The tax system has always been a fundamental problem in economics since it is one of all governments’ core activities and a fundamental prerequisite for everything else they undertake. Taxation shifted resources from the individual to the government sector, facilitating the provision of public services such as the legal system, protection, schooling, infrastructure, and healthcare. Premodern nations taxed a broad and diversified array of items, but the underlying tax system was typically relatively straightforward. Individuals, property or its production, and the transportation of commodities were all taxed by the government.
The history of taxation dates back to ancient times. Around 3000 B.C., Egypt recorded the earliest instance of regulated taxes. Taxation later evolved when Greek civilization invaded most of Europe, Northern Africa, and the Mideast in the decades preceding the Common Era. As a result, during earlier eras and throughout medieval European history, new taxes were levied on inheritances, property, and consumer goods.
The two most notable characteristics of the premodern tax system are its vague relationship to the economy and its severe regressive nature. The fundamental differences in premodern tax arrangements were related to the growth of urban areas, trade, and capitalism. Governments that lacked these elements depended on direct taxation of people or property, while governments in more industrially prosperous regions had a more diverse tax system and focused more on indirect taxation.
Britain was at the heart of this process, having experimented with the income tax in 1798–1802 to fund the Napoleonic wars before establishing it officially in 1842. The income tax spread fast across Europe, and by 1920, it was implemented in practically all established European countries. Though the income tax did not significantly raise tax collections in the early stages since it was mainly restricted to the wealthy, the establishment of the income tax is the milestone in the establishment of progressive taxation.
Therefore, the creation of the income tax was the most significant milestone in the history of the premodern tax system, contributing to closely connecting taxes to the economy and drastically improving progressivity. While the taxation system was usually used during war times, with centuries, it became an integral part of the economic structure of the government. However, the problem of taxation started with intentional tax avoidance, which, in return, caused the establishment of specific laws.
Taxes in the Modern World
Capital taxes emerged in the 20th century as part of the Western push toward more progressive taxation, with the USA at the forefront of this evolution. When globalization lowered the cost of capital mobility, some expected a death spiral in capital taxes, but this has not occurred. The explanation for this is that a number of variables, including political institutions and policy decisions, reduce the impact of globalization on capital taxation. The developed nations (Northern Europe and the USA) are the best at tax administration, nations considerably behind (Southern Europe and Eastern Europe) lag behind, and African countries are the worst performers.
Several modern less-developed countries have largely privatized their tax administration since it has grown so problematic. While this is not a reversion to premodern taxation, it is a departure from traditional administrative management. African countries present this taxation trend with the exact precision. African republics’ centralized institutions inherited from former colonies developed into corrupt administrations filled with trade ties that generated little money.
Tax evasion is a huge issue even in the greatest contemporary governmental institutions. Additionally, many corporations exercise tax avoidance to keep the revenue. For instance, the tax gap—the percentage of overall tax liabilities that are not paid—for the United States income tax is around 14%, and more than half of corporate revenue goes unreported. Between 1965 and 2010, tax evasion was perhaps the most severe financial fraud in the USA, accounting for 5% of GDP on average, with the total for all offenses being 7%.
Introduction of Taxes in the UAE
The Emirates opted to create a tax system in their government due to falling oil prices worldwide, reducing the country’s earnings. In order to regulate these earnings, the state decided to introduce a taxation system. The UAE announced in 2011 that it would begin the process of establishing a VAT with a suggested 5% rate that would be introduced in 2014 or 2015.
Personal income tax is not levied in the United Arab Emirates. However, the country does levy corporate taxes on oil firms and international banks9. In September 2016, the UAE established Federal Tax Authority by Federal Decree-Law No. 13 of 2018. The FTA is responsible for the collection, and enforcement of tax laws and penalties, in addition to the allocation of tax revenues and the execution of the Tax Procedures10.
Subsequently, on August 2017 the UAE issued Federal Decree-Law No. (7) of 2017 on Excise Tax. Later Federal Decree-Law No. (8) of 2017 on Value Added Tax was issued. While the Excise tax is imposed on some commodities that are often dangerous to human health and the environment, the majority of products and services are subject to Value Added Tax. It is a tax levied on customers and collected by the corporation on behalf of the government. VAT is levied on the final consumer of any products or services.
The Emirates’ and the state’s rapid growth plans and VAT implementation comprise a crucial policy change aimed at assisting GCC countries in achieving medium to long-term social and economic policy objectives. The implementation of VAT has aided the United Arab Emirate’s attempts to accelerate its development. The VAT system is a vital strategy that can aid in the transformation of the GCC government and the attainment of long-term economic and social development.
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