The credit crisis which started in 2007 has brought into light many defects in the current economic system. One of them, which I will discuss in this post, is the intricate relationship between economic condition and fiscal spending power (of Government).
The major source of revenue for government’s fiscal spending comes from taxes on:
1) Revenue generated (by individuals and corporations).
2) Taxes on real-estate property and other fixed-assets.
In an economic downturn, the decline in economic activity leads to a decrease in:
(1) Individual incomes as well as a decrease in corporate revenue.
(2) Devaluation of fixed assets.
All this factors lead to decrease in government’s tax revenue.
However, this is the very time when people lose jobs and start to depend on government’s public welfare schemes. Government’s expenditure shoots up and is in dire need of money. The tax-revenue (as we discussed above) falls sharply and government goes into huge deficit. In short, the current fiscal structure is designed in such a way that an economic downturn becomes a double whammy for the country and sharply raises the fiscal deficit and decreases the standard of living.
Let us compare this with the Islamic system. In an Islamic system, apart from the regular taxes, a major source of revenue for the Government’s public welfare fund (baithul-maal) comes from Zakat. Zakat is an Islamic principle of contributing a percentage of a person’s wealth (not income) towards public welfare. It is mandatory upon eligible Muslims to give out this charity and in an Islamic system this becomes a law.
Apart from the generous charitable aspect of Zakat, there is another beautiful aspect that I want to bring out. And that is, the fact that this charity is independent of the economic cycle. In fact, in some cases the charity goes up during bad economic times. The reason is that Zakat is based on an individual’s total liquid assets and not the yearly income. Liquid asset is anything which is available or can be readily converted to cash. One of the features of economic downturn is that people flock to cash and pull out money from the economic system. This increases the liquid asset of an individual which should lead to an increase in the amount of money that gets collected as Zakat.
In other words, while the modern fiscal policies lead to a dearth in fiscal revenue during an economic downturn, the Zakat-based Islamic system generates consistent (if not excess) charity for the welfare of poor and needy in the most needed time. This in turn protects the economic system from catastrophic collapse.
Indeed, this type of policy (Zakat) is something which modern nations of the world have to learn from Islam.
Monday, December 29, 2008
Modern Fiscal Setup Versus Zakat-Based Islamic System
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3 comments:
Peace,
Have you read the chapter on economic reform in Tariq Ramadan's "Western Muslims and the Future of Islam"? Its an amazing chapter. In it, he challenges Muslims to quit living on the margins of the economic systems, using "emergency" accomodations and instead to reform the global based on equitable Islamic principles in order to bring economic justice to people around the world.
If you're interested in economics, then certainly you could make some serious progress in this area. We have an opportunity as Muslims in this crucial time in history to really help the world.
Take the road less traveled and go for it!
In fact in one of the articles I read recently, charity to the third world was very seriously affected due to the current on going financial crisis. Charity became one of the first aspects on which people began to curb on expenditure.
Its such a pity that capitalism wants to put needy people at the mercy of rich people's philanthropy
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