Taxation in any economy is the financial backbone to successfully operate the state-run institutions like police, army, and government offices as well as to spend on projects of public interests like dams, roads, healthcare, education and development etc. A major portion of any state’s earning constitutes of these taxes. In short, the whole shape and face of economy is decided mostly on the amount of taxes people pay and government collect. In western societies, where normally capitalism prevails, the basis of taxation is on how much you earn and spend. We can easily confer by understanding this model that such economic systems actually encourage savings, in fact they so much do so that they even give monetary benefits on savings. Islam, on the other hand, has a different and well-proven taxation model. In Islamic finance model, the main basis of taxation is to tax the amount which is saved rather than spent.
At first sight this may sound a bit odd, but if we quantitatively and qualitatively analyze the Islamic model, we come across far greater good, both apparent and long term, which we can capture. Let us explain ourselves the Islamic taxation model with an example. A person who earns $50,000 a month may be subjected to around 40%-50% taxes in today’s western capitalistic economies. That means he is left with around $25,000-30,000 as consumable income. Off course, in the back of that person’s mind there will be a fact that he will be further taxed if he will spend the remaining money. So in return, that person saves the remaining money for 2 reasons, for getting away from the extra tax burden and for earning some cash on the savings itself.
What this does to the objective economy of the society is that it artificially stops or slows the flow of money in the market; hence concepts like extraordinary inflation or even simple inflation emerge. After all, inflation refers to the situation when too many people have the buying power to buy not too many products or services. It also creates a divide between the rich and the poor, hence contributing to greater social problems and conflicts, sometimes. Islamic finance model, however, negates almost all of these things. Say a person who earns $50,000 may only be taxed for a fixed amount from his earned income; hence he is left with a lot more money to spend around different things. Consider a person having joy of spending a lot more money than he normally can and that too without paying for any taxes on what he spends.
This is only one side of benefits you get from the Islamic taxation systems. All the extra money, the non-taxable money to be exact, will generate economic activity and jobs for everyone. People being able to earn and spend money will also uplift their living standards. More importantly, more and more people will be encouraged to spend; hence the divide between classes will decrease. The employment opportunities will in return create more productivity of the manpower, hence making its way to the top level of money generation and economic growth tools.
In concluding remarks, we may demonstrate the earlier Muslim caliphate, which was the cornerstone of all the modern Islamic financial and taxation models. The effectiveness of these Islamic taxation principles can be gauged by the fact that in some modern economic educational institutions and colleges, the Islamic finance is not only been theoretically followed, but also been implemented as the single most effective economic factor contributing to the financial well being of not only the governments, but also the employees.