simplification, because, in current policies, they, compared to the present Islamic countries, sometimes pay more attention to spiritual needs, e.g. as far as I know in West Germany church tax is an integral part of income tax policy, collected by the government compulsorily from the church members and given to the church to provide for the spiritual needs of man, including support of missionary activities.
2. Again in Section I it is stated that “moral values of Islam are incorporated within its fiscal policy”, as a point distinguishing Islamic economy from current Western economies. Are not their (mostly Christian) moral values incorporated within their policies?
3. Again in Section I, as a distinguishing point of Islamic state, it is mentioned that resources should be utilized optimally, without extravagance, and needs of future generations in utilizing those resources should be catered for. It is done in secular countries as well. In USA an independent ministry is dealing with that policy.
4. In the same section it is stated that “ the concept of efficiency may be extended to include harmony between the spiritual and material desires. Resources should be utilized only if they achieve welfare of man in the world and the Hereafter. It is also stated that a Muslim state, to emphasize, is not value free. The government in such a state has to regulate the market system which is given an important role in the provision of private goods that are in line with goals of achieving welfare of human beings in this world and in the Hereafter. These are accepted Islamic value judgements, and expressed in previous papers. But the question is: how would you put these in operation? That part is not explained in the paper. There are several Islamic value judgements, which are not put in operations, in the context of Islamic economics.
5. In Section 1.2 the author defends an Islamic state’s progressive taxes on income and expenditure system for economic stabilization policy. On the other side, for economic growth he defends lower taxes on corporations investing in high-priority projects and on reinvested funds and dividends. Different measures are proposed for different goals. But how do we put them together in an optimal tax structure in operation? That is not answered.
6. The author has analyzed Kheraj levy, and recommends it for the present Islamic countries. But in many industrializing countries, the share of agricultural output in GNP is decreasing. Therefore, the incidence of Kheraj, which applies only to the agricultural output, will be minimal. An important portion of income is subject to the other sources. It is also mentioned that, Al-Mansour had imposed Kheraj on shops. How did he do it? Is it applicable today to industry, trade and other sectors? This also needs to be explained. I wish and hope that the valuable paper of Dr. Salama stimulates further research on this subject and helps in a better understanding of Islam.

Dr. Sabahuddin Zaim

The author of this paper has brought to the four special features of fiscal policy of an Islamic state, compared and contrasted them with those of non-Islamic and secular states. The most salient point is that Islamic state is not value free as many secular and non-Islamic states claim themselves to be. Fiscal policy of an Islamic State does not exclude the objectives of the fiscal policies of modern states but it further enlarges them to include the welfare of man and society in the world Hereafter. It aims at bringing about a balance between the material, moral and spiritual needs of man. Hence moral values of Islam have to be incorporated within its fiscal policy. In other words the fiscal policy of an Islamic state has to achieve its objectives within the constraints (limits) set by Shari'ah. However the author does not explicitly point out the effects that would follow from the inclusion of the moral principles of Islam on: (i) the sources of revenue, (ii) the methods of mobilization of financial resources, (iii) the loss of revenue that is likely to occur, and (iv) alternative sources of revenue compensating for the loss of revenue.

It may be said in defence of the paper writer that he has left further empirical work to be done later.

With reference to the allocation of resources, according to the author, the concept of efficiency may be extended to include harmony between the spiritual and material desires. Safeguarding of the faith is one of the objectives of the fiscal policy in an Islamic state. However, it is not clear how much resources be allocated to it in order to bring about the desired harmony and also achieve optimal utilization of the resources available.

A description of public goods that an Islamic state would provide is given. The production, distribution and consumption of goods and services provided by the private sector would be regulated and controlled so as to conform to the principles laid down by Shari'ah. In this regard it would perhaps be more aippropriate to go a little further and categorise the goods and services into three broad categories:

1. Those which shall not be produced/imported and consumed at all by the society as whole.
2. Goods and services that may be produced and consumed but whose consumption shall not be encouraged. In this category would fall goods and services that may be classified as luxuries (in whatever manner they may be defined). Encouraging luxurious and conspicuous consumption by richer classes is likely to lead to the demonstration effect on those unable to afford them and hence would lead to waste of resources and result in less than optimal utilization of resources.
3. Goods and services that are essential. The production of these goods should be encouraged both for material needs and for moral and spiritual development of the society. Fiscal policy by way of subsidies and tax exemptions can be used for this purpose.

There is no dispute as to the type of public goods and services that an Islamic state should provide. But the question whether the Islamic state can mobilize adequate financial resources for their provision has not been dealt with directly and sufficiently in this paper. Instead of quantifying the meaning of adequate financial resources (in terms of proportion of gross domestic product), two broad and generally accepted principles viz - (a) reducing unnecessary consumption in the private sector, and (b) rationalisation of government expenditure have been discussed.

The major difficulty lies in defining in a pragmatic and practical manner what would constitute unnecessary consumption for various income groups in the society and then develop the mechanics to apply it rigorously in the private as well as in the public sector. The application of the Islamic concept of Israf would be most relevant here.

Discussing the role of fiscal policy in economic stabilization the author rightly makes the assertion that in an Islamic state the stability of the real value of money is considered obligatory and is essential if such an economy is to proceed smoothly on the path of development. It is however not clear to the reader by what measures (short of Indexation) the Islamic state would be able to maintain the stability of the real value of money when modern states with all the built-in flexibility of revenue systems and advanced social welfare systems have not been able to stem the tide of inflation which has been ravaging the modern economies today. The second part of the paper provides a historical view of the sources of revenue in an Islamic state. It has presented a detailed fiscal analysis of Kheraj — (land taxation ) — the major source of revenue of Islamic state in the past. The assessment of Kheraj presented by the author is the best exposition of how this fiscal tool had been used in the past and can be used by the Islamic state. The writer, however, does not raise the issue of the difference between Ushr and Kheraj; Ushr lands and Kheraj lands. Whether Ushr and Kheraj can be realised from the same piece of land and if so would it not amount to double taxation of the same sources of revenue. This is an important issue which needs clarification.

To be practical and pragmatic it would be necessary to examine what proportion of national output can an Islamic state raise by way of various taxes, rates, fees etc., keeping in view the average per capita income and the distribution of wealth and income in the country. Such an assessment would provide the knowledge with regard to the capa- ability of the Islamic fiscal system to be able or not to bear the burden and responsibilities of the state in the present era. The paper seems to assume without making it explicit that the Islamic state’s fiscal system has that capability.

The system of Zakah on which the author has another paper is not discussed here in detail. Zakah works in an Islamic state as a means of providing social securities, as a method of redistribution of income and wealth and as a remedy against the concentration of wealth in a smaller section of the society. Thus a broad based system of Zakah combined with other fiscal tools as described by the author seem to provide the Islamic state with sufficient means to enable it to bear its responsibilities. An empirical study of the feasibility of such a system in the Muslim countries of today is necessary to provide empirical evidence and support for the theoretical framework.

The third part of the paper discusses the sources of finance for present Muslim states. It has been asserted that where those sources of finance may not be adequate or may not be feasible debt policy may be used. The unresolved issues of what instruments could the government use to issue public debt have been pointed out. Islamic state cannot use inflationary methods of finance as it is obliged to maintain the stability of the real value of money. All inflationary methods of finance bring a decline in the value of money. Hence it is necessary for an Islamic state to use the system of indexation. The indexation appears to be the way out for an Islamic state to maintain the stability of the real value of money. This has to be examined in detail.

On the whole the paper is a well-written paper and highlights the problem areas as well as the capability of the Fiscal Policy in an Islamic State. As an initial attempt to formulate a fiscal policy that may be consistent with Islamic Shari'ah, the writer of the paper deserves to be congratulated for this effort.

Dr. Syed Waseem Ahmad

Source: Fiscal Policy and Resource Allocation in Islam, Ziauddin Ahmed, Munawar Iqbal and M. Fahim Khan. Republished with permission.