In an article by Schoen (2012) published on the NBC News website, the author reported on the amount of tax revenue spending. The author claims that the U.S. government spends more than $3.5 trillion annually on various services including Medicare, homeland defense and safety, education, transportation, and the interest on debt obligations. Many taxpayers believe that an income tax is unnecessary despite the services the collected funds are supposed to cover. Nevertheless, income tax is necessary for the U.S. economy, mainly because there is no other way to gather enough revenue to enable all the mentioned services, at least under current circumstances. However, economic experience worldwide suggests that there are a number of ways to provide high-quality public services without relying on income tax. Countries such as Saudi Arabia or Hong Kong have created an economic model that allows for alternative means of collecting tax revenues to provide necessary services. Moreover, these countries demonstrate a surprisingly high economic capability. Thus, it may be necessary for the U.S. government to remodel the tax system. Possible approaches, advantages and disadvantages, and other aspects of this topic will be the focus of this paper.
Saudi Arabia’s Way of Providing Benefits
In their book, Alshahrani and Alsadiq (2014) covered various aspects of Saudi Arabia’s economic model. The authors stated that “fiscal policy is a key element of Saudi Arabia’s macroeconomic policy given the importance of public expenditures in financing investment and consumption activities and their role in meeting the growing need for public social services” (Alshahrani & Alsadiq, 2014, p. 4). Governmental spending has grown steadily since 1970, increasing at an astonishing rate of more than 9,500%, also an indication of higher overall economic performance, according to the authors. This is evidence of high governmental expenditures in Saudi Arabia, which may mean greater efficiency in economic performance.
Saudi tax rates indicate that most taxes are collected from various types of entrepreneurial activities. For example, businesses that deal with producing oil and hydrocarbons are taxed at a rate of about 85%. Businesses exploiting the natural gas sector are taxed at a rate of 30%. Saudi shareholders are also taxed at a rate of 2.5%. Residents and foreign companies providing services within the Saudi borders are not taxed. Resident entrepreneurs are taxed based on the total income they achieve while conducting business in Saudi Arabia. Every company located in Saudi Arabia or registered in the Regulations for Companies in Saudi Arabia is considered a resident. Non-resident companies, on the other hand, are taxed based on the incomes achieved or directly connected with any permanent establishment.
Thus, the primary source of tax income for Saudi Arabia is the taxation of various types of businesses. Thus, taking the economic efficiency of the country into account, taxation is efficiently carried out without resorting to the implementation of income taxes collected from residents who are not involved in any kind of entrepreneurship. This model of taxation is greatly influenced by Saudi Arabia’s amount of resources that—unlike practices in many other countries that base their economy on extracting oil or natural gas—are exploited to achieve great income rates. Potentially, this system of taxation applies to any country with an inherently vast supply of natural resources and a stable economic base.
Possibility of Adopting the Taxation Model
As correctly noted by Henrekson and Sanandaji (2014), “the majority of small businesses in the United States have no employees other than the owner” (p. 1760). The first challenge that profoundly affects chances for the United States to adopt the Saudi tax system is that it would cause great inequality among businesses. However, it would be reasonable to eliminate this challenge by adjusting tax rates depending on the incomes of entrepreneurs. Additionally, businesses in highly profitable sectors may be subject to increased taxation compared to smaller businesses and those not involved in such sectors as the extraction of natural resources, for one example. It would then be possible to create equality as well as achieve highly effective taxation.
The assumption that tax rates are spread unequally and must therefore be adjusted is supported by the statement presented by Foremny and Riedel (2014). The authors claimed that “recent theoretical and empirical papers stress that corporate tax rate choices are influenced by the size and structure of the economy, the government’s budgetary situation and tax competition behavior” (Foremny & Riedel, 2014, p. 49). The authors went on to theorize that the tax system in general and tax rates for both small and large entrepreneurship are highly influenced by a country’s political state. This potentially means that politicians may resort to opportunistic approaches to exploit the tax system for their benefit. Thus, it is also necessary to determine whether the political environment of the United States is stable enough to prevent similar obstructions from occurring.
Tax evasion has posed a significant problem to the U.S. budget in the past and present. In an article about the relationship between corruption and tax evasion, DeBacker, Heim, and Tran (2015) concluded that companies led by entrepreneurs from countries with high levels of corruption tend to evade taxes in much greater numbers in the United States, especially if the company is small (in terms of total income). It must also be noted that U.S. businesses are often established by foreign entrepreneurs, naturally creating greater possibilities for corruption to spread among smaller businesses.
In all, it is indeed possible for the United States to adopt the Saudi taxation system. Potential obstacles involve the time and effort it would take to make the change, as well as corruption rates that might decrease potential tax incomes. Nevertheless, in the span of about five to ten years, a fully adopted system would result in much greater efficiency and create more possibilities to establish a stable business environment with the adequate competition. Moreover, the overall economic efficiency of the country would also rise (based on the observation made for Saudi Arabia above). Residents not involved in entrepreneurship would also achieve a higher quality in terms of their standard of living.
Advantages and Disadvantages of Adopting the Model
As reported by the Oxford Business Group (2017), the benefits of the Saudi taxation system are significant. Most importantly, this type of tax system allows residents to plan their taxes and budgets accordingly due to the high stability of the economic system. Additionally, tax-free citizens are allowed to achieve much higher profits, increasing the standard of living overall. Although this is not the primary goal of establishing such a system, it is difficult to deny that this aspect is significant.
The only disadvantage that this system may represent remains merely a potential problem. As noted by Ramady (2017),
As for expatriates, assuring them that part of their remittance taxes and fee charges are going towards their health and dependents schooling will go a long way in reducing the current level of uncertainties, as many are considering sending their dependents back home, thus reducing local consumption of goods and services, or seeking alternative methods of remittance transfers, all unintended consequences of the introduction of such taxes, fees, and charges.” (para. 12)
Basically, there may be the possibility that a Saudi-like taxation system would require additional taxation for expatriates. However, while it remains only a possibility, it must not be considered a significant disadvantage.
Proposal
Proposed Tax Base
Basically, the tax base would be formed by various types of taxations imposed on businesses. The tax rate would then be determined by the kind of business. Smaller businesses and foreign organizations that do not operate within the territory of the United States directly would not be taxed. The tax base must mostly rely on companies that conduct their business in highly profitable sectors (natural resources, real estate, leasing, etc.).
Exempts from Taxation
Naturally, residents who are not involved in entrepreneurship will be exempt from taxation. Income levels will not be the determiner of whether a resident must be taxed. Moreover, various types of compensation may be established, especially for residents involved in civil service or services having increased health risks, etc.
IRS Tax Rate Calculation
The tax rate for different types of businesses would be calculated based on average net income. Additional fees would be applied depending on the sector in which a company carries out its business. Highly profitable businesses would receive a greater tax rate. Furthermore, since taxes in the United States are evaded so often, additional fees must be applied for companies identified as having avoided satisfying their tax obligation.
Primary Way of Achieving Equity
Equity would naturally be achieved for most types of businesses. Since the companies with much higher incomes will receive a greater taxation rate, smaller businesses may be able to provide services for increased profits. Additionally, a competitive environment for companies with higher incomes would be established by applying equal taxes to every company independent of their current efficiency or status. Moreover, standards of living would be relatively similar both for residents involved in business and those who do not run their businesses. Although it may be viewed as suppressing entrepreneurship, the overall increase in economic stability and improved quality of the economic system will provide every resident with the possibility of living in abundance as explicitly demonstrated in the example of Saudi Arabia.
Making Up Possible Shortfalls
To make up for potential shortfalls, the U.S. Department of the Treasury, through the IRS, may adhere to its fiscal and monetary policies by enabling temporary taxation for companies collaborating with organizations based in the territory of the country. Additionally, taxation rates for U.S. shareholders may be increased to further compensate for potential losses. Since these sources of tax income are shut down most of the time, in times when the economy is low, it would be of great help to recover from financial damage. Moreover, it would not require many resources spent by organizations to recover any potential damage, since entrepreneurs from the United States actively collaborate with partners abroad.
Conclusion
The highly stable and efficient taxation system implemented by Saudi Arabia has proven outstanding performance. Although its adoption may require a large amount of time and effort, potential results will most certainly outweigh the related challenges. With the enactment of this type of taxation, U.S. entrepreneurship and the economic state, in general, will experience significant growth. Moreover, greater levels of equity in competition and living standards will also allow a better environment to be established across the country. It is indeed possible for the United States to adopt this system; however, such a sweeping change would take significant time to achieve.
References
Alshahrani, S. A., & Alsadiq, A. J. (2014). Economic growth and government spending in Saudi Arabia: An empirical investigation. Web.
DeBacker, J., Heim, B. T., & Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122-138.
Foremny, D., & Riedel, N. (2014). Business taxes and the electoral cycle. Journal of Public Economics, 115(1), 48-61.
Henrekson, M., & Sanandaji, T. (2014). Small business activity does not measure entrepreneurship. Proceedings of the National Academy of Sciences of the United States of America, 111(5), 1760-1765.
Oxford Business Group (2017). Tax system and tax regulations. Web.
Ramady, M. A. (2017). The pros and cons of expat remittance taxes in Saudi Arabia. Web.
Schoen, J. W. (2012). Here’s where your federal income tax dollars go. Web.