Why anti-tax populists celebrate an Ibn Khaldun theory
As the coronavirus disease (COVID-19) wreaks havoc with the global economy and consequently with government finances everywhere, experts have rushed to give their views on how to stimulate the economy and replenish public coffers. Economists have been giving conflicting advice at times — living proof of President Harry Truman’s lament: “Give me a one-handed economist. All my economists say, ‘on the one hand... on the other’.”
There are sound explanations as to why economists give these conditional and seemingly conflicting prescriptions, which depend on policy goals and priorities, but policymakers need quick solutions without conditions or complicated economic logic. Some governments have chosen to cut taxes and provide subsidies to stimulate the economy, hoping that resumed economic activity will restore the tax base and, hence, government revenue. Others have opted for borrowing and spending to achieve the same results; but heavy borrowing could “crowd out” private borrowing and burden future generations with large public debt. A number of countries have chosen to cut spending, which, in the current climate, could intensify the recession. Some have chosen to raise taxes, or a combination of measures that could either have contractionary effects or work at cross purposes and cancel each other out.
During these debates, the Laffer curve is mentioned and the tax theories of Ibn Khaldun are resurrected to support those calling for drastic tax cuts.
Economists are, by instinct, not fond of taxes due to their possible negative effects on the economy. The National Bureau of Economic Research, an old and reliable US think tank, concluded from a major study that: “Tax changes have very large effects: An exogenous tax increase of 1 percent of gross domestic product (GDP) lowers real GDP by roughly 2 to 3 percent.”
Despite this general rule of thumb about the ill effects of taxation, most experts recognize that taxes are necessary to fund government activities and rectify skewed income distribution. Because of the likely adverse effects of raising taxes, and possible political backlash, governments seek to maximize the positive results of higher taxes and lessen their negative impact. To achieve that balance, they need to calibrate tax rates, their scope and timing. Progressive taxation, for example, can be an appropriate tool for fair income redistribution, while regressive taxes could overburden the poor and drive small entrepreneurs out of business. The timing is also key — it is important to choose the right moment in the business cycle to raise or lower taxes, so as not to inadvertently deepen a recession or overheat an upswing. Fighting corruption and mismanagement and raising the efficiency of government spending are also important to avoid or lessen the contractionary effects of raising taxes.
Unlike the nuanced approach of the experts, populist politicians have regularly attacked taxes, calling them confiscatory, anti-capitalist, interventionist or, in the US, anti-American, relying on the historically vehement opposition to taxes in the country.
Ronald Reagan won the 1980 election riding a popular anti-tax wave. As a student in the US at the time, I enrolled in public finance courses and followed with interest that fiscal revolution, which had started in the 1970s. Our professors warned us that Reagan used obscure anecdotal information and unorthodox economic theories. One famous tool was the bell-shaped Laffer curve, named for Arthur Laffer, who theorized that increasing tax rates beyond a certain point is counterproductive in terms of boosting tax revenue.
Reagan then started referring to Ibn Khaldun, the 14th century Arab scholar, jurist and politician, as the original authority on the ills of high taxes. I was intrigued. I was already familiar with Ibn Khaldun’s work as I went to a school in Riyadh named after him and we were required to read his works. I was able to locate the theory in two small sections in the introduction to his book on history: A mammoth text of more than 7,000 pages. He argued that low tax rates were an incentive to work and encouraged compliance, while higher taxes did the opposite. He cautioned against unproductive government spending that is funded by raising taxes because it reduces the ability of businesspeople to produce, encourages tax avoidance, and creates ill feelings and mistrust.
Ibn Khaldun lived and worked in Tunisia, Algeria, Morocco, Spain and Egypt. Besides his scholarly work, he was also a seasoned practitioner, serving as a civil servant, high-level political adviser and chief judge, among other occupations. His observation on taxation was as much political as it was theoretical. Ibn Khaldun’s tax remarks were part of his more detailed economic and government theories.
Last year, President Donald Trump, who has also advocated tax cuts, gave Laffer the Presidential Medal for Freedom. Since then, interest in Ibn Khaldun, Laffer’s inspiration, has returned.
Ibn Khaldun argued that low tax rates were an incentive to work and encouraged compliance, while higher taxes did the opposite.
Abdel Aziz Aluwaisheg
Last summer, while campaigning to lead the Conservative Party, Boris Johnson cited Ibn Khaldun to support his own tax cut proposal. After becoming prime minister, Johnson came back to this theme, again invoking the Arab scholar’s wisdom.
Ibn Khaldun’s theory is quite intuitive and modern research backs it up, in that, everything else being equal, higher taxes can have negative consequences. However, it does not necessarily support anti-tax populism. His ideas are rooted in a humanist approach to governance, unlike today’s populists. His observation was meant as a commentary on corruption and diverting public funds to ever-increasing indulgent spending, to be fed by increased taxes. He would not be opposed to raising taxes when necessary to provide for national security, public welfare or protecting the weaker members of society, which, for him, were the three most important functions of any government. His was a warning against raising taxes while failing to fulfill those duties or harming social cohesion.
- Abdel Aziz Aluwaisheg is the Gulf Cooperation Council’s assistant secretary-general for political affairs and negotiation, and a columnist for Arab News. The views expressed in this piece are personal and do not necessarily represent those of the GCC. Twitter: @abuhamad1