Western economies seem to getting sums wrong with high tax policies

All these high taxes will only set off a flight of capital, including to GCC

Taxation is an important tool for nations, adopted over the centuries in various forms. Today, it has evolved and expanded to cover multiple aspects of life and economic activities, amplifying their impact on growth and business activities, depending on the state’s tax policy.

This has contributed to financial recovery for some nations and slowdown in business activities in others.

Amid increasingly complex economic conditions, and increase in countries’ public spending and other obligations, new types of taxes have been introduced as an easy way to cover rising expenses. While overlooking the potential repercussions of this approach and seeking alternative solutions related to increased investments and resource development.

Recently, it is noted that the imposition of taxes is increasingly exaggerated in European countries, after sharp increases in spending resulting from numerous factors and a mix of local and external developments. This led to the exit of many investors and businessmen after they were exhausted by taxes, which have even reached 45% on income. These come alongside other obligations, such as social insurance and social housing, which come off salaries and personal income. Such moves have even started to affect private schools, institutes and universities.

Pandering to electoral needs

One reason is attributed to electoral prospects, which cast a long shadow over an economy. To appeal to the voting public, some candidates resort to imposing high taxes on companies and businessmen, while others attempt to satisfy private companies by reducing taxes. The overall trend does lean towards tax increases, as most voters belong to groups less directly affected by these hikes.

Excessive taxation, in theory, contradicts the principles upheld by many economists, as it deters investment. For example, Ibn Khaldun, the founder of political sociology and a prominent Arab scientist in Seville during the Arab rule in Andalusia, warned against the adverse effects of heavy taxation. He underscored that lower taxes yield greater returns, advocating for optimal spending and the rational use of public funds rather than high taxes, which only go to stifling economic activities and lead to capital flight.

Similarly, economist Adam Smith, in his treatise ‘The Wealth of Nations’, stated that ‘taxes fulfil their purposes when they are not arbitrary’. He called for ‘adopting a tax policy that lowers the burden on individuals and businesses’, adding ‘higher taxes deter investment, erode profits and increase costs’.

The observations of Ibn Khaldun in his ‘Muqaddimah’ and Adam Smith are now manifested in Western countries, where numerous companies and businesses relocating—particularly to the GCC countries and Singapore—where taxes are low and more optimally levied.

Capital flight to GCC

While it is true that spending rates are rising significantly in the West, addressing this solely through increased taxation is an imprudent approach that could exacerbate issues due to capital flight.

This can lead to higher unemployment rates and a surge in social assistance applications, which further require additional allocations to budgets. In some European countries, social assistance applicants now make up 30% of the volume of the world’s powers, representing a costly percentage.

To get out of this impasse, it is essential to separate the tax policy and manage it independently and professionally from official departments such as ministries, eventually reducing its influence in election-related necessities.

Similar to how monetary policy is entrusted to central banks, which operate autonomously from the state's public apparatus, establishing independent institutions to handle tax policies could lead to more balanced and professional approaches. This separation would help insulate tax policies from electoral motivations, promoting a stable and strategic fiscal environment.

Until then, the GCC countries, Singapore, and certain Caribbean nations should prepare to welcome a growing influx of investors fleeing from high taxes, which are imposed not only on companies and corporations but also on individuals.

While taxation is indeed essential as an important tool to support state budgets, fuel investment spending, develop infrastructure, and help in accurately assessing various economic indicators, they must be balanced and appropriate, so as to support economic growth rather than impede it.

Mohammed Al Asoomi

The writer is Managing Director at Global Capital Partners.