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A Note on Economic Ideas of Caliph Ali with
Special Reference to his Letter to Malik Al-
Ashtar
Sayed Afzal Peerzade*
Abstract: It was a common practice on the part of rightly guided caliphs of
Islam to write letters to the different functionaries of the government, which
contained timely and valuable instructions covering a wide spectrum. Such
letters were treated as public documents and were preserved for posterity. In
this note, an attempt is made to study economic ideas of Ali (600-661 C.E.) with
special reference to his letter to Malik al-Ashtar (d.658 C.E.). After going
through the contents of Ali.s letter to al-Ashtar, we discover certain principles
on which Ali wanted to govern his people with a difference. Much more can be
learnt from Nahjul Balagha but the present attempt is limited to the study of only
one letter. Among all the seventy-eight letters of Ali, this particular letter
occupies a unique significance for the reasons of its length and clarity of
purpose, notwithstanding the beauty of language and style. Caliph Ali's ideas
relating to matters of governance and the administration of justice do not just
reflect his personal opinions but represent core Islamic principles as enshrined
in the Quran and the precepts of the Prophet.
Introduction
Ali, according to the Sunni doctrine, was a pious and austere person, a
close companion of the Prophet and the fourth righteous caliph. The
Shias all over the world hold him as the first imam in a chain of twelve
imams. To an equally large number of Muslims across the world, he is a
peerless mystic master who publicly and privately practiced highest level
of abstinence and detachment from material comforts. He is regarded as
one of the earliest spiritual masters and held as the first link after the
Prophet in Sufi slaasil (mystic chains/orders).
* Chairperson, Department of Economics, Karnataka State Women.s University,
Bijapur, India.
The author is very much grateful to Dr. A. R. Momin, Professor Emeritus,
Mumbai University, Mumbai, India, for his valuable comments on the draft of
this paper.
A Note on Economic Ideas of Caliph Ali with Special Reference to his Letter to Malik Al-Ashtar
140
Not much is written on the various aspects of Ali.s accomplishments
including his social, economic and political ideas. So also, not much
literature is available to highlight the sincere cooperation Ali extended to
his predecessors as well as the critical or rather highly complex situation
prevailing during his caliphate; the precarious state of affairs he had to
face; the economic, political and administrative policies he pursued and
the moral and Islamic values he upheld even in the most trying
circumstances. In recent years, however, scholars have started
identifying these gaps. There are .innumerable guides of humanity, flag
bearers of reform..builders of nations and countries and teachers of
wisdom and learning whose real accomplishments have remained
unknown to the world for hundreds of years..One of these victimized
personalities whose real worth was never appreciated was Ali b. Abu
Talib...The demands of the age in which he had lived and difficulties
which he had to face were never dispassionately analyzed.1. Similarly,
socio-economic values which Ali cherished have not received sufficient
attention. This paper, to a little extent, intends to fill-in this gap. For this
particular purpose, his seminal letter to Malik al-Ashtar is studied which
is included in Nahjul Balagha.
Introducing Nahjul Balagha
Nahjul Balagha2 (lit. Peak of Eloquence) contains masterpiece sermons,
letters and sayings of Ali. In it, there are sections on army, administration
of justice, executive officers, clerical establishments, traders and the
commoners---- all of whom speak of his deep insight. The compilation
consists of 238 khutab (orations); 78 rasa.il (epistles); 473 hikam
(aphorisms); and 9 gharib (sayings including rare words). In modern
times it has been translated into some thirty languages. It is also to be
noted that the actual number of sermons far exceed those compiled in
Nahjul Balagha. Commentaries running into several volumes are also
available.
1 Nadwi, Sayed Abul Hasan Ali., Al-Murtuza, Academy of Islamic Research and
Publications, Lucknow, 3rd Edition, 1991. The present author has followed its
English translation entitled The Life of Caliph Ali. It was rendered into English
by S. Mohiuddin Ahmed and published by Academy of Islamic Research and
Publications, Lucknow, 1991, p.2.
2 Nahjul Balagha: Sermons, Letters and Sayings of Imam Ali, compiled by ash-
Sharif ar-Radi. Several translations are available; the present author has
followed Syed Mohammed Askari Jafery.s translation, Third Edition, 1978,
published by Islamic Seminary for WSMO, U.S.A., printed at Bombay, India.
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A Selfless Advisor
In the history of Islam, the role of Ali is multifarious. He is one of the
persons who put faith in the Prophet immediately after declaration of the
prophet-hood. He proved to be a truthful companion of the Prophet who
shared with him the moments of joy, grief and sufferings. His knowledge
of Islamic doctrine and law, his love for Islam and the Prophet and his
heroic role in the early battles of Islam are all hugely applauded.
Ali acted as an able and selfless advisor to the first three caliphs and
conducted himself as a highly revered fourth caliph, though for a very
brief period (656-661 C.E.). Here is a piece of advice, rendered very
sincerely to Umar, the Second Caliph (634-644 C.E), when he asked Ali
whether he (Umar) should lead the invasion of Roman Empire. Ali
suggested: .If you command this invasion personally and if you sustain a
defeat or if you are killed then there will not remain any line of defence
for Muslims and they shall be left without a central power to protect
them. Their towns and their provinces will be left defenceless. You
appoint an experienced officer to take charge of the invasion and place
under him such soldiers who can face hardship, obey orders and have
experience of war. If God grants them victory you achieve your aim and
if they are defeated you will be at the centre to help Muslim state.3.
Following the huge conquests, the issue of distribution of conquered
lands arose upon which Caliph Umar held a consultative meeting. Ali
along with other companions of the Prophet also participated in the
meeting. One group favoured that the army personnel should be allowed,
on a permanent basis, to retain conquered lands. The other group, which
included Ali, dissented. On this occasion, Ali remarked: .Leave the land
and cultivators as it is so that it becomes a permanent source of economic
gains to the masses. If the land is distributed amongst the army
personnel, it will remain consolidated in some hands forever..
Supporting Ali, Mu.adh bin Jabal opined: .if you distribute land (among
soldiers) large parts of public lands will go to the army personnel after
whom some heir will be single woman or single man to enjoy the entire
benefits, while there will remain nothing for the government to spend on
border security and maintenance of armies. It is advisable, therefore, that
you make such an arrangement as would benefit the present as well as
the future generations.. Ultimately, Umar decided to retain the
ownership of conquered lands with the state only. The details of this
consultative meeting are available in Abu Ubaid.s classical work entitled
3 Nahjul Balagha Sermon Nos.137, p.260 and 149, p.270.
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Kitab al-Amwal4. Similarly, on several occasions, Ali is reported to have
rendered his advice in civilian and juristic matters. Umar is quoted to
have once remarked: .Umar would have been nowhere if Ali had not
been with him.5. Even the Prophet had recognized this quality of Ali for
he is reported to have said: .Ali is most competent to solve enigmatic
problems.6.
Ali once again proved himself as a selfless advisor to Caliph Othman
(644-656 C.E.) when disturbances appeared during the end of his
caliphate. Othman asked Ali: .What are the real causes of this entire
disturbance and how to control it? Openly and with all sincerity, Ali
replied: .Whatever is happening, it is all due to the wrong doings of your
governors and high officials.. Othman replied: .I have taken all the care
in selecting my governors and Umar would also have done the same,
then why this difference? Ali replied: .Yes, it is true but Umar was a
strict person and he had retained most of the powers in his own hands,
everyone was afraid of his rage, even the most rebellious camel would
have been terrorized by him. But, contrary to it you are a tender hearted
man. Your governors are taking undue advantage of it and they are
exercising their powers ruthlessly without even bringing it to your notice.
The general public feels that every action, right or wrong, is being taken
under your orders and hence you are considered responsible for it7..
Ali.s conscientious statesmanship and his principled political stand even
at the most critical times are universally acknowledged. One such was at
the time when his assassin fatally wounded him. He asked his close
family members to treat the assassin gently, maintaining that .he is also a
human being.. The impact of Ali.s personal charm, noble qualities,
magnetism of character and spell of ideas was so deep, intense and long
lasting that its hangover continues even today.
4 Abu Ubaid, al-Qasim bin Sallam., Kitab al-Amwal, (Urdu Edition), Idarah-i-
Tahqiqat-i-Islami, Islamabad, Pakistan, 1986, Shibli Numani.s al-Farooq,
International Islamic Publishers, New Delhi, 1992 and Muhammad Taqi
Amini.s The Agrarian System of Islam, Idarah-i-Adbiyat-i-Dilli, 1991.
5 Nadwi, Sayed Abul Hasan Ali., op.cit., p.97.
6 ibid.
7 Navy, Shah Moinuddin., Hazrat Ali Al Murtuza, Idara Isha.at .e-Diniyat (P)
Ltd., New Delhi, 1997, pp. 37-38. The author has quoted from Jami. Al-Tibri. p.
2938.
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The Personal Approach of Ali
The personal approach has a great bearing upon the way in which a
person conducts himself, publicly as well as privately. .The beliefs and
values held strictly, cherished and revered by a family get in-built in the
minds of the people belonging to it and any one disregarding them is
considered as the rebel and a renegade not to be tolerated by others.8.
Abu Huraira relates from the Prophet: .People are like mines of gold and
silver. Those amongst you who were men of virtue in the period of
ignorance will remain so after entering the fold of Islam, if they
understand.9.
Ali appears to be a man of many parts. As an administrator, Ali was
neither an autocrat nor a weakling. Like a democrat, he believed in
consultations. He preferred peace to war and even during wartime never
attacked first. He was open to corrections as is clear from one of his
letters. .I am leaving this city either as a tyrant and as an oppressor or I
am being tyrannised and oppressed; either I am revolting against the
people or some of them have intrigued to revolt against me. Whatever the
case may be, I invite in the name of God to those to whom letter reaches
to come and see for themselves whether I am in the right or the wrong. If
they find me on the path of truth and justice they may help me and if they
find that I am on the wrong they can reason me out of it.10.
His choice of team of officers and administrators reflects the sincerity of
purpose. He wanted to create a "people-centered system of governance".
.Inclusiveness., .equity" and "moral accountability" were high on his
agenda of governance. His failures if any can be attributed to his fear of
God and love for Islam, which often withheld him from taking a wrong
stand. He was a fervent Muslim, honest both in speech and in action,
unacquainted with crooked ways and tricks. His sole concern was
religion and the basis of all his actions was the truth.
8 Nadwi, Sayed Abul Hasan Ali., op.cit., p.11
9 Hanbal, Ahmad bin., Musnad, Egypt, 1949, Vol. II, p.535.
10 Nahjul Balagha: Letter No.57, op.cit., p. 514.
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Ali.s excelled in self-discipline in personal expenditure11. At the same
time never approved of extravagant expenditure of his governors12. He
was not unaware of the caliph.s right to subsistence from Bayt-al-Mal
but he voluntarily deprived himself of it. When some of his friends
found him shivering in the cold they advised him to get a woollen
blanket from the Bayt-al-mal but he choose to forgo it. Ibn Abi Rafay
reports that Ali used to take very simple food. He asked: .Has God
prohibited you to eat better food? Upon this Ali replied: .No, but I want
to eat the kind of food which the poorest of his realm can afford at least
once a day. I shall improve it after I have improved their standard of life.
I want to live, feel and suffer like them.. During the battle of Siffin, a
man came forward to address the opponents of Caliph Ali and inquired in
a tone of astonishment if Ali had misused fay, the public wealth. They
said never did he misused and mismanaged public funds. Then he asked
what for the war? There was long silence and no reply.
Ali was very much disturbed when Abu Dharr al-Ghifari was asked to
leave Medina for publicly rebuking the rich for owning wealth and for its
unequal distribution. Ali was not so outspoken in this matter but he was
certainly against the concentration of wealth in a few hands. He
commented: .O Abu Dharr! People are afraid of you because they will
lose their worldly possessions and positions and you are afraid of them
because you thought that Islam would suffer on their account.13. This
remark of Ali reflected the rot that had by that time set in Muslim
society. On the issue of distribution of wealth, there arose an
acrimonious argument between him and Mu.awiyah, who sent him to
the caliph as a fomenter of discord and strife. The caliph in turn deported
him to a small village of Rabadah14. In Tadkhirah of Hamdun the
following is related about Abu Dharr: .When Muawiyah built his green
11 One may refer to Jurji Zayadan., History of Islamic Civilisation: Ummayyads
and Abbasids, translated into English by D.S.Margoliouth, Kitab Bhavan, New
Delhi, IV Reprint, 2006. And also Neeru Misra.s Sufis and Sufism, Manohar
Publications, New Delhi, 2004; S.M. Hasanuz Zaman.s The Economic
Functions of Early Islamic State, International Islamic Publishers, Karachi,
1981.
12 Studies of Ibn Khaldun and Shah Waliullah Muhadith Dehlvi attribute the fall
of mighty empires to the extravagant spending by the ruling classes.
13 Nahjul Balagha, Sermon No. 133, op.cit., pp.255-56.
14 Baksh, Khuda., Politics in Islam, Idarah-i Adabiyat-i Delli, first published in
1920 and reprinted in 1981, p.32. It is English translation of Von Kremer.s
Staadsidee des Islam, originally published in German.
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palace at Damascus he asked Abu Dharr what he thought of it. He
replied: .If thou hast built it with public money thou art a traitor, if with
thy own thou art a squanderer.15.
The Period of Ali
There was no caliph for three days after the martyrdom of Othman. Utter
disorder and bewilderment prevailed. People requested Ali to assume
caliphate which he refused. Upon their persistent request¸ Ali agreed and
went to the Prophet.s Mosque where people took oath of allegiance. The
proclamation of Ali as the fourth caliph was made on 24th June, 656 C.E.
Ali served as a caliph for about four and half years. The period of his
caliphate (656-661 C.E.), was marked by civil wars such as Battle of
Jamal (36 A.H. /656 C.E.), Battle of Siffin (37 A.H. / 657 A.H.), Battle
of Nahrwan (38 A.H. / 658 C.E.). Ali did his best even though these and
other such internal troubles did not allow him to concentrate much on
economic and financial affairs16. .Ali chalked out an ideal political
policy from the first day of his caliphate. He could not have adopted any
other course as some of his critics and historians suggest and plead that
he could have, in that case, spared himself the hardships and difficulties
he had to face in future.17. The four and half year rule of Ali, brief by
any standard, has left an indelible mark on the pages of history.
Ali.s letter to Malik Al-Ashtar
Malik Al-Ashtar (d. 658 C.E.) was one of the most loyal companions of
Ali. Al-Ashtar embraced Islam during the Prophet.s time, and rose to
prominence during the caliphates of Uthman and Ali. During the
caliphate of Ali, he fought in the battles of Jamal and Siffin. On
battlefields, he was recognized for his fierce and steadfast defense of
Islam. At the personal level, he was very pious and God-fearing. The
appellation of "Al-Ashtar" is Arabic, meaning cut, torn, or ripped. He
earned the title of "Al-Ashtar" from a battle scar he received on his lower
eyelid during the Battle of Yarmouk.
After the Battle of Siffin, Malik al-Ashtar was appointed as the governor
of Egypt in 658 C.E. (38 A.H.). Earlier to him Muhammad bin Abu Bakr
(631-658 C.E) was the governor of Egypt who was martyred at the prime
age of 27 years. In order to capture Egypt, Muawiyah, the governor of
15 ibid
16 For a detailed discussion one can refer to Mohammad Jawad Chirri.s The
Brother of the Prophet Mohammad: The Imam Ali, 2 Vols., The Islamic Centre
of Detroit, Michigan, 1996
17 Al-Aqqad, Abbas Mahmud., Al-Abqariyat al Islamiyah, quoted by Sayed
Abul Hasan Ali Nadwi, op.cit., p. 189.
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Syria, had dispatched 6000 soldiers under the command of Amr ibn al-
Aas. Muhammad bin Abu Bakr requested Ali to send help. Ali
dispatched Malik Al-Ashtar, since Ali believed that only Malik could
beat Muawiyah and Amr ibn al-Aas. Muhammad ibn Abû-Bakr was
instructed to return to capital city, Kufa. However, Malik was martyred
on his way to Egypt. It is believed that Muawiyah.s men poisoned him.
Preamble of the Letter
Upon the appointment of Malik Al-Ashtar as the governor of Egypt, Ali
wrote a long letter to him explaining the Islamic principles of
administration and justice. It was a normal practice of the time that two
letters, containing instructions, were handed down; one to the
governor/officer, and other to the people of the region where the
governor/officer was deputed18. In the preamble of the letter Ali writes:
.In the name of Allah, the Merciful and Kind God. These are the orders
issued by the creature of God, Ali, the son of Abu Talib, to Malik, the
son of Ashtar when he appointed Malik as the Governor of Egypt to
collect zakah there, to fight against the enemies of Islam and the Egypt,
to work for the welfare of its people and look after its prosperity.19.
From this preamble we can deduce Ali.s perspective of governorship. In
his opinion it is the duty of the governor to:
1. To collect zakah from the eligible persons.
2. To protect the faith of Islam from its enemies.
3. To protect Egypt from foreign aggression.
4. To promote welfare and to ensure prosperity of its people.
From the economic viewpoint, Ali assigned primary importance to the
collection of zakah, not because it was dependable source of revenue,
but, as it will be clear at a later stage, for the reason that its primary
beneficiaries were poor and needy. Their welfare was always close to his
heart. While protection of Islam was a part of faith, protection of Egypt
and its people, without regard to their religion, was a part of good
governance. Similarly, welfare of people and their prosperity, by the way
of fight against poverty, also had a secular character. It appears to us that
in the opinion of Ali, the Islamic state should not make any difference
between Muslims and non-Muslim and two should be treated with equity
and justice. Ali warns Malik Ashtar in these words: .I order you to use
your head, heart, hands and tongue to help (creatures of) God because
18 Nahjul Balagha: Letter No. 62, op.cit., p.517.
19 ibid.
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the Almighty God holds himself responsible to help those who sincerely
try their best to help Him (in His cause and His creatures.).20.
Major Issues in the Letter
The whole letter moves around the following issues: fear of God; the
government is of God; the governors and the governed are both creatures
of God; their respective duties are laid down by God; the orphans and
deprived are trust of God and the army is the army of God. A famous
Christian scholar of Arab origin, Abdul Maseeh Anthaki, is reported to
have remarked: .(This letter) explains what a humane administration
should be like and how it is to be carried on and it justifies the claims of
Muslims that Islam wants to introduce a Godly administration of the
people for the people and by the people and it wants that a ruler should
rule not to please himself but to bring happiness to the ruled..Ali
should be congratulated for having introduced these principles in his
government and for having written them down for posterity.21.
Just and Equitable Approach
Caliph Ali.s approach to matters of governance and administration is
characterized by a remarkable openness, compassion, magnanimity and
inclusiveness. The just and equitable approach of Ali is clear when the
following instruction is read: .Remember Malik that amongst your
subjects there are two kinds of people: those who are having same
religion as yours and they are brothers unto you and those who have
other religion than yours and yet they are human beings like you. Men
of the either category suffer from the same weaknesses and disabilities
that the human flesh is heir to; let your mercy and compassion come to
their rescue and help in the same way and to the same extent that you
expect God to show mercy and forgiveness to you.22. Since subjects of
the state suffer from certain common weaknesses, Ali warns Malik
Ashtar in these words: .Do not hurry over punishment...do not get
angry and lose your temper quickly over the mistakes and failures of
those over whom you rule. Never say to yourself: I am their lord, their
ruler and all in all over them and that I must be obeyed submissively and
humbly.23.
Ali was aware of previous rules and rulers over Egypt and elsewhere,
where men in charge of public affairs generously rewarded their kith and
kin at the expense of rightful and deserving persons. Their partial
20 ibid
21 Anthaki, Abdul Maseeh, quoted in the English translation of Nahjul Balagha
op.cit., p.492-93.
22 Nahjul Balagha op.cit., p.494.
23 ibid
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attitude, on one hand, created economic inequalities, on the other, it led
to social and political unrest. This flawed practice has very often led to
the downfall of mighty empires24. Taking this particular fact into
consideration Ali warns Malik Ashtar against falling a prey to
favouritism and nepotism in the following words: .So far as your own
affairs and those of your relatives and friends are concerned, take care
that you do not violate the duties laid down upon you by the God and
usurp the rights of mankind, be impartial (in granting fiefs and delivering
justice) and do justice..nothing will bring down His vengeance and His
anger quicker than to insist upon oppression and tyranny over His
creatures....25.
Concern for the Poor
The poor and deprived always used to receive attention of Ali26. They
occupied a central place in his sermons, actions and policies. He himself
led a life characterizing real traits of poverty. His prime concern was
welfare of a large number of people and not the welfare of a few. Ali
wanted to realize this through a proactive role of government. He wanted
that his government should work for the welfare of people not with the
intent to earn their goodwill, which will automatically follow, but to
please the Almighty whose divinely arrangement of public spending is in
favour of poor and needy. One should recall here the Quranic Verse No.
9:60 which runs as follows: .Verily sadqat are for poor, needy and those
who collect them and those whose hearts are to be reconciled and to free
captives and debtors and for the cause of Almighty Allah and for
wayfarer a duty imposed by Almighty Allah. Almighty Allah is surely
All Knower and All Wise..
It is evident from his letter: .Remember that displeasure and disapproval
of common men, have-nots and depressed persons more than
overbalances the approval of important persons; and displeasure of a few
big will be excused by the Lord if the general public and masses of your
subjects are happy with you..the common men, the poor, apparently
less important sections of your subjects, are the pillars of Islam..be
more friendly with them and secure their confidence and sympathy.27.
24 One should study the al-Muqadimmah of Ibn Khaldun on the cycle of rise and
fall of mighty empires.
25 Nahjul Balagha op.cit., p.495
26 Who is poor from the Islamic viewpoint? For this purpose one may refer to
Sayed Afzal Peerzade.s . Definition and Measurement of Poverty. Pakistan
Development Review, 36:1 Spring, 1997, pp.87-97 27 ibid.
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Ali then directs Malik al-Ashtar in these words: .It is absolutely
necessary that they should be looked after, helped and well provided
for.28. The term .well provided for. signifies the provision, at the public
level, of necessities of life, which include food, clothing and shelter. In
exceptional cases, it also includes personal attendants to handicapped
persons who do not have sufficient resources to make such an
arrangement at the personal level.
In the same letter at a different place, Ali writes: .Then I want to caution
you about the poor. Fear God about their conditions and your attitude
towards them. They have no support, no resources and no opportunities.
They are poor, they are destitute and many of them are cripples and
unable to work...You should be a source of comfort, love and respect to
them. Appoint a respectable, honest and pious person, a person who
fears God, and can treat them respectfully, order him to find out
everything about them and to bring the report to you.29.
After going through the following statement of Ali, we can appreciate the
vision of his government. He wanted that his government should be propoor
and it should sensitize issues relating to poverty and sufferings of
masses. In a large number of Muslim countries where poverty is
rampant, people silently suffer from hunger, disease, malnutrition and
deprivation of different types30. These phenomena may be attributed to
several reasons, the major being lack of committed public action and
public authorities. Under the present circumstances, Muslim countries
and governments should set the goal of realizing Ali.s extraordinary
vision. He instructs Malik al-Ahstar: .When poor cannot reach you, you
must reach the poor. That nation or government cannot achieve
salvation where the rights of depressed, destitute and suppressed are not
guarded and where mighty and powerful persons are not forced to accede
these rights.31.
This pro-poor role of the government was advocated and practiced at a
time when poor and deprived were left at the mercy of nature to fend for
themselves. They never found any place in public agenda. In the present
day secular economies, it is a very recent phenomenon that the
governments have started responding to the needs of poor and vulnerable
sections. Till the first half of 20th century governments across the world
28 Nahjul Balagha op.cit., p.499
29 Nahjul Balagha op.cit., p.505
30 For a detailed study of deprivation of different types, one may refer to various
issues of Human Development Report. One may also refer to various
publications brought out by Mahbub ul Haq Human Development Centre.
31 Nahjul Balagha op.cit., p.506
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were apathetic towards poor for the reason that they were still under the
hanger over of the policy of laissez faire and efficiency of market forces.
They had a firm belief in the effectiveness of invisible hand, an idea
propounded by Adam Smith. A few developments in the beginning of
twentieth century, however, paralyzed invisible hand. These
developments made governments pro-active and pro-poor32. This shift in
the policy was out of compulsion and not on account of their concern of
poor and needy.
When the government is interested in reaching out its people, it must be
very particular about the appointment/selection of public persons.
Favoritism, nepotism and bias make it difficult for the government to
achieve desired objectives, in particular extending a helping hand to the
poor. This was exactly the reason why Ali, at different places in his
letter, has spoken about the necessity of appointing God-fearing persons
to public offices. He sought to infuse a sense of commitment, dedication
and moral accountability among rulers and administrators. He demands
that the public officers should regularly investigate the sufferings of poor
and report to the same to their higher ups. In particular, Ali writes: .Do
not accept advice of misers, they will try their best to keep you away
from acts of kindness and from doing good to others. They will keep
you frightening from poverty and destitution.33. What is meant here is
that misers think that public treasury would be empty when funds
available at its disposable are spent for the welfare of poor and needy.
Similarly, Ali advises: .At the same time, avoid greedy and covetous
persons who aspire to the position of acting as your
counselors..Remember that miserliness, cowardice and greed appear to
be different wicked qualities but they all arise from the same evil
mentality of having no faith and no trust in God.34.
Ali emphasizes the need for a complete overhauling of the then
prevailing administration. He warns Malik Al-Ashtar: .Your worst
ministers will be the men who had been a minister to the tyrannical and
oppressive rulers before you and who had been a party to atrocities and
32 . Major developments were: (1) The Russian Revolution of 1917. (2) The
Great Depression of 1929 and (3) Publication of Keynes. General Theory. The
first provided political shock, the second provided economic shock and the third
development generated academic shock damaging the old notion of nonintervention.
33 Nahjul Balagha op.cit., pp. 496-97
34 ibid
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151
savage cruelties committed by them (on poor masses).35. Ali advises that
officers should be first appointed on probation. The period of probation
will provide an opportunity to evaluate the performance of officers. To
put it in other words, Ali did not favour awarding permanent postings
and appointments at the beginning of tenure itself.
Need for Sincere and Honest Rule
Ali asks Malik Ashtar to be sincere in his rule: .Remember Malik! that
Almighty God will not absolve any ruler of the obligations laid upon him
unless he sincerely tries his best to discharge duties..... the things
which should gladden the heart of ruler must be the fact that his state is
being ruled on the principles of equity and justice and that his subjects
love him. And, your subjects will love you only when their hearts are not
sore against you.36.
In the opinion of Ali, there are only two types of rulers. One is Godfearing,
sincere, diligent and taking right action at the right time and
place. He follows the principles of justice and equity and protects the
rights of others. He is not the one who takes shelter behind gorgeous
curtains, show of pomp and pride. The other is one who is utterly
apathetic to the needs of ruled and leads a life ostentation and
extravagance. He fails in meeting his private and public obligations37. Ali
then repeatedly asks Malik Ashtar to be a sincere and God-fearing ruler.
It is a known fact that Ali led a very simple life, ate minimum of simple
food, wore very simple clothes, and used torn out shoes. He knew it well
that his governors may find it difficult to replicate his standard, yet he
advised them to lead a life devoid of pomp and extravagance. In this
context, he writes: .Do not place a prestige curtain between you and
those over whom you rule. Such pretensions and show of pomp and pride
are in reality manifestations of interiority complex and vanity.38. In
another letter similar direction is given to Othman bin Hunaif, the
governor of Basra province. .Oh ibn Hunaif! Fear God and be content
with the bread that you get with lawful means so that you may be
exempted and freed from the fire of hell.39.
35 Nahjul Balagha op.cit., pp. 496-97
36 Nahjul Balagha op.cit., p.500
37 ibid
38 Nahjul Balagha op.cit., p.507.
39 Nahjul Balagha: Letter No. 45, op.cit., pp. 483-486.
A Note on Economic Ideas of Caliph Ali with Special Reference to his Letter to Malik Al-Ashtar
152
Typology of People
For the purpose of smooth administration of the state, Ali instructed
Malik Ashtar to put people into the following categories:
1. Army personnel who defend the cause of God.
2. Secretaries of the state who issue general or special orders on the
direction of caliph/governor.
3. Judges and magistrates who administer justice.
4. Officers maintaining law and order.
5. Common men, both Muslims and non-Muslims, who pay taxes.
6. Professionals and artisans.
7. Poor and have-nots40.
It is highly significant to note that this typology is based on two major
criteria: faith (distinguishing Muslims from non-Muslims), and
profession or callings. There is no mention of tribe, caste, creed and
colour. It is also not based on wealth or social status of a person. As
usual, the poor and deprived find a place in the above-mentioned
classification.
After categorizing people into different groups, Ali remarks that all these
represent a closely woven net. They are all dependent upon one another.
He writes: ..the prosperity or welfare of each class of the society,
individually and collectively, is so interdependent upon the wellbeing of
the other classes..one class cannot exist peacefully, cannot live happily
and cannot work without the support and good wishes of the other...41.
In the context of the maintenance of army, Ali speaks of importance of
tax collection: .The upkeep and maintenance of an army depends upon
the taxes collected by the state out of which God hath fixed for them a
share. With this amount they provide their requirements, maintain
themselves and their arms in fit position to fight for religion and cause of
justice.42.
Collection of Taxes
Ali was always extremely careful about tax collection. In addition to this
letter, there are several passages in Nahjul Balagha wherein tax related
issues such as types of taxes, tax rates, methods of collection, etc., are
dealt with a rare mastery. Particularly, for tax purposes, the
categorization of land according to its fertility and classification of rich
40 Nahjul Balagha op.cit., p.498
41 ibid.
42 ibid
IUB Journal of Social Sciences and Humanities Vol.8 No2, 2010
153
people according to their wealth deserve a serious attention43. His
treatment of ahl uz zimmah needs to be highlighted.
Ali knew this fact very well that earlier governments, in Arabia and
elsewhere, were unpopular mainly because of inhumane nature of their
tax collection. Ali attributes poverty of people to the desire of rulers and
officers to amass wealth and possessions whether by fair or foul means.
They wanted to make most during the shortest time at their disposal.
.They never learnt any lesson from the history of nations and never paid
any attention to the orders of God.44.
In the matters of taxation, the overall approach of Ali contains .supplyside
. ideals. This refers to a policy alternative wherein importance is
attached to production, productive agents and related tax incentives. As
against this, the demand management approach, attaches importance to
regulating/deregulating demand to control economic fluctuations. In this
context, it may be quoted from Ali.s letter: .So far as collection of land
revenues and taxes are concerned you must always keep in view that the
welfare of taxpayers is of primary importance than the taxes
themselves.45. From this instruction, it is clear that Ali wanted that the
welfare of taxpayers should be a dominant reason of tax policy. In
several other letters/instructions issued to the governors, this consistency
in the approach of Ali is noticed.
The above-mentioned stand of Ali is still more explicit in the following
instruction. .More importance should be attached to the fertility of land
than to the collection of taxes because actual taxable capacity of people
rests upon the fertility of the land. The ruler who does not pay attention
to the prosperity of his subjects and fertility of land but concentrates
only the collection of revenue, lays waste the land, (he) ruins the state
and brings destruction to creatures of God. His rule cannot last for
long.46.
The above instruction of Ali should be held as the golden maxim of
taxation wherein importance is attached to the tax base and its attributes
and not to the tax rate and amount of revenue to be collected. This
essentially is the message of modern period fiscal experts. Now, across
the world, tax reforms movements on one-hand and tax administrators on
43 Peerzade, Sayed Afzal., .Tax Reform: Learning Lessons from Shariah.,
Journal of Objective Studies,Vol. 9, No.2, 1997.
44 Nahjul Balagha op.cit., p. 503
45 Nahjul Balagha op.cit., p. 502
46 ibid
A Note on Economic Ideas of Caliph Ali with Special Reference to his Letter to Malik Al-Ashtar
154
the other, have realized that, in the matters of revenue collection, tax
base is more important and not the tax rate. If the base is broad and
productive, more tax revenue is likely to be collected with low rates. A
regime of high tax rates neither brings in more revenue nor improves
prosperity levels. On the contrary, the efficiency costs of high tax rates
are huge. Ali is perfectly right when he remarks that a ruler, who is
interested only in revenue collection and ignores issues such as fertility
of soil and greater welfare of its people, brings nothing but disaster.
People get frustrated when they observe that huge sums are collected in
taxes but at the same time, there is inefficient provision of public goods
and services. They revolt against unjust and corrupt systems, sometimes
peacefully through ballot boxes and at other times violently.
Ali also speaks of heavy burden of taxation, and asks his officers to
reduce their burden as and when the situation warrants. He writes to
Malik Ashtar: .If taxpayers complain to you about heavy incidence of
taxation, of any accidental calamity, of vagaries of monsoon, of scarcity
and stoppage of the means of irrigation, of floods or destruction of their
crops on account of excessive rainfall and if their complaints are true
then reduce their taxes. This reduction should be such that it provides
them opportunities to improve their conditions and eases their
circumstances.47.
Ali also anticipates that on account of reduced taxes, revenue would fall
and the state would face difficulties. The difficulties get compounded
further when the state is required to make huge public expenditure to
solve economic and social difficulties of its subjects. Such a situation
would make the ruler depress. Ali, however, has a different view when
he writes: .Decrease in state income due to such reasons should not
depress you, because the best investment for a ruler is to help his subjects
at the time of their difficulties. They are the real wealth of a country and
any investment on them even in the form of reduction of taxes, will be
returned to the state in the shape of the prosperities of its cities and
improvement of the country at large, at the same time you will be in a
position to command and secure their love, respect and praise along with
the revenues. Will not that be a lasting happiness? Remember Malik! If
a country is prosperous and if its people are well-to-do then it will
happily and willingly bear any (amount of tax) burden.48.
47 ibid
48 Nahjul Balagha op.cit., p.503.
IUB Journal of Social Sciences and Humanities Vol.8 No2, 2010
155
Public Interest and Private Interest
Several socio-economic ills may be attributed to a situation where clear
lines are not drawn between public and private interests and where the
private interest is promoted at the cost of public interest. Ali warns Malik
Ashtar to be very careful about public interest and asks:
1. Not to give land in permanent lease to relatives and friends.
2. Sources of water supply should never be under the custody of
private persons.
3. Lands, which have special public utility, should not be reserved
for private use.
The reason cited by Ali was that if a privileged few .get possession of
such holdings they will oppress others to derive undue benefits and thus
gather all fruits for themselves leaving for you a bad reputation in this
world and punishment in the next (world).49. It is apparent that Ali was
afraid of concentration of wealth in a few hands and its consequent
socio-economic evil effects. Ali asks Malik Ashtar: .Do not reserve for
yourself anything which is common property to all and in which others
have equal rights.50.
Conclusion
After a through reading of Ali.s letter to Malik al-Ashtar, it is possible to
learn certain principles. A few of them are noted as under:
There should not be any discrimination of people on the basis of
religion, tribe, wealth and social status.
Justice, equity, economic fair play, inclusiveness, and moral
accountability should be the hallmarks of public policy and
governance.
Poor, deprived and destitute must find their rightful place on the
economic and public agenda before the government.
Government, with regard to poor, should play pro-active and propoor
roles. It should reach out to the people.
Public resources should not be used for private purposes.
Tax base is more important than tax rate and tax revenue.
Tax revenue should be primarily used for financing public welfare. It
should not be used for pomp and glory of rulers.
The above mentioned principles are in fact time-tested and these are
highly relevant even today. These reflect moderation on one hand and
49 Nahjul Balagha op.cit., p.508
50 Nahjul Balagha op.cit., p.510
A Note on Economic Ideas of Caliph Ali with Special Reference to his Letter to Malik Al-Ashtar
156
humanism on the other. Both Ali and Malik al-Ashtar, however, were
victims of circumstances. Neither al-Ashtar could reach Egypt to assume
the governorship, nor could Ali get sufficient time to implement his
grand vision. Al-Ashtar was poisoned on the way to Egypt and Ali was
entangled in the internal strife. Given the sincerity of purpose and
commitment to the cause of public good and extremely cautious
governance of Ali, the Muslim world would have been definitely a better
place to live in had Ali and Malik Al-Ashtar got sufficient time to
consolidate themselves. This is, thus, another tragedy in the history of
Islam where there is no drought of tragedies.
References
Abu Ubaid, al-Qasim bin Sallam. 1986. Kitab al-Amwal, (Urdu Edition),
Idarah-i-Tahqiqat-i-Islami, Islamabad, Pakistan,
Amini, Muhammad Taqi. 1991. The Agrarian System of Islam, Idarah-i-
Adbiyat-i-Dilli.
Baksh, Khuda. 1981. Politics in Islam, Idarah-i Adabiyat-i Dilli, first
published in 1920 and reprinted in, p.32. It is English translation
of Von Kremer.s Staadsidee des Islam, originally published in
German.
Chirri, Mohammad Jawad. 1996. The Brother of the Prophet
Mohammad: The Imam Ali, 2 Vols. The Islamic Centre of
Detroit, Michigan,
Hasanuz Zaman S. M. 1981. The Economic Functions of Early Islamic
State, International Islamic Publishers, Karachi,.
Misra, Neeru. 2004. Sufis and Sufism, Manohar Publications, New Delhi.
Nadwi, Sayed Abul Hasan Ali., 1991. Al-Murtuza, Academy of Islamic
Research and Publications, Lucknow, 3rd Edition, 1991. The
present author has followed its English translation entitled The
Life of Caliph Ali. It was rendered into English by S. Mohiuddin
Ahmed and published by Academy of Islamic Research and
Publications, Lucknow, p.2.
Nadwi, Shah Moinuddin., 1997. Hazrat Ali Al Murtuza, Idara Isha.at .e-
Diniyat (P) Ltd., New Delhi, , pp. 37-38.
Nahjul Balagha 1978. Sermons, Letters and Sayings of Imam Ali. Several
translations are available; the present author has followed Syed
Mohammed Askari Jafery.s translation, Third Edition, ,
published by Islamic Seminary for WSMO, U.S.A., printed at
Bombay, India.
Numani, Shibli. 1992. al-Farooq, International Islamic Publishers, New
Delhi,
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Peerzade, Sayed Afzal., 1997. .Tax Reform: Learning Lessons from
Shariah., Journal of Objective Studies, 9,2.
Peerzade, Sayed Afzal 1997. The Definition and Measurement
of Poverty: An Integrated Islamic Approach, Pakistan
Development Review, 36,1:87-97
Peerzade, Sayed Afzal 2004. Islamic Public Finance and Policy, Idarahi-
Adbiyat-i-Dilli,.
Razi, Muhammad and M.H. Syed. 2009. Ali: The Lion of Almighty,
Anmol Publications, New Delhi.
Zayadan, Jurji 2006, History of Islamic Civilisation: Ummayyads and
Abbasids, translated into English by D.S.Margoliouth, Kitab
Bhavan, New Delhi, IV Reprint.
Saturday, March 19, 2011
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Vol. 4 Issue 10 01-15 October 2009
Ibn Khaldun: Revisiting the Ideas of a Fiscal EconomistDr Sayed Afzal Peerzade and Dr Rahatunissa
Ibn Khaldun (1332-1406 C.E.) is widely known as a brilliant historian, philosopher, sociologist and anthropologist. His contribution to the subject of economics is also equally significant. Unfortunately, however, his views on economic matters have not received adequate attention. Some of the seminal ideas on economic issues enunciated by Ibn Khaldun more than six centuries ago were later taken up and elaborated by the Mercantilists and the classical economists such as Sir William Petty (1623-1687), Adam Smith (1723-1790), David Ricardo (1772-1823), Thomas R. Malthus (1766-1834), Karl Marx (1818-1883) and John Maynard Keynes (1883-1946), as well as by many contemporary economic theorists.The principal objective of this paper is to identify and expatiate on Ibn Khaldun's contribution to one of the most important branches of economics, that is, public finance. Public finance deals with state finances in general and with taxation, public expenditure and public borrowing in particular.
LIFE AND CAREERAby Zayd Abd al-Rahman Ibn Khaldun was born in a prominent and learned family of Tunis on the 1st of Ramdan732/27 May 1332. His grand-father, Abu Bakr Muhammad ibn al–Hasan, occupied a high position in the royal court and was in-charge of finances during the reign of Abu Ishaq. Abu Bakr's son Muhammad also occupied various official positions both at Bougies and Tunis. Ibn al Lihyani, son of Muhammad and father of Ibn Khaldun, eschewed politics and led the life of a faqih [ jurist] and a man of letters.The career of Ibn Khaldun may be divided into three parts. The first twenty years of his life were spent in the pursuit of education. He learnt the Quran, memorised it and studied different styles of recitation and interpretation. He studied hadith, jurisprudence, grammar and rhetoric under the tutelage of some of the most eminent scholars and teachers of Tunis, which was at that time a prime centre of learning, after Cairo, in North Africa. In 1349 CE, North Africa was afflicted with the Great Plague, a horrifying calamity that befell large parts of the Muslim world from Samarqand in Central Asia to Mauritania in Africa. Ibn Khaldun lost both his parents and nearly all his teachers.Ibn Khaldun devoted the next 23 years of his life to the pursuit of higher learning. As an ambitious man, Ibn Khaldun was also consumed by a passion to achieve worldly success and prosperity. North Africa at that time provided several avenues of success for men of ability, ambition and drive. Ibn Khaldun was quite close to the Emperor Abu Inan, the greatest monarch of his time in North Africa, and this association, which lasted for 30 years, proved to be momentous in Ibn Khaldun’s career. It brought him great prestige, power and prosperity. He spent the remaining 31 years of his life as a private scholar, teacher and magistrate. The early periods in his life were spent in Morocco and Algeria while he spent the last years of his life in Morocco, Algeria and Egypt.Ibn Khaldun’s works sought to deal with the problems and challenges that had confronted the state and society in North Africa during the 14th century. His grounding in philosophy provided a depth to his writings and facilitated theoretical generalisations from his observations and personal experiences. Ibn Khaldun wrote many books, most of which did not survive the vicissitudes of time. His magum opus, the Muqaddimah, is a testament to his genius and his multi-faceted contributions.IBN KHALDUN’s VIEWS ON THE ROLE OF STATEThere is a close linkage between public finances and the structure and role of the state. It is therefore profitable to proceed with a discussion of Ibn Khaldun’s view on the role of the state. Ibn Khaldun holds that the state is not a subject of abstract speculation or of utopian ideals, but has a concrete political and existential reality and has a close bearing on human behaviour. Ibn Khaldun argues that human society is necessary because individuals acting alone cannot acquire and manage either resources for food or security. The state arises out of the need to curb the aggressive instincts embedded in human nature. The state is inconceivable without society, while society is well-nigh impossible without state. According to Ibn Khaldun, the strength of the state depends upon society, the prosperity of business, the intensity of human efforts and the search for gain. If men slacken in their economic activities the markets slump and society deteriorates. People leave that country and migrate elsewhere in search of a decent livelihood, resulting in the desertion of cities and weakening of the state. Ibn Khaldun argues that the system of caliphate is the most viable and best form of governance and administration. The misfortunes of history are caused by the wilful violation of the cardinal principles of the Islamic shari’ah, as well as by the sins of pride, over-indulgence and luxury, and avarice. The rise and fall of states, societies and civilizations, according to Ibn Khaldun, can be attributed to this fundamental principle. The rise and fall of states and civilizations, according to him, take place in a cyclical manner.In academic discourse, three distinctive approaches towards the structure and role of the state can be identified. These can be described as are libertarian, collectivist and neo-liberal. Each of these approaches reflects the dominant philosophy or climate of opinion in a given period of time. The libertarian approach emphasizes the efficiency of market mechanisms and envisages a minimal role for the state. The scope for public finances, according to this perspective, is restricted. The collectivist approach, on the other hand, which is also known as the interventionist perspective, was born out of the economic shocks experienced by several countries during the early decades of 20th century. It calls for a proactive role on the part of the government necessitating unrestrained public finances. The later decades of 20th century brought to the fore the pitfalls inherent in the interventionist perspective. The major argument was that institutions and persons had to face high inefficiency costs because of excessive taxation, huge expenditure and heavy public borrowing. Rent-seeking activities and free-riding were other two prominent shortcomings identified with the interventionist role. It is in this context that the neo-liberals plead for a restrained role of government. They, therefore, restrained public finances.Ibn Khaldun, like Muslim scholars and writers in general, considered the time of the Prophet and the first four caliphs as representing the perfect model for society and state. The first city-state in Islamic history was established by the Prophet in the wake of his migration to Madinah in 622 C.E. The city-state was conceived and created by the Prophet in order to ensure order and stability, social and political solidarity and security for the Muslim community.The Islamic faith strikes a fine balance between individual and society, between personal autonomy and the social order. The structure, functions and role of the Islamic state exemplify this harmony. In respect of the management of the economy, Islam encourages public as well as private participation. Since Islam aims at falah (all-round wellbeing) and adl [balance, justice], excessive and uncalled for intervention by the state is eschewed. It accords preference to public interest over private interest in critical and core areas of the economy. Consequently, its approach towards public finance is also marked by balance and moderation. The following Table summarises the approaches towards the structure and role of the state.
Table No. 1: Historical Approaches towards the Role of State
Libertarian
Collectivist
Neo-Liberal
Islamic
Minimal public finance
Unrestrained public finance
Restrained public finance
balanced approach to public finance
Private spending replaces public spending
Public replaces private spending
Seek conditionality for public spending
different areas of public and private spending
Minimum burden of taxation
Redistributive taxes for equity
Tax ‘bads’ not ‘goods’ for efficiency
shariah itself and its levies have inbuilt mechanism for redistribution
Regressive taxes
Progressive taxes
Proportional taxes
mainly proportional with inbuilt flexibility for progression
Minimal public expenditure
Expansive public expenditure
Restrained public expenditure
need-based expenditure with welfare orientation
Limited public borrowing
Expansive public borrowing
Restrained public borrowing
borrowing permitted during exigencies.
Ibn Khaldun is against a proactive and interventionist role on the part of the state. He is against the idea of the king or the ruler engaging in trade, commerce, agriculture and other economic pursuits. Ibn Khaldun argues that if the king engages in trade and commerce and other economic pursuits, it will have adverse economic consequences for his subjects. Farmers and merchants, for example, would find it difficult to buy livestock because they would not have the same amount of resources as the king. Furthermore, the king’s power and authority would prevent ordinary traders and merchants to bid for commodities against him. Moreover, the king may force merchants and farmers to buy products and commodities from him at rates fixed by him. Thus merchants would not have the freedom or power to trade independently in competitive conditions. The concentration of trading authority and resources in the ruling class would therefore undermine entrepreneurship. The relevance of views of Ibn Khaldun in this respect can be better appreciated in the contemporary context of an excessive, and at times aggressive, intervention on the part of governments, which suffocates and chokes private enterprise. Economists speak of “crowding-out effect” to describe this particular phenomenon.IBN KHADLUN’S VIEWS ON PUBLIC EXPENDITUREIbn Khaldun’s Muqaddimah contains a wide-ranging discussion on the core areas of public finance, which attests to the originality of his thinking. His view are based on an ingenious synthesis of ideas and principles drawn from the Quran, the Traditions of the Prophet and the works of Muslim thinkers and philosophers. The classical and neo-classical economists believed in the efficacy of market mechanisms. According to them, market forces, such as demand and supply, operate autonomously and 'invisibly'. Thus Adam Smith, who is regarded as the father of economics, coined the term "invisible hand" to describe the functioning of the market economy. He and his followers assigned a limited role to the government and saw little or no need for taxation and public expenditure. They developed maxims such as "the best of all taxes is the one which is least in the amount" and "the best of all plans of expenditure is to spend the least".Ibn Khaldun is of the opinion that the expenditure made by the king "flows like water, fertilizing all that it touches". This statement is of immense significance because public expenditure stimulates economic activity when the private expenditure is inadequate. The role of kings and emperors is now assumed by democratically elected governments. Their expenditures stimulate and sustain the growth process. The views of Ibn Khaldun are very close to those of modern economists who favour government expenditure for a variety of reasons, including employment generation, correction of personal and regional disparities, human resource development and infrastructure development. The recent spending "packages" announced by the U.S. and several other Western governments are intended to work towards this end.Ibn Khaldun suggests that the king, representing the state, should promote and encourage economic activities. He is of the view that the state generates market for goods and services produced privately. This in turn facilitates productive and entrepreneurial activities. He opines that the king himself and his nobles spend huge amounts of money which, directly or indirectly, benefit a large number of people having direct dealings with court and courtiers. In turn, these people become rich and start spending lavishly. Their expenditure, along with spending of king and his nobles, promote arts and crafts causing further advancement of “all that is meant by civilisation”.
Ibn Khaldun suggests that the king, representing the state, should promote and encourage economic activities. He is of the view that the state generates market for goods and services produced privately. This in turn facilitates productive and entrepreneurial activities. He opines that the king himself and his nobles spend huge amounts of money which, directly or indirectly, benefit a large number of people having direct dealings with court and courtiers. In turn, these people become rich and start spending lavishly. Their expenditure, along with spending of king and his nobles, promote arts and crafts causing further advancement of “all that is meant by civilisation”.
Ibn Khaldun suggests that the state should promote and stimulate economic activities. He holds that the state represents the greatest market for goods, facilitating productive enterprises.Furthermore, he argues that the money raised by the ruler from the subjects goes to the courtiers, whose expenditure reach to the large number of private citizens inhabiting the metropolis, who have dealings with the court and officials, whose fortune consequently grows, and whose standard of living rises. These private citizens soon acquire habits of luxury, which promote the crafts and arts, and all that is meant by civilization.Seen in the contemporary context, it is clear that Ibn Khaldun is emphasizing the expenditure made by the state and its different departments. His assertion "all that is meant by civilisation" is very meaningful. In popular economics, it is believed that the expenditure is of three types. First, private consumption expenditure, which is denoted by C; private investment expenditure, which is denoted by I, and government expenditure, which is denoted by G. The aggregate expenditure E is a sum total of C+I+G. This can be explained with the help of the following equation:E=f [C+I+G] --------- (1)This aggregate expenditure, at a given point of time, supports a certain level of employment, output and income. In difficult and depressing conditions, when the private consumption (C) and investment expenditure (I) are not sufficient to support a desired level of output and employment, economists usually suggest an increase in the government expenditure. Now the new equation will be:E1=f [C+I+G1] ---------- (2)G1 stands for the increased government or public expenditure. This stimulates output and employment generating activities. It is rightly argued that the public expenditure provides much-needed antidote during depressing conditions. Even during normal conditions, public expenditure helps economies in maintaining a desired rate of growth.Ibn Khaldun also speaks about different types of expenditure which have different socio-economic implications. His mention of luxurious waste by kings and their nobles deserve a serious attention. He is of the opinion that the decline of mighty empires is caused by an increase in luxurious spending by men who wield power and authority. While criticizing luxurious and wasteful expenditure, Ibn Khaldun emphasizes the need to spend on social heads. He writes: “Take care of the poor, widows and orphans; pay them special stipends from your treasury… do the same to the blind and to those who can recite the Quran”. And, "provided this does not overburden the state treasury, build hospitals for sick, with a staff of physicians and attendants who will look after them and administer to their needs”. He also suggests payment of a “special stipend” to people suffering from different disabilities. Here Ibn Khaldun emphasises the need for humanitarian expenditure. He may be regarded as a precursor of the modern concepts of old age homes, homes for the destitute and public hospitals. In addition to its welfare program, the government should spend its tax revenue wisely to improve conditions of its "subjects, to safeguard their rights and to protect them from harm. Here Ibn Khaldun endorses the expenditure on the provision of internal and external security.IBN KHALDUN’S VIEWS ON RESOURCE MOBILIZATIONAt a given point of time, the capacity of a state to finance its expenditure depends greatly upon its ability to mobilise resources in an efficient manner. Ibn Khaldun’s views in this connection are refreshingly original. He puts different taxes into two categories, namely “good taxes” and “bad taxes”. “Good taxes are those taxes, which are collected according to the shariah, expressly ordained by Allah and His Messenger. These are zakah, land taxes and the poll tax (jizyah). They are good because they constitute small assessment, which do not destroy incentives. Among the bad sources of revenue to the government are high custom duties, revenues from the commercial activities of the government, revenue obtained through other confiscatory levies and forced labour, etc. He states that the strongest incentive for cultural activities comes from the lowest possible taxes levied upon persons capable of undertaking enterprises. This statement of Ibn Khaldun makes a reference to the correlation between taxes and incentives which normally include the desire to work, earn, save and invest. In a larger context, incentives are destroyed when tax rates are high. Economists use the term "efficiency loss" to describe any damage to incentives. This is a core issue in the area of optimal taxation. Several econometric studies have demonstrated the deterrent effect of high tax rates. Universally, the growth of the parallel economy of black money is attributed to high taxes on people and materials.It is remarkable that more than six centuries ago Ibn Khaldun spoke of the disincentive effect of high tax rates. He favours shariah-based taxes whereby the minimum rate is determined at 2.5 percent and the maximum rate does not exceed 20 per cent. Economists argue that disincentive effect is not all that strong when the tax rates are between 10 and 20 per cent. Ibn Khaldun argues that taxes collected at low rates generally lead to more revenues for the government while taxes with high rates bring in less revenue. Extremely high taxes lead to the fall of civilizations. He is, however, careful enough to maintain that tax rates administered below those set by the shariah will deprive government of the required revenue. Therefore, both extremely low and extremely high taxe rates need to be eschewed.The assessments increase beyond the limits of equity. The result is that the interests of the subjects in cultural enterprises disappears, since when they compare expenditures and taxes with their income and gain and see the little profit they make, they lose all hope. The result is that the total tax revenue goes down, as (the number of) the individual assessments goes down. Finally, individual imposts and assessments reach their limit. The costs of all cultural enterprise are now too high, the taxes are too heavy, and the profits anticipated fail to materialise….Finally, civilization is destroyed, because the incentive for cultural activity is gone. (The Muqaddimah, translated by Franz Rosenthal, 1958, Vol. 2, pp. 90-91)
The assessments increase beyond the limits of equity. The result is that the interests of the subjects in cultural enterprises disappears, since when they compare expenditures and taxes with their income and gain and see the little profit they make, they lose all hope. The result is that the total tax revenue goes down, as (the number of) the individual assessments goes down. Finally, individual imposts and assessments reach their limit. The costs of all cultural enterprise are now too high, the taxes are too heavy, and the profits anticipated fail to materialise….Finally, civilization is destroyed, because the incentive for cultural activity is gone. (The Muqaddimah, translated by Franz Rosenthal, 1958, Vol. 2, pp. 90-91)
Ibn Khaldun writes that, in its incipient phase, the state commanding religious authority collects more revenue from a small number of taxpayers. It extracts only those dues [taxes] as provided by the Islamic law, such as zakah, ushr, kharaj and jizyah. The shariah based levies have a divine sanction regarding base, rate, exemption limit, methods of collection and disbursement. Overall, the shariah levies demonstrate commendable moderation. Consequently, enterprises develop because businessmen feel that it is worthwhile to part with some amount of money in taxes. And, as businesses prosper, the number of taxpayers grows and the total tax yield increases.According to Ibn Khaldun when the dynasty continues in power and their rulers follow each other in succession, they become sophisticated. The tribal way of life of people changes in favour of more settled one. Their needs and exigencies grow owing to the luxury in which they have been brought up. Hence, the king and the officials of the state adopt a luxurious way of life. In the opinion of Ibn Khaldun they start extracting more revenue by increasing rates of various taxes. Thus, in the later stages the burden of taxation increases and the revenue falls. This is exactly the argument advanced by modern economists in general and supply-siders in particular. They argue that high tax rates need not bring in more revenue; on the contrary, they yield less revenue. Persons, institutions, businesses and companies start underreporting their incomes and transactions once they feel that tax rates are confiscatory.Ibn-Khaldun has warned against possible adverse effect of excessive taxes on the desire to work hard and subsequently on economic growth. He is of the view that the ruler should collect taxes in a just manner and according to the ability of the taxpayers. None should be exempted from paying taxes because of his status or riches or position. At the same time, Ibn Khaldun warns against the use of coercion in collecting taxes. He is against a policy whereby revenue is collected in order to just enlarge the treasury. He advocates that the object should justify collection. Revenues should be spent judiciously.Ibn Khaldun observes that when there is a fall in revenue due to either high tax rates or the flight of capital and entrepreneurial activities to low taxed activities and areas, the people at the helm of affairs fail to judge the exact cause of fall. They mistakenly point to a decline in revenue to low tax rates and try to remedy it, in a wrong way, by increasing tax rates still higher. Hence, tax rates reach a confiscatory level leaving no profit to businesses. Consequently, businessmen and their businesses disappear from the scene.The above-mentioned notion of taxation as enunciated by Ibn-Khaldun was picked up by Arthur Laffer, an eminent American economist whoserved as an advisor to the U.S. President Ronald Reagan in the early 1980s. He shot to limelight because of his advocacy for low tax rates. He invented a famous curve, now popularly known in academic circles as the Laffer curve. His argument is as follows: At both extremes of taxation—zero percent and one-hundred percent—the government collects no revenue. Laffer and other economists used the curve to argue that taxes were currently too high. They further argued that in order to encourage enterprising activities, tax rates should be brought down. Currently, we notice a world-wide trend in favour of low tax rates on men and materials. Surprisingly, Laffer does not claim to have invented the concept; He attributes it to Ibn-Khaldun. Thus, the well-known Laffer curve is nothing but a graphical representation of the theory of taxation developed by Ibn Khaldun in the fourteenth century.This brief paper has attempted to demonstrate that Ibn Khaldun rightfully belongs to the galaxy of the earliest fiscal economists. It would be fruitful and rewarding to examine the relevance of his ideas in other branches of economics. This can be done by a critical study of those parts of the Muqaddimah which deal with economic issues and an examination of their relevance in the context of present times.SELECT BIBLIOGRAPHYFuad, ba Ali., Ibn Khuldun’s Science of Human Culture, Adam Publishers and Distributors, Delhi, 1996.Issawi, Charles., “Ibn Khuldun’s Analysis of Economic Issues” in Readings in Islamic Thought edited by Abul Hassan .M.Sadeq and Aidit Ghazali, Longman Malaysia, Kuala-Lumpur, 1992.Peerzade, Sayed Afzal., Islamic Public Finance and Policy, Idarah-i- Adabiyat, Delhi, 2004.Rahatunissa, Contribution of Early Muslim Scholars to Economic Thought, Unpublished Ph.D. thesis, Karnataka University, Dharwad, 2006.Rahmani, Raghib., Muqadimah, Urdu translation, Iteqad Publishing House, Delhi, 1987.Rosenthal, Franz., Muqaddimah : An Introduction to History, Translation from Arabic, Rutledge and Kegan Paul, London 1958.Zakaria, Rafiq., Struggle Within Islam, Viking Books, 1988.www.bized.ac.uk/economy/virtuallibrary
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Vol. 4 Issue 10 01-15 October 2009
Ibn Khaldun: Revisiting the Ideas of a Fiscal EconomistDr Sayed Afzal Peerzade and Dr Rahatunissa
Ibn Khaldun (1332-1406 C.E.) is widely known as a brilliant historian, philosopher, sociologist and anthropologist. His contribution to the subject of economics is also equally significant. Unfortunately, however, his views on economic matters have not received adequate attention. Some of the seminal ideas on economic issues enunciated by Ibn Khaldun more than six centuries ago were later taken up and elaborated by the Mercantilists and the classical economists such as Sir William Petty (1623-1687), Adam Smith (1723-1790), David Ricardo (1772-1823), Thomas R. Malthus (1766-1834), Karl Marx (1818-1883) and John Maynard Keynes (1883-1946), as well as by many contemporary economic theorists.The principal objective of this paper is to identify and expatiate on Ibn Khaldun's contribution to one of the most important branches of economics, that is, public finance. Public finance deals with state finances in general and with taxation, public expenditure and public borrowing in particular.
LIFE AND CAREERAby Zayd Abd al-Rahman Ibn Khaldun was born in a prominent and learned family of Tunis on the 1st of Ramdan732/27 May 1332. His grand-father, Abu Bakr Muhammad ibn al–Hasan, occupied a high position in the royal court and was in-charge of finances during the reign of Abu Ishaq. Abu Bakr's son Muhammad also occupied various official positions both at Bougies and Tunis. Ibn al Lihyani, son of Muhammad and father of Ibn Khaldun, eschewed politics and led the life of a faqih [ jurist] and a man of letters.The career of Ibn Khaldun may be divided into three parts. The first twenty years of his life were spent in the pursuit of education. He learnt the Quran, memorised it and studied different styles of recitation and interpretation. He studied hadith, jurisprudence, grammar and rhetoric under the tutelage of some of the most eminent scholars and teachers of Tunis, which was at that time a prime centre of learning, after Cairo, in North Africa. In 1349 CE, North Africa was afflicted with the Great Plague, a horrifying calamity that befell large parts of the Muslim world from Samarqand in Central Asia to Mauritania in Africa. Ibn Khaldun lost both his parents and nearly all his teachers.Ibn Khaldun devoted the next 23 years of his life to the pursuit of higher learning. As an ambitious man, Ibn Khaldun was also consumed by a passion to achieve worldly success and prosperity. North Africa at that time provided several avenues of success for men of ability, ambition and drive. Ibn Khaldun was quite close to the Emperor Abu Inan, the greatest monarch of his time in North Africa, and this association, which lasted for 30 years, proved to be momentous in Ibn Khaldun’s career. It brought him great prestige, power and prosperity. He spent the remaining 31 years of his life as a private scholar, teacher and magistrate. The early periods in his life were spent in Morocco and Algeria while he spent the last years of his life in Morocco, Algeria and Egypt.Ibn Khaldun’s works sought to deal with the problems and challenges that had confronted the state and society in North Africa during the 14th century. His grounding in philosophy provided a depth to his writings and facilitated theoretical generalisations from his observations and personal experiences. Ibn Khaldun wrote many books, most of which did not survive the vicissitudes of time. His magum opus, the Muqaddimah, is a testament to his genius and his multi-faceted contributions.IBN KHALDUN’s VIEWS ON THE ROLE OF STATEThere is a close linkage between public finances and the structure and role of the state. It is therefore profitable to proceed with a discussion of Ibn Khaldun’s view on the role of the state. Ibn Khaldun holds that the state is not a subject of abstract speculation or of utopian ideals, but has a concrete political and existential reality and has a close bearing on human behaviour. Ibn Khaldun argues that human society is necessary because individuals acting alone cannot acquire and manage either resources for food or security. The state arises out of the need to curb the aggressive instincts embedded in human nature. The state is inconceivable without society, while society is well-nigh impossible without state. According to Ibn Khaldun, the strength of the state depends upon society, the prosperity of business, the intensity of human efforts and the search for gain. If men slacken in their economic activities the markets slump and society deteriorates. People leave that country and migrate elsewhere in search of a decent livelihood, resulting in the desertion of cities and weakening of the state. Ibn Khaldun argues that the system of caliphate is the most viable and best form of governance and administration. The misfortunes of history are caused by the wilful violation of the cardinal principles of the Islamic shari’ah, as well as by the sins of pride, over-indulgence and luxury, and avarice. The rise and fall of states, societies and civilizations, according to Ibn Khaldun, can be attributed to this fundamental principle. The rise and fall of states and civilizations, according to him, take place in a cyclical manner.In academic discourse, three distinctive approaches towards the structure and role of the state can be identified. These can be described as are libertarian, collectivist and neo-liberal. Each of these approaches reflects the dominant philosophy or climate of opinion in a given period of time. The libertarian approach emphasizes the efficiency of market mechanisms and envisages a minimal role for the state. The scope for public finances, according to this perspective, is restricted. The collectivist approach, on the other hand, which is also known as the interventionist perspective, was born out of the economic shocks experienced by several countries during the early decades of 20th century. It calls for a proactive role on the part of the government necessitating unrestrained public finances. The later decades of 20th century brought to the fore the pitfalls inherent in the interventionist perspective. The major argument was that institutions and persons had to face high inefficiency costs because of excessive taxation, huge expenditure and heavy public borrowing. Rent-seeking activities and free-riding were other two prominent shortcomings identified with the interventionist role. It is in this context that the neo-liberals plead for a restrained role of government. They, therefore, restrained public finances.Ibn Khaldun, like Muslim scholars and writers in general, considered the time of the Prophet and the first four caliphs as representing the perfect model for society and state. The first city-state in Islamic history was established by the Prophet in the wake of his migration to Madinah in 622 C.E. The city-state was conceived and created by the Prophet in order to ensure order and stability, social and political solidarity and security for the Muslim community.The Islamic faith strikes a fine balance between individual and society, between personal autonomy and the social order. The structure, functions and role of the Islamic state exemplify this harmony. In respect of the management of the economy, Islam encourages public as well as private participation. Since Islam aims at falah (all-round wellbeing) and adl [balance, justice], excessive and uncalled for intervention by the state is eschewed. It accords preference to public interest over private interest in critical and core areas of the economy. Consequently, its approach towards public finance is also marked by balance and moderation. The following Table summarises the approaches towards the structure and role of the state.
Table No. 1: Historical Approaches towards the Role of State
Libertarian
Collectivist
Neo-Liberal
Islamic
Minimal public finance
Unrestrained public finance
Restrained public finance
balanced approach to public finance
Private spending replaces public spending
Public replaces private spending
Seek conditionality for public spending
different areas of public and private spending
Minimum burden of taxation
Redistributive taxes for equity
Tax ‘bads’ not ‘goods’ for efficiency
shariah itself and its levies have inbuilt mechanism for redistribution
Regressive taxes
Progressive taxes
Proportional taxes
mainly proportional with inbuilt flexibility for progression
Minimal public expenditure
Expansive public expenditure
Restrained public expenditure
need-based expenditure with welfare orientation
Limited public borrowing
Expansive public borrowing
Restrained public borrowing
borrowing permitted during exigencies.
Ibn Khaldun is against a proactive and interventionist role on the part of the state. He is against the idea of the king or the ruler engaging in trade, commerce, agriculture and other economic pursuits. Ibn Khaldun argues that if the king engages in trade and commerce and other economic pursuits, it will have adverse economic consequences for his subjects. Farmers and merchants, for example, would find it difficult to buy livestock because they would not have the same amount of resources as the king. Furthermore, the king’s power and authority would prevent ordinary traders and merchants to bid for commodities against him. Moreover, the king may force merchants and farmers to buy products and commodities from him at rates fixed by him. Thus merchants would not have the freedom or power to trade independently in competitive conditions. The concentration of trading authority and resources in the ruling class would therefore undermine entrepreneurship. The relevance of views of Ibn Khaldun in this respect can be better appreciated in the contemporary context of an excessive, and at times aggressive, intervention on the part of governments, which suffocates and chokes private enterprise. Economists speak of “crowding-out effect” to describe this particular phenomenon.IBN KHADLUN’S VIEWS ON PUBLIC EXPENDITUREIbn Khaldun’s Muqaddimah contains a wide-ranging discussion on the core areas of public finance, which attests to the originality of his thinking. His view are based on an ingenious synthesis of ideas and principles drawn from the Quran, the Traditions of the Prophet and the works of Muslim thinkers and philosophers. The classical and neo-classical economists believed in the efficacy of market mechanisms. According to them, market forces, such as demand and supply, operate autonomously and 'invisibly'. Thus Adam Smith, who is regarded as the father of economics, coined the term "invisible hand" to describe the functioning of the market economy. He and his followers assigned a limited role to the government and saw little or no need for taxation and public expenditure. They developed maxims such as "the best of all taxes is the one which is least in the amount" and "the best of all plans of expenditure is to spend the least".Ibn Khaldun is of the opinion that the expenditure made by the king "flows like water, fertilizing all that it touches". This statement is of immense significance because public expenditure stimulates economic activity when the private expenditure is inadequate. The role of kings and emperors is now assumed by democratically elected governments. Their expenditures stimulate and sustain the growth process. The views of Ibn Khaldun are very close to those of modern economists who favour government expenditure for a variety of reasons, including employment generation, correction of personal and regional disparities, human resource development and infrastructure development. The recent spending "packages" announced by the U.S. and several other Western governments are intended to work towards this end.Ibn Khaldun suggests that the king, representing the state, should promote and encourage economic activities. He is of the view that the state generates market for goods and services produced privately. This in turn facilitates productive and entrepreneurial activities. He opines that the king himself and his nobles spend huge amounts of money which, directly or indirectly, benefit a large number of people having direct dealings with court and courtiers. In turn, these people become rich and start spending lavishly. Their expenditure, along with spending of king and his nobles, promote arts and crafts causing further advancement of “all that is meant by civilisation”.
Ibn Khaldun suggests that the king, representing the state, should promote and encourage economic activities. He is of the view that the state generates market for goods and services produced privately. This in turn facilitates productive and entrepreneurial activities. He opines that the king himself and his nobles spend huge amounts of money which, directly or indirectly, benefit a large number of people having direct dealings with court and courtiers. In turn, these people become rich and start spending lavishly. Their expenditure, along with spending of king and his nobles, promote arts and crafts causing further advancement of “all that is meant by civilisation”.
Ibn Khaldun suggests that the state should promote and stimulate economic activities. He holds that the state represents the greatest market for goods, facilitating productive enterprises.Furthermore, he argues that the money raised by the ruler from the subjects goes to the courtiers, whose expenditure reach to the large number of private citizens inhabiting the metropolis, who have dealings with the court and officials, whose fortune consequently grows, and whose standard of living rises. These private citizens soon acquire habits of luxury, which promote the crafts and arts, and all that is meant by civilization.Seen in the contemporary context, it is clear that Ibn Khaldun is emphasizing the expenditure made by the state and its different departments. His assertion "all that is meant by civilisation" is very meaningful. In popular economics, it is believed that the expenditure is of three types. First, private consumption expenditure, which is denoted by C; private investment expenditure, which is denoted by I, and government expenditure, which is denoted by G. The aggregate expenditure E is a sum total of C+I+G. This can be explained with the help of the following equation:E=f [C+I+G] --------- (1)This aggregate expenditure, at a given point of time, supports a certain level of employment, output and income. In difficult and depressing conditions, when the private consumption (C) and investment expenditure (I) are not sufficient to support a desired level of output and employment, economists usually suggest an increase in the government expenditure. Now the new equation will be:E1=f [C+I+G1] ---------- (2)G1 stands for the increased government or public expenditure. This stimulates output and employment generating activities. It is rightly argued that the public expenditure provides much-needed antidote during depressing conditions. Even during normal conditions, public expenditure helps economies in maintaining a desired rate of growth.Ibn Khaldun also speaks about different types of expenditure which have different socio-economic implications. His mention of luxurious waste by kings and their nobles deserve a serious attention. He is of the opinion that the decline of mighty empires is caused by an increase in luxurious spending by men who wield power and authority. While criticizing luxurious and wasteful expenditure, Ibn Khaldun emphasizes the need to spend on social heads. He writes: “Take care of the poor, widows and orphans; pay them special stipends from your treasury… do the same to the blind and to those who can recite the Quran”. And, "provided this does not overburden the state treasury, build hospitals for sick, with a staff of physicians and attendants who will look after them and administer to their needs”. He also suggests payment of a “special stipend” to people suffering from different disabilities. Here Ibn Khaldun emphasises the need for humanitarian expenditure. He may be regarded as a precursor of the modern concepts of old age homes, homes for the destitute and public hospitals. In addition to its welfare program, the government should spend its tax revenue wisely to improve conditions of its "subjects, to safeguard their rights and to protect them from harm. Here Ibn Khaldun endorses the expenditure on the provision of internal and external security.IBN KHALDUN’S VIEWS ON RESOURCE MOBILIZATIONAt a given point of time, the capacity of a state to finance its expenditure depends greatly upon its ability to mobilise resources in an efficient manner. Ibn Khaldun’s views in this connection are refreshingly original. He puts different taxes into two categories, namely “good taxes” and “bad taxes”. “Good taxes are those taxes, which are collected according to the shariah, expressly ordained by Allah and His Messenger. These are zakah, land taxes and the poll tax (jizyah). They are good because they constitute small assessment, which do not destroy incentives. Among the bad sources of revenue to the government are high custom duties, revenues from the commercial activities of the government, revenue obtained through other confiscatory levies and forced labour, etc. He states that the strongest incentive for cultural activities comes from the lowest possible taxes levied upon persons capable of undertaking enterprises. This statement of Ibn Khaldun makes a reference to the correlation between taxes and incentives which normally include the desire to work, earn, save and invest. In a larger context, incentives are destroyed when tax rates are high. Economists use the term "efficiency loss" to describe any damage to incentives. This is a core issue in the area of optimal taxation. Several econometric studies have demonstrated the deterrent effect of high tax rates. Universally, the growth of the parallel economy of black money is attributed to high taxes on people and materials.It is remarkable that more than six centuries ago Ibn Khaldun spoke of the disincentive effect of high tax rates. He favours shariah-based taxes whereby the minimum rate is determined at 2.5 percent and the maximum rate does not exceed 20 per cent. Economists argue that disincentive effect is not all that strong when the tax rates are between 10 and 20 per cent. Ibn Khaldun argues that taxes collected at low rates generally lead to more revenues for the government while taxes with high rates bring in less revenue. Extremely high taxes lead to the fall of civilizations. He is, however, careful enough to maintain that tax rates administered below those set by the shariah will deprive government of the required revenue. Therefore, both extremely low and extremely high taxe rates need to be eschewed.The assessments increase beyond the limits of equity. The result is that the interests of the subjects in cultural enterprises disappears, since when they compare expenditures and taxes with their income and gain and see the little profit they make, they lose all hope. The result is that the total tax revenue goes down, as (the number of) the individual assessments goes down. Finally, individual imposts and assessments reach their limit. The costs of all cultural enterprise are now too high, the taxes are too heavy, and the profits anticipated fail to materialise….Finally, civilization is destroyed, because the incentive for cultural activity is gone. (The Muqaddimah, translated by Franz Rosenthal, 1958, Vol. 2, pp. 90-91)
The assessments increase beyond the limits of equity. The result is that the interests of the subjects in cultural enterprises disappears, since when they compare expenditures and taxes with their income and gain and see the little profit they make, they lose all hope. The result is that the total tax revenue goes down, as (the number of) the individual assessments goes down. Finally, individual imposts and assessments reach their limit. The costs of all cultural enterprise are now too high, the taxes are too heavy, and the profits anticipated fail to materialise….Finally, civilization is destroyed, because the incentive for cultural activity is gone. (The Muqaddimah, translated by Franz Rosenthal, 1958, Vol. 2, pp. 90-91)
Ibn Khaldun writes that, in its incipient phase, the state commanding religious authority collects more revenue from a small number of taxpayers. It extracts only those dues [taxes] as provided by the Islamic law, such as zakah, ushr, kharaj and jizyah. The shariah based levies have a divine sanction regarding base, rate, exemption limit, methods of collection and disbursement. Overall, the shariah levies demonstrate commendable moderation. Consequently, enterprises develop because businessmen feel that it is worthwhile to part with some amount of money in taxes. And, as businesses prosper, the number of taxpayers grows and the total tax yield increases.According to Ibn Khaldun when the dynasty continues in power and their rulers follow each other in succession, they become sophisticated. The tribal way of life of people changes in favour of more settled one. Their needs and exigencies grow owing to the luxury in which they have been brought up. Hence, the king and the officials of the state adopt a luxurious way of life. In the opinion of Ibn Khaldun they start extracting more revenue by increasing rates of various taxes. Thus, in the later stages the burden of taxation increases and the revenue falls. This is exactly the argument advanced by modern economists in general and supply-siders in particular. They argue that high tax rates need not bring in more revenue; on the contrary, they yield less revenue. Persons, institutions, businesses and companies start underreporting their incomes and transactions once they feel that tax rates are confiscatory.Ibn-Khaldun has warned against possible adverse effect of excessive taxes on the desire to work hard and subsequently on economic growth. He is of the view that the ruler should collect taxes in a just manner and according to the ability of the taxpayers. None should be exempted from paying taxes because of his status or riches or position. At the same time, Ibn Khaldun warns against the use of coercion in collecting taxes. He is against a policy whereby revenue is collected in order to just enlarge the treasury. He advocates that the object should justify collection. Revenues should be spent judiciously.Ibn Khaldun observes that when there is a fall in revenue due to either high tax rates or the flight of capital and entrepreneurial activities to low taxed activities and areas, the people at the helm of affairs fail to judge the exact cause of fall. They mistakenly point to a decline in revenue to low tax rates and try to remedy it, in a wrong way, by increasing tax rates still higher. Hence, tax rates reach a confiscatory level leaving no profit to businesses. Consequently, businessmen and their businesses disappear from the scene.The above-mentioned notion of taxation as enunciated by Ibn-Khaldun was picked up by Arthur Laffer, an eminent American economist whoserved as an advisor to the U.S. President Ronald Reagan in the early 1980s. He shot to limelight because of his advocacy for low tax rates. He invented a famous curve, now popularly known in academic circles as the Laffer curve. His argument is as follows: At both extremes of taxation—zero percent and one-hundred percent—the government collects no revenue. Laffer and other economists used the curve to argue that taxes were currently too high. They further argued that in order to encourage enterprising activities, tax rates should be brought down. Currently, we notice a world-wide trend in favour of low tax rates on men and materials. Surprisingly, Laffer does not claim to have invented the concept; He attributes it to Ibn-Khaldun. Thus, the well-known Laffer curve is nothing but a graphical representation of the theory of taxation developed by Ibn Khaldun in the fourteenth century.This brief paper has attempted to demonstrate that Ibn Khaldun rightfully belongs to the galaxy of the earliest fiscal economists. It would be fruitful and rewarding to examine the relevance of his ideas in other branches of economics. This can be done by a critical study of those parts of the Muqaddimah which deal with economic issues and an examination of their relevance in the context of present times.SELECT BIBLIOGRAPHYFuad, ba Ali., Ibn Khuldun’s Science of Human Culture, Adam Publishers and Distributors, Delhi, 1996.Issawi, Charles., “Ibn Khuldun’s Analysis of Economic Issues” in Readings in Islamic Thought edited by Abul Hassan .M.Sadeq and Aidit Ghazali, Longman Malaysia, Kuala-Lumpur, 1992.Peerzade, Sayed Afzal., Islamic Public Finance and Policy, Idarah-i- Adabiyat, Delhi, 2004.Rahatunissa, Contribution of Early Muslim Scholars to Economic Thought, Unpublished Ph.D. thesis, Karnataka University, Dharwad, 2006.Rahmani, Raghib., Muqadimah, Urdu translation, Iteqad Publishing House, Delhi, 1987.Rosenthal, Franz., Muqaddimah : An Introduction to History, Translation from Arabic, Rutledge and Kegan Paul, London 1958.Zakaria, Rafiq., Struggle Within Islam, Viking Books, 1988.www.bized.ac.uk/economy/virtuallibrary
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J.KAU: Islamic Econ., Vol. 18, No. 1, pp. 3-12 (2005 A.D/1426 A.H)
3
Towards Self-Enforcing Islamic Tax System:
An Alternative to Current Approaches
SAYED AFZAL PEERZADE
Head, Department of Studies in Economics,
Karnataka State Women University, Bijapur, India
ABSTRACT. In this paper an attempt is made to develop an alternative Islamic approach
towards self-enforcing direct tax system. A number of Muslim countries are, at present,
economically backward. Here resource mobilization efforts occupy a prime position.
Taxation is one of the important means of mobilizing resources. It calls for a selfenforcing
tax system which helps not only in raising the required revenue but also
minimizes revenue leakage on account of tax evasion. It is defined as the one where
efforts to evade one tax will automatically involve the taxpayer in other tax liabilities so
great that evasion is not worthwhile. The system makes it to pay to be honest about
taxes. Any approach towards a self-enforcing system qualifies itself to be called as the
Islamic only when it essentially satisfies two conditions. First, it is necessary that in the
perceived approach zakah should form the core of resource mobilization effort. Second,
in addition to the current secular rules and regulations regarding rates, exemption levels,
administration, etc., the approach should also incorporate minimum of the Shariah
prescriptions. On one front of the Islamic approach, as developed in the present paper,
zakah occupies a pre-eminent position, on the other front a gross tax on income, an
expenditure tax and a withdrawal tax operate to support one another so as to reinforce the
system. This approach makes taxpayers to pay at each and every stage of accretion,
consumption and accumulation.
A number of Muslim countries, wherein it is possible to create Islamic societies and
establish Islamic states, are, at present, characterized by economic backwardness. Even
though a few among them are capital surplus countries, it can be said that they, too, are
not developed in the real sense of the term(1). If efforts are not made to speedup economic
growth then, in the years to come, their economic backwardness would create problems
for the Muslim ummah on social, economic and political fronts. Their dependence on
developed countries, mainly non-Muslim, would increase to the advantage of the latter.
(1) One can refer to various issues of World Development Report of the World Bank and Human
Development Report of UNDP so as to obtain a clear idea about the present state of economic affairs in
Muslim countries.
4 Sayed Afzal Peerzade
Given the present day scenario it is necessary for Muslim countries to make
sincere efforts to accelerate the rate of economic growth. The path of economic growth
is not a smooth one. It involves pains, sacrifices and adjustments of different sorts. Here
the resource mobilization effort occupies a prime position. Resources are normally
mobilized through tax and non-tax means. On account of the limitation of this paper the
non-tax means of revenue are not discussed here. So far as taxes are concerned it is
maintained here that not only the rates and number of taxes matter, an effective tax
administration is equally important. It helps not only in raising the required revenue but
it also minimizes revenue leakage on account of tax evasion. It is here that the need for
a self-enforcing tax system arises. This paper attempts to develop outlines of a selfenforcing
tax system for Muslim countries. It is organized as under: Section I explains
meanings of the self-enforcing tax system. Section II examines certain minimum
Shariah prescriptions that impart Islamic character to the proposed self-enforcing tax
system. Different constituents of the self-enforcing system are explained in Section III.
The final Section contains some concluding observations.
I
The governments in developing countries, in order to raise required revenue,
normally impose several types of taxes on individuals, business corporations and
commodities. Several tax rates on one hand and poor tax compliance and administration
on the other make it possible, and even encourage too, a large-scale tax evasion. Even
though currently there is a paradigm shift in favour of market-led growth with
governments adopting off-budget measures, the importance of taxation as a means of
resource mobilization cannot be denied. Not in all the Muslim countries it can be
expected that a recourse to market provides sufficient revenue for the purpose of
financing socially welfare-oriented functions of the government. The market failure in
the context of provision of public goods is an important part of the debate in area of
Public Economics(2).
In developed countries the problem of tax evasion may not be that serious though
its existence cannot be denied altogether. Limited possibilities of evasion can be
attributed to a practice of book keeping which is normally of a very high order. At the
same time there prevails in developed countries a very high sense of tax compliance.
Consequently, tax evasion happens to be a very small fraction of tax liabilities of
individuals and corporations. This, however, is not so in the case of Muslim countries in
particular and other developing countries in general. Here tax evasion is a rule rather
than an exception. This phenomenon of evasion not only adversely affects resource
mobilization effort but it also makes governments to rely more on non-tax means of
revenue such as deficit financing and public borrowing. It is here that the need for a
self-enforcing tax system is felt which, on one hand, helps to raise required revenue and,
on the other, brings down the existing level of evasion.
(2) A. B. Atikinson, and J. E. Stiglitz, Lectures on Public Economics, Tata MacGraw Hill, New Delhi, 1980.
One can also refer to A. J. Auerbac and M. Feldestein (eds) Handbook of Public Economics, North
Holland Amsterdam, 1985; Richard A Musgrave and P. B. Musgrave, Public Finance in Theory and
Practice, McGraw Hill, Tokyo, 1976.
Towards Self-Enforcing Islamic Tax System … 5
Higgins defines a self-enforcing tax system as the one where efforts to evade one
tax will automatically involve the taxpayer in other tax liabilities so great that evasion is
not worthwhile. The system makes it to pay to be honest about taxes. At the same it has
built-in incentive aspects that should contribute to economic growth(3). This notion of a
self-enforcing tax system as defined by Higgins is very close to the idea of "a closed tax
system" developed and proposed by Nicholas Kaldor to the Government of India in
1956(4). The Government of India adopted Kaldor’s report and introduced wealth and
expenditure taxes. To this day the wealth tax exists, the expenditure tax, however, had a
chequered history(5). Of the several reasons attributed to its poor performance one major
reason was that the expenditure tax was not implemented in the form as recommended
by Kaldor. At present a different variant of the expenditure tax is operating.
Higgins admits that Kaldor’s idea of a closed system provided the "missing link".
Higgins borrowed from Kaldor his famous idea of an expenditure tax(6). He admits that
by adding to Kaldor’s expenditure and wealth taxes, a penal tax on excess inventories
and a turnover tax, it is possible to devise a closed system so that any one failing to
report one taxable transaction will either find himself paying more under another tax or
having the transaction reported by the other party to it because the other party can
reduce its liability by honest reporting.
II
Following the above scheme an attempt is made here to develop an alternative
Islamic self-enforcing tax system that can be applied in Muslim countries(7). Admitting
complexities and intricacies that are normally associated with the administration of
different taxes, the scope of present paper is limited only to the area of direct taxes only.
We already have two approaches before us. One is that of Higgins "self-enforcing
tax system" and the other that of Kaldor’s "model of a closed system". What is then an
alternative Islamic approach? Any approach towards a self-enforcing system qualifies
itself to be called as the Islamic only when it essentially satisfies two conditions. First, it
is necessary that in the perceived approach zakah should form the core of resource
mobilization effort. Second, in addition to the current secular rules and regulations
regarding rates, exemption levels, administration, etc., the approach should also
incorporate minimum of the Shariah prescriptions.
The two minimum requirements as mentioned above make it necessary to
understand the importance of zakah and Shariah prescriptions. The importance of zakah
is very well documented in the literature on Islamic Economics. It is, therefore, not
necessary to repeat the same once again. It suffices here to maintain that Islam
institutionalized zakah to ensure that no one suffers for the want of wherewithal to meet
(3) Benjamin Higgins, Economic Development: Problems, Principles and Policies, Universal Book Stall,
New Delhi, Reprint, 2001, p. 528.
(4) Nicholas Kaldor, Indian Tax Reform: Report of A Survey, Ministry of Finance, Government of India,
New Delhi, 1956.
(5) Sayed Afzal Peerzade, Expenditure Tax in India, Anmol Publications, New Delhi, 1990.
(6) Nicholas Kaldor, An Expenditure Tax, George Allen and Unwin, London, 1955.
(7) For a discussion on "just tax system from Shariah view point" please refer to M. Umer Chapra, Islam
and Economic Challenge, The Islamic Foundation, Leicester, U.K., 1992, pp. 296-97
6 Sayed Afzal Peerzade
his or her basic needs. "It is, thus, the financial embodiment of an indispensable socioeconomic
commitment of Muslims to meet the needs of all without putting entire
burden on the public exchequer which socialist and secular welfare states have
unwittingly done"(8).
In Muslim countries the choice of a tax or a combination of taxes, level of
exemption, rate bands, scope for deductions and definition and measurement of tax
bases, etc., need to be greatly guided by the dictates of Shariah. A study of
administration of zakah and kharaj during the period of the Prophet and his righteous
caliphs would be of immense significance. It provides us with a set of Shariah
principles. The levy of zakah, itself, for example, sets certain imperatives as follows:(9)
First, no additional levies on personal or collective incomes can be imposed on assets
whose incomes fall below the nisab stipulated in zakah.
Second, in the calculation of assessable income, expense items shall have to be
deducted as are done under zakah laws. The deductible items have been examined in
detail in the Shariah……These have to be taken account of and strictly adhered to, not
only in the administration of zakah but in additional levies as well.
Third, double or multiple assessment of the same base is not possible in one stipulated
period in zakah. Hence such a policy is to be avoided in case of other direct taxes.
Here three more Shariah-based prescriptions are added:(10)
First, once income/spending/wealth level crosses zakah nisab level, then the whole of
income/spending/wealth should be taxed and not just that part which is in excess of nisab.
Second, tax tools should not be used to achieve, as far as possible, non-tax goals
through a series of deductions, concessions and allowances.
Third, the rate bands of different taxes should greatly reflect the essence behind the
rates of prominent Shariah levies where the thrust is on moderation.
The above prescriptions help and guide us when we contemplate an Islamic
approach towards a self-enforcing tax system. It should strengthen the working of
conventional Shariah levies, especially the zakah. It is their promotion and continuation
that imparts a distinct Islamic character to the existing tax systems in Muslim countries.
(8) M. Umer Chapra, Islam and Economic Challenge, The Islamic Foundation, Leicester, U.K., 1992, pp.
271-272
(9) F. R. Faridi, "Zakah and Fiscal Policy" in Ahmed Khursheed (ed.) Selected Papers, Amar Prakashan,
New Delhi, 1984, p.121. One can also refer to the classic works of great masters such as Abu Yusuf
(1966), Abu Ubayd (1986), and al-Daudi (1995) In recent times the contributions of al-Qaradawi (1980)
and Nejatullah Siddiqi (2001) are also significant. The Islamic Fiqh Academy, New Delhi, has also done
commendable work in this area.
(10) Sayed Afzal Peerzade, Principles of Islamic Public Finance and Policy, Idarah-I Adbiyat-I Delli, Delhi,
2004 (forthcoming).
Towards Self-Enforcing Islamic Tax System … 7
III
An alternative Islamic approach comprises a tax on gross income, an expenditure
tax, the zakah, a withdrawal tax and an agency administering a scheme of "special
deposit account". On the periphery there would be corporation, gift, capital gains and
property taxes. These constituents are briefly discussed in the following paragraphs.
Currently among all direct taxes, a tax on personal income occupies a pride place
in all developed and developing countries including Muslim countries. It is viewed as
an important means of revenue and an effective instrument of correcting unequal
income and wealth distribution. In terms of percentage its contribution to the total tax
revenue may not be high, yet it attracts maximum attention of the policy makers, tax
administrators and taxpayers.
Currently, following the accretion ideal, income is computed on gross basis,
however, tax is not imposed on gross income. First, a part of income is exempted. Next, a
number of deductions, concessions, rebates, etc., are allowed. As a result, a significant
portion of gross income gets excluded from the tax net. Consequently, to satisfy equal
revenue condition, the tax rate is required to be higher than what it would have been when
no such exemptions, deductions, concessions, rebates, etc., were allowed.
The present practice of allowing a number of deductions and concessions mainly
for the non-tax purposes has diluted the pure income base (following the accretion
ideal). It is now regarded as a hybrid base(11). A hybrid base is the one that conforms to
neither the accretion ideal nor the consumption ideal. Further, this practice has also
enabled a few assets to enjoy a relatively high index of fiscal privilege. This is an
additional advantage that some persons enjoy by manipulating their tax affairs. Surely,
the revenue outcome of a hybrid base would be entirely different from the one where
the tax base remains undiluted following the accretion principle.
In this context it is argued here that when all deductions, concessions, exemptions,
etc., are withdrawn so as to impose a tax on gross income, the above-mentioned
weaknesses disappear. Even with a sufficiently low rate a substantially large amount of
tax revenue gets collected. This requires bold policy decisions. Muslim countries should
set a precedent and should not wait for the one from Western countries. Following the
Shariah principles the entire income of a taxpayer should be taxed if it exceeds the
minimum exemption level.
An expenditure tax is another important constituent of the Islamic approach.
Following the consumption ideal, here the tax base is personal consumption
expenditure. It is not for the purpose of promotion of savings alone that an expenditure
tax is favoured but more importantly for the reason that no other tax but an expenditure
tax prevents depletion of scarce resources by charging dissaving. "Taxes on
consumption expenditure may some time become necessary to discourage deliberate
evasion of zakah and willful obstruction in the fulfillment of its secondary function
namely the promotion of productive investment of one’s savings"(12).
(11) The working of personal income taxation in India, Pakistan and several other countries lend support to
this contention.
(12) F. R. Faridi., "Zakah and Fiscal Policy", op .cit., p. 122.
8 Sayed Afzal Peerzade
There are reasons to believe that an expenditure tax helps Muslim countries to
achieve broad goals of Islamic fiscal management, more conveniently than any other
direct tax(13). In brief these reasons are, first, an expenditure tax helps to curb
ostentatious consumption. Second, since savings are tax free, it releases more finance
for economic growth. Third, it helps to control inflation and thereby maintain price
stability. Fourth, it facilitates expansion of the existing zakah base. Of the four
mentioned above, it is emphasized here that the first three are incidental to the
introduction of an expenditure tax and the primary and motivated reason happens to be
the expansion of zakah base.
Savings assume different forms such as bank deposits, shares, investments in real
estates, participatory loans and investments in numerous other financial and nonfinancial
instruments. This undoubtedly expands zakah base because zakah primarily
covers different types of productive assets. No other direct tax but an expenditure tax
helps in promoting and strengthening zakah base, to the advantage of both the Muslim
ummah and Muslim countries. With passage of time more attractive forms of savings
and investments have appeared and their number continues to multiply. The Islamic
approach maintains that the financial and non-financial assets that are above nisab,
complete one year and are free from debt, come under the reach of zakah.
For tax purposes it is directly not possible to keep a record of consumption
expenditure spread over the purchases of numerous goods and services. It is exactly for
this reason that the computation of expenditure for tax purposes is approached indirectly
following the basic relation between consumption and savings components of income,
i.e., c=y-s. Once savings are tracked the computation of chargeable consumption does
not pose any problem.
Under an expenditure tax regime, in order to claim a cent percent deduction, it is
required that all savings and investments are recorded. Unrecorded transactions are
treated on "cash flow" basis and are taxed. Since a cent percent allowable deduction is
tagged to the recorded savings and investments, the expenditure taxpayers get a strong
incentive to record the same and, therefore, zakah base expands to the extent of their
recordings. This incentive could be further enthused when the amount paid in zakah
also qualifies for a cent percent deduction from gross income or expenditure.
In this alternative Islamic approach a special place is occupied by zakah.
Ordinarily the zakah does not belong to the broad genre of taxes imposed by a state. So
also the funds collected through zakah do not belong to the ordinary genus of revenue.
But, purely from the economic view point, the zakah is an impost, which like any other
levy, effects a transfer of resources from private to the public use for an earmarked
spending. Even though the revenue from zakah can not be spent on the heads other than
those enumerated in the Holy Quran [9:60] it can be said that the extent to which zakah
funds are available to the state for spending on poor, destitute, needy and indigent, the
broad purpose of any resource mobilization effort, i.e., poverty alleviation, is served.
(13) For a detailed discussion one may refer to Sayed Afzal Peerzade, "The Place of An Expenditure Tax in
the Islamic Fiscal System", Journal of King Abdul Aziz University: Islamic Economics, Jeddah, 1999,
Vol. 11, pp. 29-62
Towards Self-Enforcing Islamic Tax System … 9
There are at least three reasons to believe that the levy of zakah is likely to provide
substantial funds to the state exchequer(14). First, it makes accessible to the tax
authorities such items as ordinarily beyond their purview. Second, the low exemption
limit of zakah enables the state to throw its fiscal net quite wide. Third, the incentive
effect of zakah is likely to increase productive investment and hence net savings in the
economy. As this happens, the zakah base widens and brings in more resources.
At this juncture one objection can be anticipated. A system, where the zakah and
an expenditure tax operate side by side, is on a self-destruct path for the reason that the
levy of zakah would cancel incentives to save. Therefore, one should not expect
promotion of savings, investment, capital formation and thereby high growth rates. This
criticism, however, is not well founded. The imposition of zakah leads to a persuasive
utilization of assets that in the absence of zakah would have remained idle. This effect
of zakah can be understood in the context of a circular relationship between zakah and
increased investment on one hand and zakah and increased transfer payments on the
other. One set of forces strengthens supply-side and the other stimulates demand.
Further, what the zakahpayers are going to do with their large savings when it is feared
that the zakah on an annual basis depletes their savings? Will they notice silently a
gradual decline in their accumulated balances? How they react to this adverse situation
that gets worsened further on account of a persistent fall in the value of money on
account of inflation?
Indeed, it can be said that, the fear of a gradual depletion in savings alongside a
fall in the value of money force zakahpayers to find out suitable avenues of investment.
Supposing that they are not wise enough to understand intricacies of financial markets
so as to invest personally, they can undertake investment through secondary sources,
i.e., financial institutions, investment houses, mutual funds, etc. Even deposits in
commercial banks can be considered as a safe investment. Therefore, it is maintained
here that the investments increase following an increase in savings.
It should not be ignored that the assets on which zakah is paid are subject to a
"divine multiplier" [The Holy Quran 2:261-62]15. As against conventional economic
wisdom (substitution effect) it is not difficult to find Muslims who earn more (economic
effect) to save more so as to pay more zakah in order to earn ethereal reward (merit
effect)16. In this context zakah is not considered as a levy but a celestially ambrosial
incentive to save. As zakah is considered as a means of seeking the pleasure of Almighty
Allah, it is not expected to reduce savings, it, on the contrary, increases the same.
The Islamic approach towards a self-enforcing tax system requires, for the sake of
administrative simplicity and convenience, setting up of a National Equity Fund (NEF),
which administers a scheme of Special Deposit Account (SDA). The contributions to
SDA qualify for a cent percent deduction. It is merely a matter of policy before
governments in the Muslim countries to declare which saving-schemes they are going to
(14) F. R. Faridi, "Zakah and Fiscal Policy", op. cit., p. 126.
(15) One must not cast doubt on introducing the concept of "divine multiplier" here in our discussion. The divine
reward is guaranteed by the Almighty and, therefore, a Muslim is required to accept it in letter and spirit.
(16) Sayed Afzal Peerzade, "The Idea of Merit Effect: Islam's Contribution to Economics", Journal of
Objective Studies, Vol. 3, No. 1, 1993, pp. 1-22.
10 Sayed Afzal Peerzade
treat as fully tax deductible. The NEF would undertake investment on behalf of its
contributors who have no or a very limited knowledge to understand complexities of
financial markets(17).
It is also suggested the proposed NEF should be authorized to deduct zakah at
source on the savings of each one of the contributor, provided it is above nisab and that
it has completed one year under the administration of NEF. Further, the NEF adhering
to the expenditure tax principle collects a tax on withdrawals that are permitted after a
stipulated period. This covers consumption financed out of dissaving. A progressive
income tax with adequate saving provisions does not restrain a taxpayer from dissaving.
Thus, in Muslim countries the NEF is expected to perform the following functions:
First, it mobilizes funds and channels the same into productive business and commercial
ventures on behalf of its numerous contributors and share profit and loss with them.
Second, it deducts zakah annually from the capital of each one of its contributors,
provided Shariah conditions are satisfied.
Third, it deducts a tax on withdrawal at source in the year of withdrawal.
Let us consider the following numerical example of a hypothetical taxpayer who
earns one million rupees per year. As his income exceeds the nisab level, he is,
therefore, taxed on his gross income. Further, he contributes Rs.200,000/- to the NEF.
Since we are following consumption criterion as well, contributions to the NEF are fully
tax exempt. The remaining amount of Rs.800,000/- is taxed on cash flow basis. There at
the NEF level, after the completion of one year, Rs.200,000/- are covered for zakah
purposes. The dividend remains untouched. It may be remitted or reinvested by the NEF
on the instructions from the contributor. Suppose that the contributor, after the
completion of stipulated period, decides to withdraw his contribution with the NEF. The
NEF now imposes a withdrawal tax. Thus, at every stage of earning (the accretion
principle) and spending (the consumption principle) our hypothetical taxpayer is
required to pay something to the state exchequer. He pays zakah as well on his
contributions to the NEF.
There could be a large number of people who prefer to save and invest
independently of the NEF in one or more profitable business ventures. Here it is
proposed that such investors should pay zakah directly to the zakah authorities and
thereby claim deduction for the amount paid in zakah from their total taxable income.
The monitoring of zakah base (and consequently consumption base) is possible because
in the year preceding zakah payment they had asked for a cent percent deduction of the
amount paid in zakah. Here tracking of the sale of assets accumulated tax-free is also
possible because in the next year zakah will not be paid on them. Consequently, these
are included in the gross income in the year of sale and taxed accordingly. It is no
longer necessary to impose a wealth tax because its purpose is well served by zakah.
However, a wealth tax or a property tax could be imposed on such of the assets that are
not normally covered under the purview of zakah.
(17) It is not necessary that there should be only one institution of the type of NEF as suggested, there could
be many. In several countries such organizations are functioning at the government and private levels as
well. The essence of this proposal is that there should be some record of contributions, i.e., savings and
investments, so that these qualify for a cent percent tax deduction.
Towards Self-Enforcing Islamic Tax System … 11
IV
It is clear from the above discussion that it is possible to present an alternative
Islamic approach of a self-enforcing tax system. On one front of the self-enforcing tax
system, zakah occupies a pre-eminent position, on the other front a gross tax on income,
an expenditure tax and a withdrawal tax operate to support one another so as to
reinforce the system. The creation of NEF facilitates flow of funds into productive
channels. This approach makes taxpayers to pay at each and every stage of accretion,
consumption and accumulation. It makes attempts of evading taxes less attractive than
before for two reasons. First, from the gross income a cent percent deduction of the
amount paid in zakah is claimed. Second, a cent percent deduction is claimed on
contributions to the NEF. There is a sufficient provision for cross-checking too. Once
contributions to the NEF are reported, consumption is tracked and vice versa.
References
Abu Ubayd (1986), Kitab al-Amwal (Urdu), Idarah-I Tahqiqat-I Islami, Islamabad, Pakistan.
Abu Yusuf (1966), Kitab al-Kharaj (Urdu), Makatab-e-Chiragh-e-Rah, Karachi.
Ahmed, Khursheed (ed.) (1984), First International Conference on Islamic Economics: Selected
Papers, Amar Prakashan, New Delhi.
al-Daudi, Jafar Ahmad ibn Nasr (1995), Kitab al-Amwal, Islamic Research Institute Islamabad,
Pakistan.
Atkinson A. B. and J. E. Stiglitz (1980), Lectures on Public Economics, MacGraw Hill, New York.
Auerbec A. J. and M. Feldstein (eds.), Handbook of Public Economics, North Holland,
Amsterdam.
Chapra, M. Umer (1992), Islam and Economic Challenge, The Islamic Foundation, Leicester, U.K.
Faridi F. R. (1984), "Zakah and Fiscal Policy", in Khursheed Ahmed (ed.) First International
Conference on Islamic Economics: Selected Papers, Amar Prakashan, New Delhi.
Higgins, Bejamin (2001), Economic Development: Problems, Principles, Policies, Universal
Book Stall, New Delhi, Reprint.
Kaldor, Nicholas (1955), An Expenditure Tax, George Allen & Unwin, London,
Kaldor, Nicholas (1956), Indian Tax Reform: Report of A Survey, Ministry of Finance,
Government of India, New Delhi.
Musgrave, Richard A., and P. B. Musgrave (1976), Public Finance in Theory and Practice,
McGraw Hill, Tokyo.
Peerzade, Sayed Afzal (1990), Expenditure Tax in India, Anmol Publications, New Delhi,.
_______, (1993) "The Idea of Merit Effect: Islam's Contribution to Economics", Journal of
Objective Studies, Vol. 3, No.1.
_______, (1999) "The Place of an Expenditure Tax in the Islamic Fiscal System", Journal of King
Abdul Aziz University, Jeddah, Vol. 11.
_______,(2004)Islamic Principles of Public Finance and Policy, Idarah-I Adbiyat-I Dilli, Delhi,
(forthcoming).
al-Qardawi, Yusuf (1980), Fiqh-al Zakah (Urdu), Idarah Dawat al-Quran, Bombay.
Siddiqi, Muhammad Nejatullah (2001), Islamic Public Economics, Idarah-I Adbiyat-I Dilli, Delhi.
12 Sayed Afzal Peerzade
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3
Towards Self-Enforcing Islamic Tax System:
An Alternative to Current Approaches
SAYED AFZAL PEERZADE
Head, Department of Studies in Economics,
Karnataka State Women University, Bijapur, India
ABSTRACT. In this paper an attempt is made to develop an alternative Islamic approach
towards self-enforcing direct tax system. A number of Muslim countries are, at present,
economically backward. Here resource mobilization efforts occupy a prime position.
Taxation is one of the important means of mobilizing resources. It calls for a selfenforcing
tax system which helps not only in raising the required revenue but also
minimizes revenue leakage on account of tax evasion. It is defined as the one where
efforts to evade one tax will automatically involve the taxpayer in other tax liabilities so
great that evasion is not worthwhile. The system makes it to pay to be honest about
taxes. Any approach towards a self-enforcing system qualifies itself to be called as the
Islamic only when it essentially satisfies two conditions. First, it is necessary that in the
perceived approach zakah should form the core of resource mobilization effort. Second,
in addition to the current secular rules and regulations regarding rates, exemption levels,
administration, etc., the approach should also incorporate minimum of the Shariah
prescriptions. On one front of the Islamic approach, as developed in the present paper,
zakah occupies a pre-eminent position, on the other front a gross tax on income, an
expenditure tax and a withdrawal tax operate to support one another so as to reinforce the
system. This approach makes taxpayers to pay at each and every stage of accretion,
consumption and accumulation.
A number of Muslim countries, wherein it is possible to create Islamic societies and
establish Islamic states, are, at present, characterized by economic backwardness. Even
though a few among them are capital surplus countries, it can be said that they, too, are
not developed in the real sense of the term(1). If efforts are not made to speedup economic
growth then, in the years to come, their economic backwardness would create problems
for the Muslim ummah on social, economic and political fronts. Their dependence on
developed countries, mainly non-Muslim, would increase to the advantage of the latter.
(1) One can refer to various issues of World Development Report of the World Bank and Human
Development Report of UNDP so as to obtain a clear idea about the present state of economic affairs in
Muslim countries.
4 Sayed Afzal Peerzade
Given the present day scenario it is necessary for Muslim countries to make
sincere efforts to accelerate the rate of economic growth. The path of economic growth
is not a smooth one. It involves pains, sacrifices and adjustments of different sorts. Here
the resource mobilization effort occupies a prime position. Resources are normally
mobilized through tax and non-tax means. On account of the limitation of this paper the
non-tax means of revenue are not discussed here. So far as taxes are concerned it is
maintained here that not only the rates and number of taxes matter, an effective tax
administration is equally important. It helps not only in raising the required revenue but
it also minimizes revenue leakage on account of tax evasion. It is here that the need for
a self-enforcing tax system arises. This paper attempts to develop outlines of a selfenforcing
tax system for Muslim countries. It is organized as under: Section I explains
meanings of the self-enforcing tax system. Section II examines certain minimum
Shariah prescriptions that impart Islamic character to the proposed self-enforcing tax
system. Different constituents of the self-enforcing system are explained in Section III.
The final Section contains some concluding observations.
I
The governments in developing countries, in order to raise required revenue,
normally impose several types of taxes on individuals, business corporations and
commodities. Several tax rates on one hand and poor tax compliance and administration
on the other make it possible, and even encourage too, a large-scale tax evasion. Even
though currently there is a paradigm shift in favour of market-led growth with
governments adopting off-budget measures, the importance of taxation as a means of
resource mobilization cannot be denied. Not in all the Muslim countries it can be
expected that a recourse to market provides sufficient revenue for the purpose of
financing socially welfare-oriented functions of the government. The market failure in
the context of provision of public goods is an important part of the debate in area of
Public Economics(2).
In developed countries the problem of tax evasion may not be that serious though
its existence cannot be denied altogether. Limited possibilities of evasion can be
attributed to a practice of book keeping which is normally of a very high order. At the
same time there prevails in developed countries a very high sense of tax compliance.
Consequently, tax evasion happens to be a very small fraction of tax liabilities of
individuals and corporations. This, however, is not so in the case of Muslim countries in
particular and other developing countries in general. Here tax evasion is a rule rather
than an exception. This phenomenon of evasion not only adversely affects resource
mobilization effort but it also makes governments to rely more on non-tax means of
revenue such as deficit financing and public borrowing. It is here that the need for a
self-enforcing tax system is felt which, on one hand, helps to raise required revenue and,
on the other, brings down the existing level of evasion.
(2) A. B. Atikinson, and J. E. Stiglitz, Lectures on Public Economics, Tata MacGraw Hill, New Delhi, 1980.
One can also refer to A. J. Auerbac and M. Feldestein (eds) Handbook of Public Economics, North
Holland Amsterdam, 1985; Richard A Musgrave and P. B. Musgrave, Public Finance in Theory and
Practice, McGraw Hill, Tokyo, 1976.
Towards Self-Enforcing Islamic Tax System … 5
Higgins defines a self-enforcing tax system as the one where efforts to evade one
tax will automatically involve the taxpayer in other tax liabilities so great that evasion is
not worthwhile. The system makes it to pay to be honest about taxes. At the same it has
built-in incentive aspects that should contribute to economic growth(3). This notion of a
self-enforcing tax system as defined by Higgins is very close to the idea of "a closed tax
system" developed and proposed by Nicholas Kaldor to the Government of India in
1956(4). The Government of India adopted Kaldor’s report and introduced wealth and
expenditure taxes. To this day the wealth tax exists, the expenditure tax, however, had a
chequered history(5). Of the several reasons attributed to its poor performance one major
reason was that the expenditure tax was not implemented in the form as recommended
by Kaldor. At present a different variant of the expenditure tax is operating.
Higgins admits that Kaldor’s idea of a closed system provided the "missing link".
Higgins borrowed from Kaldor his famous idea of an expenditure tax(6). He admits that
by adding to Kaldor’s expenditure and wealth taxes, a penal tax on excess inventories
and a turnover tax, it is possible to devise a closed system so that any one failing to
report one taxable transaction will either find himself paying more under another tax or
having the transaction reported by the other party to it because the other party can
reduce its liability by honest reporting.
II
Following the above scheme an attempt is made here to develop an alternative
Islamic self-enforcing tax system that can be applied in Muslim countries(7). Admitting
complexities and intricacies that are normally associated with the administration of
different taxes, the scope of present paper is limited only to the area of direct taxes only.
We already have two approaches before us. One is that of Higgins "self-enforcing
tax system" and the other that of Kaldor’s "model of a closed system". What is then an
alternative Islamic approach? Any approach towards a self-enforcing system qualifies
itself to be called as the Islamic only when it essentially satisfies two conditions. First, it
is necessary that in the perceived approach zakah should form the core of resource
mobilization effort. Second, in addition to the current secular rules and regulations
regarding rates, exemption levels, administration, etc., the approach should also
incorporate minimum of the Shariah prescriptions.
The two minimum requirements as mentioned above make it necessary to
understand the importance of zakah and Shariah prescriptions. The importance of zakah
is very well documented in the literature on Islamic Economics. It is, therefore, not
necessary to repeat the same once again. It suffices here to maintain that Islam
institutionalized zakah to ensure that no one suffers for the want of wherewithal to meet
(3) Benjamin Higgins, Economic Development: Problems, Principles and Policies, Universal Book Stall,
New Delhi, Reprint, 2001, p. 528.
(4) Nicholas Kaldor, Indian Tax Reform: Report of A Survey, Ministry of Finance, Government of India,
New Delhi, 1956.
(5) Sayed Afzal Peerzade, Expenditure Tax in India, Anmol Publications, New Delhi, 1990.
(6) Nicholas Kaldor, An Expenditure Tax, George Allen and Unwin, London, 1955.
(7) For a discussion on "just tax system from Shariah view point" please refer to M. Umer Chapra, Islam
and Economic Challenge, The Islamic Foundation, Leicester, U.K., 1992, pp. 296-97
6 Sayed Afzal Peerzade
his or her basic needs. "It is, thus, the financial embodiment of an indispensable socioeconomic
commitment of Muslims to meet the needs of all without putting entire
burden on the public exchequer which socialist and secular welfare states have
unwittingly done"(8).
In Muslim countries the choice of a tax or a combination of taxes, level of
exemption, rate bands, scope for deductions and definition and measurement of tax
bases, etc., need to be greatly guided by the dictates of Shariah. A study of
administration of zakah and kharaj during the period of the Prophet and his righteous
caliphs would be of immense significance. It provides us with a set of Shariah
principles. The levy of zakah, itself, for example, sets certain imperatives as follows:(9)
First, no additional levies on personal or collective incomes can be imposed on assets
whose incomes fall below the nisab stipulated in zakah.
Second, in the calculation of assessable income, expense items shall have to be
deducted as are done under zakah laws. The deductible items have been examined in
detail in the Shariah……These have to be taken account of and strictly adhered to, not
only in the administration of zakah but in additional levies as well.
Third, double or multiple assessment of the same base is not possible in one stipulated
period in zakah. Hence such a policy is to be avoided in case of other direct taxes.
Here three more Shariah-based prescriptions are added:(10)
First, once income/spending/wealth level crosses zakah nisab level, then the whole of
income/spending/wealth should be taxed and not just that part which is in excess of nisab.
Second, tax tools should not be used to achieve, as far as possible, non-tax goals
through a series of deductions, concessions and allowances.
Third, the rate bands of different taxes should greatly reflect the essence behind the
rates of prominent Shariah levies where the thrust is on moderation.
The above prescriptions help and guide us when we contemplate an Islamic
approach towards a self-enforcing tax system. It should strengthen the working of
conventional Shariah levies, especially the zakah. It is their promotion and continuation
that imparts a distinct Islamic character to the existing tax systems in Muslim countries.
(8) M. Umer Chapra, Islam and Economic Challenge, The Islamic Foundation, Leicester, U.K., 1992, pp.
271-272
(9) F. R. Faridi, "Zakah and Fiscal Policy" in Ahmed Khursheed (ed.) Selected Papers, Amar Prakashan,
New Delhi, 1984, p.121. One can also refer to the classic works of great masters such as Abu Yusuf
(1966), Abu Ubayd (1986), and al-Daudi (1995) In recent times the contributions of al-Qaradawi (1980)
and Nejatullah Siddiqi (2001) are also significant. The Islamic Fiqh Academy, New Delhi, has also done
commendable work in this area.
(10) Sayed Afzal Peerzade, Principles of Islamic Public Finance and Policy, Idarah-I Adbiyat-I Delli, Delhi,
2004 (forthcoming).
Towards Self-Enforcing Islamic Tax System … 7
III
An alternative Islamic approach comprises a tax on gross income, an expenditure
tax, the zakah, a withdrawal tax and an agency administering a scheme of "special
deposit account". On the periphery there would be corporation, gift, capital gains and
property taxes. These constituents are briefly discussed in the following paragraphs.
Currently among all direct taxes, a tax on personal income occupies a pride place
in all developed and developing countries including Muslim countries. It is viewed as
an important means of revenue and an effective instrument of correcting unequal
income and wealth distribution. In terms of percentage its contribution to the total tax
revenue may not be high, yet it attracts maximum attention of the policy makers, tax
administrators and taxpayers.
Currently, following the accretion ideal, income is computed on gross basis,
however, tax is not imposed on gross income. First, a part of income is exempted. Next, a
number of deductions, concessions, rebates, etc., are allowed. As a result, a significant
portion of gross income gets excluded from the tax net. Consequently, to satisfy equal
revenue condition, the tax rate is required to be higher than what it would have been when
no such exemptions, deductions, concessions, rebates, etc., were allowed.
The present practice of allowing a number of deductions and concessions mainly
for the non-tax purposes has diluted the pure income base (following the accretion
ideal). It is now regarded as a hybrid base(11). A hybrid base is the one that conforms to
neither the accretion ideal nor the consumption ideal. Further, this practice has also
enabled a few assets to enjoy a relatively high index of fiscal privilege. This is an
additional advantage that some persons enjoy by manipulating their tax affairs. Surely,
the revenue outcome of a hybrid base would be entirely different from the one where
the tax base remains undiluted following the accretion principle.
In this context it is argued here that when all deductions, concessions, exemptions,
etc., are withdrawn so as to impose a tax on gross income, the above-mentioned
weaknesses disappear. Even with a sufficiently low rate a substantially large amount of
tax revenue gets collected. This requires bold policy decisions. Muslim countries should
set a precedent and should not wait for the one from Western countries. Following the
Shariah principles the entire income of a taxpayer should be taxed if it exceeds the
minimum exemption level.
An expenditure tax is another important constituent of the Islamic approach.
Following the consumption ideal, here the tax base is personal consumption
expenditure. It is not for the purpose of promotion of savings alone that an expenditure
tax is favoured but more importantly for the reason that no other tax but an expenditure
tax prevents depletion of scarce resources by charging dissaving. "Taxes on
consumption expenditure may some time become necessary to discourage deliberate
evasion of zakah and willful obstruction in the fulfillment of its secondary function
namely the promotion of productive investment of one’s savings"(12).
(11) The working of personal income taxation in India, Pakistan and several other countries lend support to
this contention.
(12) F. R. Faridi., "Zakah and Fiscal Policy", op .cit., p. 122.
8 Sayed Afzal Peerzade
There are reasons to believe that an expenditure tax helps Muslim countries to
achieve broad goals of Islamic fiscal management, more conveniently than any other
direct tax(13). In brief these reasons are, first, an expenditure tax helps to curb
ostentatious consumption. Second, since savings are tax free, it releases more finance
for economic growth. Third, it helps to control inflation and thereby maintain price
stability. Fourth, it facilitates expansion of the existing zakah base. Of the four
mentioned above, it is emphasized here that the first three are incidental to the
introduction of an expenditure tax and the primary and motivated reason happens to be
the expansion of zakah base.
Savings assume different forms such as bank deposits, shares, investments in real
estates, participatory loans and investments in numerous other financial and nonfinancial
instruments. This undoubtedly expands zakah base because zakah primarily
covers different types of productive assets. No other direct tax but an expenditure tax
helps in promoting and strengthening zakah base, to the advantage of both the Muslim
ummah and Muslim countries. With passage of time more attractive forms of savings
and investments have appeared and their number continues to multiply. The Islamic
approach maintains that the financial and non-financial assets that are above nisab,
complete one year and are free from debt, come under the reach of zakah.
For tax purposes it is directly not possible to keep a record of consumption
expenditure spread over the purchases of numerous goods and services. It is exactly for
this reason that the computation of expenditure for tax purposes is approached indirectly
following the basic relation between consumption and savings components of income,
i.e., c=y-s. Once savings are tracked the computation of chargeable consumption does
not pose any problem.
Under an expenditure tax regime, in order to claim a cent percent deduction, it is
required that all savings and investments are recorded. Unrecorded transactions are
treated on "cash flow" basis and are taxed. Since a cent percent allowable deduction is
tagged to the recorded savings and investments, the expenditure taxpayers get a strong
incentive to record the same and, therefore, zakah base expands to the extent of their
recordings. This incentive could be further enthused when the amount paid in zakah
also qualifies for a cent percent deduction from gross income or expenditure.
In this alternative Islamic approach a special place is occupied by zakah.
Ordinarily the zakah does not belong to the broad genre of taxes imposed by a state. So
also the funds collected through zakah do not belong to the ordinary genus of revenue.
But, purely from the economic view point, the zakah is an impost, which like any other
levy, effects a transfer of resources from private to the public use for an earmarked
spending. Even though the revenue from zakah can not be spent on the heads other than
those enumerated in the Holy Quran [9:60] it can be said that the extent to which zakah
funds are available to the state for spending on poor, destitute, needy and indigent, the
broad purpose of any resource mobilization effort, i.e., poverty alleviation, is served.
(13) For a detailed discussion one may refer to Sayed Afzal Peerzade, "The Place of An Expenditure Tax in
the Islamic Fiscal System", Journal of King Abdul Aziz University: Islamic Economics, Jeddah, 1999,
Vol. 11, pp. 29-62
Towards Self-Enforcing Islamic Tax System … 9
There are at least three reasons to believe that the levy of zakah is likely to provide
substantial funds to the state exchequer(14). First, it makes accessible to the tax
authorities such items as ordinarily beyond their purview. Second, the low exemption
limit of zakah enables the state to throw its fiscal net quite wide. Third, the incentive
effect of zakah is likely to increase productive investment and hence net savings in the
economy. As this happens, the zakah base widens and brings in more resources.
At this juncture one objection can be anticipated. A system, where the zakah and
an expenditure tax operate side by side, is on a self-destruct path for the reason that the
levy of zakah would cancel incentives to save. Therefore, one should not expect
promotion of savings, investment, capital formation and thereby high growth rates. This
criticism, however, is not well founded. The imposition of zakah leads to a persuasive
utilization of assets that in the absence of zakah would have remained idle. This effect
of zakah can be understood in the context of a circular relationship between zakah and
increased investment on one hand and zakah and increased transfer payments on the
other. One set of forces strengthens supply-side and the other stimulates demand.
Further, what the zakahpayers are going to do with their large savings when it is feared
that the zakah on an annual basis depletes their savings? Will they notice silently a
gradual decline in their accumulated balances? How they react to this adverse situation
that gets worsened further on account of a persistent fall in the value of money on
account of inflation?
Indeed, it can be said that, the fear of a gradual depletion in savings alongside a
fall in the value of money force zakahpayers to find out suitable avenues of investment.
Supposing that they are not wise enough to understand intricacies of financial markets
so as to invest personally, they can undertake investment through secondary sources,
i.e., financial institutions, investment houses, mutual funds, etc. Even deposits in
commercial banks can be considered as a safe investment. Therefore, it is maintained
here that the investments increase following an increase in savings.
It should not be ignored that the assets on which zakah is paid are subject to a
"divine multiplier" [The Holy Quran 2:261-62]15. As against conventional economic
wisdom (substitution effect) it is not difficult to find Muslims who earn more (economic
effect) to save more so as to pay more zakah in order to earn ethereal reward (merit
effect)16. In this context zakah is not considered as a levy but a celestially ambrosial
incentive to save. As zakah is considered as a means of seeking the pleasure of Almighty
Allah, it is not expected to reduce savings, it, on the contrary, increases the same.
The Islamic approach towards a self-enforcing tax system requires, for the sake of
administrative simplicity and convenience, setting up of a National Equity Fund (NEF),
which administers a scheme of Special Deposit Account (SDA). The contributions to
SDA qualify for a cent percent deduction. It is merely a matter of policy before
governments in the Muslim countries to declare which saving-schemes they are going to
(14) F. R. Faridi, "Zakah and Fiscal Policy", op. cit., p. 126.
(15) One must not cast doubt on introducing the concept of "divine multiplier" here in our discussion. The divine
reward is guaranteed by the Almighty and, therefore, a Muslim is required to accept it in letter and spirit.
(16) Sayed Afzal Peerzade, "The Idea of Merit Effect: Islam's Contribution to Economics", Journal of
Objective Studies, Vol. 3, No. 1, 1993, pp. 1-22.
10 Sayed Afzal Peerzade
treat as fully tax deductible. The NEF would undertake investment on behalf of its
contributors who have no or a very limited knowledge to understand complexities of
financial markets(17).
It is also suggested the proposed NEF should be authorized to deduct zakah at
source on the savings of each one of the contributor, provided it is above nisab and that
it has completed one year under the administration of NEF. Further, the NEF adhering
to the expenditure tax principle collects a tax on withdrawals that are permitted after a
stipulated period. This covers consumption financed out of dissaving. A progressive
income tax with adequate saving provisions does not restrain a taxpayer from dissaving.
Thus, in Muslim countries the NEF is expected to perform the following functions:
First, it mobilizes funds and channels the same into productive business and commercial
ventures on behalf of its numerous contributors and share profit and loss with them.
Second, it deducts zakah annually from the capital of each one of its contributors,
provided Shariah conditions are satisfied.
Third, it deducts a tax on withdrawal at source in the year of withdrawal.
Let us consider the following numerical example of a hypothetical taxpayer who
earns one million rupees per year. As his income exceeds the nisab level, he is,
therefore, taxed on his gross income. Further, he contributes Rs.200,000/- to the NEF.
Since we are following consumption criterion as well, contributions to the NEF are fully
tax exempt. The remaining amount of Rs.800,000/- is taxed on cash flow basis. There at
the NEF level, after the completion of one year, Rs.200,000/- are covered for zakah
purposes. The dividend remains untouched. It may be remitted or reinvested by the NEF
on the instructions from the contributor. Suppose that the contributor, after the
completion of stipulated period, decides to withdraw his contribution with the NEF. The
NEF now imposes a withdrawal tax. Thus, at every stage of earning (the accretion
principle) and spending (the consumption principle) our hypothetical taxpayer is
required to pay something to the state exchequer. He pays zakah as well on his
contributions to the NEF.
There could be a large number of people who prefer to save and invest
independently of the NEF in one or more profitable business ventures. Here it is
proposed that such investors should pay zakah directly to the zakah authorities and
thereby claim deduction for the amount paid in zakah from their total taxable income.
The monitoring of zakah base (and consequently consumption base) is possible because
in the year preceding zakah payment they had asked for a cent percent deduction of the
amount paid in zakah. Here tracking of the sale of assets accumulated tax-free is also
possible because in the next year zakah will not be paid on them. Consequently, these
are included in the gross income in the year of sale and taxed accordingly. It is no
longer necessary to impose a wealth tax because its purpose is well served by zakah.
However, a wealth tax or a property tax could be imposed on such of the assets that are
not normally covered under the purview of zakah.
(17) It is not necessary that there should be only one institution of the type of NEF as suggested, there could
be many. In several countries such organizations are functioning at the government and private levels as
well. The essence of this proposal is that there should be some record of contributions, i.e., savings and
investments, so that these qualify for a cent percent tax deduction.
Towards Self-Enforcing Islamic Tax System … 11
IV
It is clear from the above discussion that it is possible to present an alternative
Islamic approach of a self-enforcing tax system. On one front of the self-enforcing tax
system, zakah occupies a pre-eminent position, on the other front a gross tax on income,
an expenditure tax and a withdrawal tax operate to support one another so as to
reinforce the system. The creation of NEF facilitates flow of funds into productive
channels. This approach makes taxpayers to pay at each and every stage of accretion,
consumption and accumulation. It makes attempts of evading taxes less attractive than
before for two reasons. First, from the gross income a cent percent deduction of the
amount paid in zakah is claimed. Second, a cent percent deduction is claimed on
contributions to the NEF. There is a sufficient provision for cross-checking too. Once
contributions to the NEF are reported, consumption is tracked and vice versa.
References
Abu Ubayd (1986), Kitab al-Amwal (Urdu), Idarah-I Tahqiqat-I Islami, Islamabad, Pakistan.
Abu Yusuf (1966), Kitab al-Kharaj (Urdu), Makatab-e-Chiragh-e-Rah, Karachi.
Ahmed, Khursheed (ed.) (1984), First International Conference on Islamic Economics: Selected
Papers, Amar Prakashan, New Delhi.
al-Daudi, Jafar Ahmad ibn Nasr (1995), Kitab al-Amwal, Islamic Research Institute Islamabad,
Pakistan.
Atkinson A. B. and J. E. Stiglitz (1980), Lectures on Public Economics, MacGraw Hill, New York.
Auerbec A. J. and M. Feldstein (eds.), Handbook of Public Economics, North Holland,
Amsterdam.
Chapra, M. Umer (1992), Islam and Economic Challenge, The Islamic Foundation, Leicester, U.K.
Faridi F. R. (1984), "Zakah and Fiscal Policy", in Khursheed Ahmed (ed.) First International
Conference on Islamic Economics: Selected Papers, Amar Prakashan, New Delhi.
Higgins, Bejamin (2001), Economic Development: Problems, Principles, Policies, Universal
Book Stall, New Delhi, Reprint.
Kaldor, Nicholas (1955), An Expenditure Tax, George Allen & Unwin, London,
Kaldor, Nicholas (1956), Indian Tax Reform: Report of A Survey, Ministry of Finance,
Government of India, New Delhi.
Musgrave, Richard A., and P. B. Musgrave (1976), Public Finance in Theory and Practice,
McGraw Hill, Tokyo.
Peerzade, Sayed Afzal (1990), Expenditure Tax in India, Anmol Publications, New Delhi,.
_______, (1993) "The Idea of Merit Effect: Islam's Contribution to Economics", Journal of
Objective Studies, Vol. 3, No.1.
_______, (1999) "The Place of an Expenditure Tax in the Islamic Fiscal System", Journal of King
Abdul Aziz University, Jeddah, Vol. 11.
_______,(2004)Islamic Principles of Public Finance and Policy, Idarah-I Adbiyat-I Dilli, Delhi,
(forthcoming).
al-Qardawi, Yusuf (1980), Fiqh-al Zakah (Urdu), Idarah Dawat al-Quran, Bombay.
Siddiqi, Muhammad Nejatullah (2001), Islamic Public Economics, Idarah-I Adbiyat-I Dilli, Delhi.
12 Sayed Afzal Peerzade
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