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© 2023 International Monetary Fund
WP/23/33
IMF Working Paper
Fiscal Affairs Department
Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities
Prepared by Mario Mansour and Eric M. Zolt*
Authorized for distribution by Ruud de Mooij
February 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Personal income taxes (PITs) play little or no role in the Middle East and North Africa, often yielding less than 2 percent of GDP in revenue—with the exception of few North African countries. This paper examines how PITs have evolved in recent decades, and what they might look like in the next 20 years. Top marginal tax rates on labor and business income of individuals have declined substantially, a trend that mirrors reductions in advanced and developing economies. Taxation of passive capital income has changed very little, and the revenue intake from this source remains low throughout the region (less than 1 percent of GDP on average and concentrated in oil-importing non-fragile states). Social security contributions (SSC) have increased in importance in nearly all MENA countries, and some countries have introduced additional payroll taxes. The combination of reduced marginal tax rates, light taxation of income from capital and business activities, and increase of SSC, have resulted in income tax systems that create disincentives to work and incentives for informality, and contribute little to government revenue and income redistribution. Given differences in economic and political structures, demographics, and starting points, the path to PIT/SSC reforms will vary across the region. Countries with relatively mature PIT/SSC systems, where revenue performance has improved in the past two decades, will increasingly need to balance the revenue and equity objectives against efficiency objectives (in particular labor market incentives and informality). Countries with no PITs will have to weigh whether a consumption tax/SSC system that mimic a flat tax on labor income is sufficient to diversify revenue away from oil and whether to adopt PITs to address rising income and wealth inequality. Finally, fragile states, who face more political volatility and weaker fiscal institutions, will have to focus on simplicity of tax design and collection to be able to raise revenue from PITs.
RECOMMENDED CITATION: Mansour, Mario, and Eric M. Zolt. 2023. “Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities,” IMF Working Paper 23/34, Washington DC: IMF.
| JEL Classification Numbers: | H20, H23, H24 |
| Keywords: | Personal income taxes; social security contributions; payroll taxes; fragile and conflict states; Middle East and North Africa; Gulf-Cooperation Council |
| Author’s E-Mail Address: | mmansour@imf.org; zolt@ucla.law.edu |
| JEL Classification Numbers: | H20, H23, H24 |
| Keywords: | Personal income taxes; social security contributions; payroll taxes; fragile and conflict states; Middle East and North Africa; Gulf-Cooperation Council |
| Author’s E-Mail Address: | mmansour@imf.org; zolt@ucla.law.edu |
Title Page
WORKING PAPERS
Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities
Prepared by Mario Mansour and Eric M. Zolt
Contents
GLOSSARY
I. INTRODUCTION
II. POLICY DESIGN CONSIDERATIONS
A. Types of PIT Systems
B. Factors Influencing the Success of PIT
C. Political Economy Considerations
III. ASSESSMENT OF PERSONAL INCOME TAXES
A. Overview and Evolution since 2000
B. The Revenue Contribution of PITs
C. Are PITs in the MENA Progressive?
IV. WHERE NEXT FOR PIT IN MENA?
A. Competing PIT Objectives
B. Possible Approaches for Different Countries
V. CONCLUSIONS
REFERENCES
FIGURES
1. Evolution of Top PIT Rates in MENA: 1990–2020
2. Contribution of Income Taxes to Tax Revenues in MENA
3. Statutory Average Tax Rates in MENA
4. Statutory Average Tax Rates in MENA, by Country Sub-Group
5. Statutory Average Tax Rates in Libya, Jordan and Morocco
TABLES
1. Factors Influencing Tax Capacity and Spending Levels
2. Selected Economic and Demographic Indicators in MENA
3. PIT Rates and Brackets in MENA, 2020 vs. 2000
4. Typical Tax Rates on Income from Capital in MENA, 2020
5. The Size of PIT Revenues in MENA
6. PIT Objectives and Policy Choices
ANNEXES
I. List of MENA Countries and Sub-groups
II. Determinants of PIT Revenue
Glossary
| CIT | Corporate Income Tax |
| EATR | Effective Average Tax Rate |
| FCS | Fragile and Conflict State |
| GCC | Gulf Cooperation Council |
| GDP | Gross Domestic Product |
| MENA | Middle East and North Africa |
| PAYE | Pay-As-You-Earn |
| PIT | Personal Income Tax |
| SSC | Social Security Contributions |
| SATR | Statutory Average Tax Rate |
Respectively, Division Chief, Fiscal Affairs Department, International Monetary Fund, and Michael H. Schill Distinguished Professor of Law Emeritus, UCLA School of Law, and Extraordinary Professor, African Tax Institute, University of Pretoria. Views expressed are the authors’ and do not necessarily represent those of the IMF, its Executive Board, or IMF management. The authors would like to thank Julieta Raquel Ladronis and Fernanda Morales for excellent research assistance, and for their comments, Marwa Alnasaa, Cristian Alonso, Juan Carlos Benitez, Brenden Crowley, Ruud de Mooij, Michael Keen, Priscilla Muthoora, Rose Nyongesa, Fadia Sakr, Elife Ture, and Charles Vellutini. An earlier version of this paper was presented at the Canadian Tax Foundation’s conference Public Finance in the Real World: A Symposium in Honour of Richard Bird (April 2022).