Fiscal Policy & Income Distribution

Equity is a well-established principle in Islam. In distributing rewards the Khulfai-Rashedeen followed the practice of the Prophet (peace be upon him) by distributing those rewards evenly. This was a clear indication that Islam aims at an equitable distribution of income and wealth and abhores its accumulation in a few hands. Abu-Bakr is quoted to have refused distributing al-Fay according to piety and instead distributed it evenly. Umar is quoted to have said that if he lived for another year he would distribute the funds available in such a way that the poor will be equal to the rich.

Islam stands for both horizontal and vertical equity. The Prophet (peace be upon him) is quoted to have given the married double the share of a single person while distributing al-Fay. In this respect Umar is also quoted to have given the single half the share of the married. Equity and fair treatment is not limited to Muslims alone. It extends to non-Muslims as well. Umar Ibn Abdulaziz is quoted to have asked Audie Ibn Arta’a to look after disabled to protect non-Muslims and to help them from Baitul-Mal (the treasury at that time). This decision was based on what Umar Ibn El-Khatab had done to an old Dhimmi whom he saw begging. Umar is quoted to have said to the Dhimmi that we have not done justice to you by taking fazia from you while you were young and taking no care of you now that you are old. The Dhimmi was then ordered a regular pay from Baitul-Mal.

Measures taken in the past to redistribute income and wealth in Islamic history are numerous. Most important was the decision taken by Umar not to distribute al-Fay lands to the Sahaba. This was done in order to prevent accumulation of wealth in a few hands. The act was described by some scholars to be of great benefit to Muslims because the newly conquered lands became the property of the whole Muslim nation. Also important for the finances of the Muslim nation was his decision to collect Kheraj and distribute the revenue among Muslims beside spending it on the defence of the nation. This was also a fiscal measure to redistribute wealth.

Recently many economically developing countries have sacrificed the goal of equitable distribution of income at the alter of economic growth and many Muslim countries joined the hand-wagon. The maldistribution is found to be greater in these countries than in economically developed countries. Such maldistribution may be related to many factors. Most important among these are discussed below.

In the developing countries the tax systems are lopsided due to easy taxes on consumption, and on the salaried class, inefficiency of tax systems and its inadequacy to reach the windfall gains and the predominance of agricultural sector. These factors make the tax system regressive, thus violating the equity criterion. Social security systems are in many cases either non-existent limited in coverage to a privileged sector of the population. Besides, many of these countries have adopted policies of development orientated towards import substitution, capital intensive techniques in the industrial sector, development programmes concentrated on urban areas and have continuously resorted to deficit financing thereby creating situation of inflation and hyper-inflation.

It has now become easier to establish whether acute maldistribution exists or not through various techniques. It is essential that Muslim countries should from time to time investigate the position of income distribution in order to prevent acute disparities which are contradictory to the teaching of Islam. Also when a small percentage of the population owns a sizable percentage of income, this group becomes extravagant and as Ibn Khaldun put it the masses follow suit, or in the language of today, demonstration effect operates which leads to the decay of the Muslim nation. A Muslim state should provide at least a minimum standard of living to all its citizens beyond which people will be allowed to compete freely. However, equality of opportunities has to be ensured. In the past the system had its built-in distributive mechanism, such as Zakah, the inheritance rules, allowances paid to Muslims and needy non-Muslims from Baitul-Mal. Fiscal measures available to a Muslim state today beside the above measures are numerous, e.g. distributive expenditures, progressive taxes on income, capital gains taxes, land taxation and taxes on luxury consumption.

A salient feature of the Islamic fiscal system is the existence of Zakah as a separate distributive mechanism. It is an earmarked levy with fixed rates and the budget has no control over its rate or categories of recipients. If properly applied it will achieve equitable distribution of income. Hence, the budget may concentrate its efforts on achieving the other set of goals. In my view, the advantage of such a system is to reduce the conflicts that exist in achieving economic stabilization, growth, resource allocation and income distribution simultaneously. For example, there may be a conflict between the objectives of economic growth and distribution. The existence of Zakah in an Islamic state greatly reduces this conflict. But this does not preclude using the budget to redistribute income through progressive taxes. Distributive government expenditure and non-fiscal tools may also be used to prevent a growing maldistribution of income and wealth.

The goals set above for fiscal policy in a Muslim state need fiscal tools. In the past, Muslim states used Zakah and Kheraj plus other sources of revenue. These were used to provide for some public goods such as defence, education, postal services and many other services which are well documented in the literature. Zakah was collected by the state. Kheraj was also an important fiscal tool to achieve economic growth, resource allocation and economic stabilization. Nowadays with the development of fiscal systems in the West (which definitely has some roots in the Islamic civilization), a Muslim state may utilize developed techniques in formulating its fiscal policy. The following section reflects the past experience of fiscal tools in Muslim states, reviews the new developments and attempts to formulate a framework for fiscal policy in Muslim states of today.

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