There are different ways in which the federal government can generate revenues to fund its services. The government can impose taxes and fees, where a bulk of government taxes come from corporate tax, income tax and social security taxes. Personal income taxes are imposed on financial income that is generated by all the entities in their jurisdictions. These entities can be individuals, an estate or a corporation. Whereas many countries including the U.S impose income tax rates to generate revenues, there are a number of countries that have zero income tax rates, yet they provide state services and benefits to its citizens. In my research, the countries that impose zero income tax include the United Arab Emirates, Oman, Bahrain, Qatar, Saudi Arabia, Kuwait, Bermuda, Cayman Islands, The Bahamas, and Brunei. For the purpose of this paper, focus shall be placed on Qatar.
How Qatar Provides Services and Benefits to Its Citizens without Collecting Personal Income Tax
Although Qatar is a small power, it has shown effective and wise use of its power, which is evident in the countries growth in GDP over the years. According to (Ustaoğlu & İncekara, 2017) Qatar is one of the few foreign countries in the world that have trade surplus. The country does not impose personal income tax, sales tax and corporate tax (p. 104). The huge export revenues are enough to meet the country’s public spending. The country is heavily reliant on the hydrocarbons for the provision of services and benefits, with the country’s huge gas and oil reserves enabling the country to rank first in per capita income in the world. The country has build infrastructure for export of its products, which is the major source it its revenues.
In order to increase its revenues in addition to revenues collected from the export of gas and oil products, the citizens in the country are required to pay 5% of their income for social security benefits and employees are required to contribute 10% to the social security fund. Foreigners who move to the country are required to pay little tax, but are only required to pay income tax if they operate businesses in the country. According to (Oxford Business Group, 2012), the country charges import tax, service tax for foods and drinks served in restaurants and a flat corporate tax (about 10%) on profits made by foreign-owned businesses.
Can U.S Adopt the Qatar Taxation Model Without Reducing its Total Amount of Revenues?
The United States cannot adopt the taxation model employed in Qatar without reducing the total amount of revenues that the federal government collects. First, the United States has a large population compared to Qatar, with a highly technological and complex healthcare sector that demands a lot of revenue allocation. The country also invests a lot of money in overseas military missions which require a lot of federal funding. For the United States government to fund its public services and benefits such as healthcare, education and overseas missions, there is need for income tax. In contrary, Qatar have got less involvement in any overseas missions, they have comparable very little investment in military. In addition, there healthcare sector is not as developed and advanced as that of the U.S, which demands less revenue allocation.
Secondly, the foreign trade surplus in Qatar is one of the highest owing to the mineral endowment. In contrast, the United States is not reliant on minerals for its foreign trade surplus. The presence of huge reserves for Qatar government offers an alternative source of revenues for funding the public services and benefits, which U.S does not have. Oxford Business Group, (2012) points that if the mineral export was eliminated, then the actual GDP is Qatar far much low. This cites the importance of the gas reserves in funding the public services and benefits and the no personal income tax on citizens.
Advantages and Disadvantages of U.S Adopting a Zero Income Tax Model
The adoption of a zero income tax model offers a number of advantages and disadvantages. If U.S adopts the zero income tax model, the advantages that the country will reap include speedy growth in economy, increase in employment rates and an increase in the welfare. The adoption of zero income tax model means the federal government will be forced to create other methods of generating its revenues. Given that the U.S allocates substantial amount of revenues in healthcare, military and education among other sectors, the federal government will be forced to increase import tax and corporate tax for foreign owned companies, to cover for the income tax revenue streams. This will lead to a reduction in the imports to the country, which means many companies will get increased market share for their products within the U.S market.
In addition, high corporate and import tax duties will mean reduction in foreign direct investment, which creates more market for local companies. Many locally owned companies will be formed to develop product and services to meet the shortages in products that may result owing to increase in taxation. In the end, the increased tax will reduce foreign investment in U.S, which will spur growth of local companies. All these will combine to create more employment, growth in economy and an increase in welfare.
However, the adoption of zero income tax models can lead to a reduction in foreign direct investment and higher sales taxes. Of course the abolition of the personal income tax rates means the federal company will look for other sources of revenues and the obvious areas are the import tax, corporate tax and the sales tax. Increasing corporate tax will negatively impact foreign companies with investment interests in the U.S and those who hope to open business in the country. The potential of opening business in a country with higher corporate tax rates is not appealing to investors, which means the U.S stands to lose significant foreign direct investment. In addition, many people will feel the pain since the government will start to levy higher tax rates on goods, which can result in higher cost of living.
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The Primary Way in Which the Federal Government Could Make Up Any Shortfalls in Revenues Collected
In the event that the federal government cannot collect the targeted revenues from personal income tax, there are a number of ways that the government can adopt to meet the shortfalls. One of the primary ways that the federal government can adopt to make up for the shortfalls is to increase the tax rate or price on liquor, tobacco and gun. The use of liquor, tobacco and gun is subject of abuse and drug addiction is considered one of the biggest problems facing the U.S youths (Zemore, Mulia, Williams & Gilbert, 2016). Increasing taxes on these products will impact their price elasticity of demand (Xu, & Chaloupka, 2011). The increase in prices of these products will reduce their consumption, leading to increased personal disposable income, which can be deposited in the banks to generate fees that the treasury can use. However, if the tax in these products is increased and the consumers keep using then, then the IRS will get increased revenue collections. The results is the reduction in the cash outflow to cash inflow of investments such retirements and other social benefits.
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