Taxation is important to the government because the money collected is used to fund projects related to education, defense, transportation, healthcare, and other sectors. The government allocates part of the tax money for provisions of essential services to its citizens. Tax is collected from different sources such as fees, charges, fines, levies, foreign grants, and penalties. Taxes are paid by citizens in various forms including from purchase of goods, income earned, and from goods imported. Income tax is the major form of tax contributed to the total government revenue. United States is one of the countries that levy income tax to its citizens. Many people dread paying income taxes due to inequalities contained within the tax code. People who pay income tax and other taxes often experience a tax burden. On the other hand, some countries do not collect income taxes from the citizens and are able to offer the essential services and benefits. An exploration of a zero income tax model will help to understand how it works and if its principles can be applied in the United States.
Several countries offer their citizens the financial benefit of not having an income tax. One of the countries is United Arabs Emirates, which is among the richest countries in the world. The country has a thriving economy with a multicultural environment. United Arabs Emirates has a relatively stable government and economy owing to the oil deposits and trade (Aljifri and Moustafa, 2007) . It is the richest country in the world by Gross Domestic Product per capita. The countries collect revenue through other taxes such as corporate taxes. The foreign gas producing companies pay about 55% of the operating profits as tax. However, the taxes defer depending on the agreement between the emirate and the individual company. The government collects municipal tax on the revenue collected from hotel and entertainment businesses. The indirect taxes are levied on alcohol imports, rental of commercial premises, and licenses fees paid by the business owners. In addition, revenue is also collected from court fines and penalties.
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United Arab Emirates has an effective fines system in the world. The fines are more expensive compared to other countries. The country has heavy fines for traffic offenders. The traffic radar cameras are stationed everywhere in the country. Many people in the country pay heavy fines for violation of traffic rules contributing well to the government funding (Harrison, 2010) . Other fines are imposed on visitors and immigrants who extend their stay beyond the end date of the resident visa. The government derives revenue from business licenses and government services. A business license is extremely expensive in UAE especially for non-resident companies. The licenses cost over one thousand dollars and are renewed annually. The government charges high fees on renewal of licenses and other trade documents. In addition, UAE government provides services to its citizen at a higher cost compared to other countries. Majority of the people in the UAE are Muslims who adhere to the Sharia law. Heavy fines are imposed for petty offenses creating revenue for the government. The United States operates a progressive model of income taxes. In addition, the government levies other forms of taxes on its citizens (Thacker, 2008) . The government spends a lot of money on defense, health care, and education. The population of USA is larger compared to that of UAE. USA economy is driven by consumption of the middle class while that of UAE is driven by oil and tourism industries. Therefore, the United States cannot adopt the taxation model of the UAE without reducing the total amount of revenue collected from income taxes.
Having a zero income tax model has two notable advantages. To begin with , individuals can spend all their income, rather than spend a portion of it while the rest is taken by the state . In basic microeconomics , people plan their expenditure based on their disposable income. Introducing a zero tax model increases people’s disposable income. This has the effect of increasing the demand for goods and services and the national income increases as producers respond by increasing their production activities. In essence, the increase in disposable income has a positive multiplier effect on the economy of a specific country or state. That is, the economy benefits from reduced tax by growing at an increasing rate as income and consumption increase. Secondly, having a zero tax system reduces the burden of government expenditure. In essence, this is based on the presumption that the government is expected to do less if it takes less from the general population in the form of taxes.
Governments require a source of funds for them to be capable of carrying out fundamental functions such as law enforcement . If a state adopts as zero income tax regime, then it will need to both find new sources of revenue and a way of reducing its current burden (Harrison, 2010) . The disadvantages of a zero income tax model are that it increases other types of taxes. In essence, governments are necessary and for them to operate, they need resources. This could lead to an alternative tax system that increases the cost of living for an average household. For instance, there are zero income taxes in the United Arab Emirates but the government earns revenue by indirectly taxing items such as crucial government services, entertainment, and property and rental income. In essence, these other forms of taxes my cumulatively be a larger burden on the taxpayers. The second disadvantage of a zero income tax model is that the government may be incapable of carrying out its duties. As mentioned previously , states without an income tax can adapt by reducing their expenditure or look for new sources of revenue. If the government scales down its operations, some crucial services such as social welfare, education and health may be adversely affected. In essence, this may result in losses of significant gains in these areas. Notably, the income tax is an effective tool of income redistribution, which is ignored in a zero income model, and the social and economic state of the poor can deteriorate.
With a zero income tax model, the government needs to find other sources of income for it to comfortably serve its function . There are several alternatives that can be used in sourcing for income but they have to meet the canons of taxations such as flexibility, equitability, efficiency, understandability, and reciprocity. For instance, the government could use a sales tax or a value-added tax. In essence, this would tax those who earn more, and therefore spend more, higher than those who earn low wages. In consideration of the principles of taxation, low-income earners should be excluded from the taxation system. This implies that some items that are fundamental for human life such as food, books and clothing should not be taxed (Thacker, 2008) . In contrast, items such as jewelry, automobiles, luxury food, entertainment, and alcoholic drinks would be taxed higher so that the government can earn revenue. There are cases when the revenue obtained from taxation falls short of the budgetary requirements of a government. In consideration of that, fines can be used to increase the avenues of earning revenue. In addition, an adjustable corporate tax would effectively serve the function of meeting deficits in tax from sales and value added in addition to being used as a tool of macroeconomic adjustment in an economy. By doing this, the government would be capable of carrying out its functions in the absence of an income tax model.
In conclusion, a zero income tax model would be instrumental in encouraging economic activity in a state and reduce the government’s burden of expenditure. However, caution should be taken to see to it that crucial services such as healthcare, social security, and education are not underfunded . In addition , a zero income tax model could end up increasing the cost of living as the government uses other ways of earning revenue. In this context, the government can introduce sales and value added taxes to raise its revenue. These taxes should not apply to essential commodities and they should be supportive of the monetary and fiscal policies of the national government.
References
Aljifri, K., & Moustafa, M. (2007). The impact of corporate governance mechanisms on the performance of UAE firms: an empirical analysis. Journal of Economic and Administrative Sciences , 23 (2), 71-93.
Harrison, M. (2010). Taxation and the GCC States. Gulf One Lancaster Centre for Economic Research Report. Lancaster University Management School, Lancashire .
Thacker, S. (2008). Taxation in the Gulf: Introduction of a Value Added Tax. Mich. St. U. Coll. LJ Int'l L. , 17 , 721.
