Editorial
U.S. Imposes Flatly Wrong Tax on Iraq
by Fred E. Foldvary, Senior EditorUnder the old regime, Iraq taxed up to 60 percent of individual and corporate incomes under its Tax Law No. 113 of 1982, with exemptions for foreign-company development projects. In practice, however, many ordinary Iraqis did not pay any tax on their small incomes. After the U.S. invasion and the collapse of the old regime, Iraq became in effect tax-free. This brief period of tax freedom has come to an end.
On Sept. 15, 2003, the U.S. military administration of Iraq imposed an income tax of 15 percent on Iraq, starting in January 2004. While a flat 15-percent rate may seem low relative to taxation in the rest of the world, the tax adds an unnecessary hardship on the struggling economy of Iraq. Many of the countries along the Persian Gulf have no income taxes, so this tax, in addition to the danger of violence, creates a major comparative disadvantage for Iraq.
L. Paul Bremer, the administrator in Baghdad, stated in Coalition Provisional Authority Order Number 37, "Tax Strategy for 2003," that "The highest individual and corporate income tax rates for 2004 and subsequent years shall not exceed 15 percent." Bremer exempted the coalition authority, the armed forces, their contractors and humanitarian organizations from taxes.
Some U.S. conservatives are rejoicing. "It's extremely good news," said Grover Norquist, head of Americans for Tax Reform. "It might be a hint to the rest of us." Proponents of a flat-rate income tax have for many years been advocating changing the U.S. tax system from rates which rise with higher income to one flat rate for all or most income. They point to several countries, including Russia, which have implemented a flat tax.
A flat-rate income tax is indeed less of an economic burden than the current U.S. system, but any general income tax still imposes an excess burden on the economy, reducing production and investment. The burden is unnecessary because the use of land rent for public revenue has no excess burden. An opportunity to truly liberate Iraq's fiscal policy has been squandered. Oil revenues could finance the national government of Iraq, and the tapping of land value or land rent could finance local government, with no need to tax income or sales.
Supply-side economics is the policy of reducing taxes and regulations to stimulate a greater supply of production and investment. A complete supply-side policy is a marginal tax rate of zero, i.e. no tax on any income from productive activity. The tapping of land rent acts like a fixed annual cost, with no tax penalty on wages, profits, and investment returns. Those who call themselves "supply-siders," but who reject taxing land value in favor of instead taxing income, are either woefully ignorant or else they are, well, disingenuous.
This tax decree is opposed by most of the members of the U.S.-appointed Iraqi Governing Council. This tax will not endear the military occupation to workers and entrepreneurs in Iraq. The tax will have to be enforced, and a flat income tax can be evaded just a graduated one can. There will have to be files on all taxpayers, creating a massive bureaucracy. There will have to be intrusive tax audits, snooping, confiscation of assets, and imprisonment of Iraqi non-taxpayers and tax resisters. The tax will create even more enemies against the U.S., especially since the U.S. military occupiers and contractors are exempt!
Imagine a tenant farmer in Iraq who has to struggle with contaminated water, insects, and theft of his equipment. On the way to market he has to pass through U.S. checkpoints, where he is delayed, quizzed and groped for guns. After paying for rent and supplies, he manages to make a profit just enough to feed his family and buy seeds and gasoline, but now, down comes the U.S. tax collector to take way some of his gains. The tax is 15 percent of his income, but what is the profit? He has to prove how much his crop revenue is, and what his expenses are. Does he have receipts? Are they genuine? Is he selling crops for cash? What about food the family grows for itself? Is he sophisticated enough to include depreciation as an expense?
The Iraqi tax collector working for the military occupation has to guess at what the right income is and whether the farmer is telling the truth. Maybe if the farmer gives him a dinner and some cash and a chicken as gifts, the tax collector will be amenable to a lower tax estimate. Or maybe this farmer is unpopular, and tax evasion would be a good excuse to lock him up in prison.
Can you see the implications? Do we really want to sow more corruption and oppression? Just because a flat tax works OK in Estonia does not imply it will go smoothly in Iraq. This tax will be a nightmare and another excuse for U.S.-hating terrorists to do violence. This is just one more example of the incredibly inept and incomprehensively foolish U.S. policy in Iraq.
Copyright 2004 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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