Iraq’s Low Tax Rates Driving Development or Corruption?

Taxation and tax rate issues do not hit the headlines of the Iraqi news channels and newspapers even though they are perceptible in all world’s major media channels and business magazines, in its place corruption is under the spotlight in this part of the world.

Oddly, both taxes and corruption are drivers of political campaigns, economical strategies, and most major reforms. Both are causing relatively similar actions, but in different parts of the world. The aim of this article is to explore the connection between both and also how taxation can lower corruption.

Tax rate is a portion of individuals’ or corporates’ income that is due to the government. The countries’ lack to a constant and sufficient source of money to run the government, leads to the need of a foundation of taxation strategy. The goal of this strategy is to collect money to fund the government budget that is used to fund building, constructions, wars and all sorts of national projects.

In Iraq, some would argue that the country does not need taxation to fund the government budget since Iraq is a rich country considering its greatest assets of its natural resources and its exceptional geographical position. For instance, its oil’s annual revenue alone is up to $94.45m. As a result, it can be concluded that the revenues generated from these blessings and many others eliminate the need for revenues generated from taxation.

There are many kinds of taxation; the most common ones are corporate income tax and individual income tax. In Iraq, corporate income tax is 15% and individual income tax doesn’t actually exist, however, it has a form of it that is called Direct Withholding Tax. Direct Withholding Tax is a portion of the employee salary, and not the overall income, which mainly is paid by the employers, and only a small portion of employees pay for it themselves.

Iraq is facing the issue of corruption and lack of transparency. Iraq ranks eighth in the world most corrupted countries index (Transparency International). One of the ways to solve this issue is by establishing and enforcing effective taxation laws; taxation can work as a system of checks and balances on government and politicians’ actions.

Some would argue that the development of the country is a more vital issue than corruption, and since Iraq is a developing country it would need as much investment as possible, which is why taxes should be lowered. This argument is valid for corporate income tax, not individual income tax.

It is reasonable to have low corporate tax rate to support investment and boost the economy, through both local and foreigner investment in the country. Iraq corporate tax rate falls below the global average of 24.09% by 9.08%. It also falls below Asia average, which is 22.36%, by 7.36%. As a result, Iraq has a relatively low corporate tax rate (KPMG data).

As for individual tax rate, it is a foreign concept to Iraqi citizens, while it exists in most countries.  I asked Mr. Al-Harithi, a civil engineer from Baghdad about his knowledge of individual tax rate in Iraq; he said “I never knew that my boss is paying this Direct Withholding Tax instead of me.” Then I clarified that in other parts of the world citizens are charged for their overall income, then Mr. Al-Harithi said “So they want to take from my own salary, I would be really mad.” This is the point!!

Individual tax rate was established for the benefit of the government to collect money, yet it can fire back, it could be used as a tool for citizens to monitor the government, their progress, their achievement and their overall performance. Citizens would defiantly keep track of their money and where it is going once they have paid it. The existing form of taxes doesn’t impulse the sense of paying to the government and actually taking an active role in supplying the government budget and what it does. As a result, and in order to increase citizens’ monitor over government and achieve transparency, a better form of individual taxation should be established.

Furthermore, it is not a coincidence that the top least corrupted countries in the world which are the Denmark, Finland, and Sweden are also included in the top 10 countries with the highest tax rates. Yes, taxes may seem a way against citizens and taking their rights, but in fact it maybe used as the citizens’ means to guarantee their right, and to take role in their community.