Government Tax Increases: Bad Omen or Good?

In economists' conception, tax is considered an optimal tool in the government's hand for implementing its economic policies, whether fiscal or monetary, in order to grow the national economy and stabilize it...and to stimulate it and raise its gross domestic product, where it spends on various sectors of the economy...whether through current operational, transfer or developmental spending, or paying the interest resulting from borrowing, from revenues the government collects and obtains to finance its spending whether local or foreign.

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And the government, in managing the national economy through its economic policy—which branches into fiscal policies and monetary policies—extends its authority in running this economy by enacting laws and moving market forces...so it uses the tools of its fiscal policy such as taxes and spending...and the tools of its monetary policy, which are supervised by the central bank and, in our case, the Palestine Monetary Authority (PMA)..such as interest rates and the money supply...and which at times the public reacts to more than it reacts to fiscal policy tools...especially if it has a national currency.!! 
In the area of domestic revenues, which the citizen is the main payer of whether in the private or public sector, these citizens finance the government through tax and non-tax revenues...and tax revenues include all types of taxes from income, value-added, customs and other taxes imposed by law..and there are fees, fines and confiscations under the heading of non-tax revenues but they feed the state's treasury with funds..to finance its expenditures. Also..as appear in its annual budgets, where the total current expenditures and net lending in the 2018 budget reached 16.180 billion shekels, i.e. equivalent to 4.494 billion US dollars. These domestic revenues were estimated in the Palestinian government's 2018 budget at 4.533 billion shekels (of which 2.954 billion shekels were tax revenues and 1.579 billion shekels non-tax revenues), i.e. equivalent to 1.259 billion US dollars...which represent 8.1% of gross domestic product...!!. Tax revenues from citizens, which represent only 22% of net public revenues as stated in the 2018 budget cited above, extend to also include taxes, fees and customs paid by the Palestinian citizen whether a merchant, worker or importer through what is called clearance revenues ("clearing bill") via the Israeli side which deducts taxes on the wages of Palestinian workers whether in Israel or in the Israeli settlements...in the occupied West Bank...or value-added taxes and customs and other taxes that the Israeli side collects and obtains from Palestinian imports of goods from Israel, which constitute 80% of total Palestinian external imports...These taxes and collected funds are transferred by the Israeli side..to the Palestinian side monthly in a session known as the clearance session.... The value of the clearing bill was estimated, according to what appears in the government's 2018 budget, at 9.158 billion shekels..i.e. equivalent to 2.544 billion US dollars, which represent 16.1% of gross domestic product. They constitute about 68% of net public revenues for the 2018 budget.. (the actual data for 2018 we have not obtained yet, because the 2019 budget has not been submitted yet to my knowledge),
As for our topic, briefly, regarding increasing or reducing taxes what we mean are the taxes over which the Palestinian government has control in enacting its laws, and which constitute about 22% of net revenues in the 2018 budget...as for the value-added tax we follow the Israeli side in the rates imposed with some limited flexibility (+ or – 2%)..according to the Paris Economic Protocol.

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What happens if the government decides to raise taxes by increasing their rates?..In the ordinary economic conception, it will deduct more money than before from individuals' (households') incomes according to the new tax rates..thus reducing their net income, which is the fundamental factor that drives consumer demand....This will lead to a reduced desire by these individuals to spend in the market as their demand for goods and services falls, i.e. their purchasing power will decline.....They follow in their spending decisions the principle of priorities and necessities in that spending..and thus most of this decline in the demand for consumer spending will lead to a reduction in gross domestic product...even if the state increases transfer expenditures to assist low-income people. Because part of the funds collected from the tax increase will go to servicing the budget deficit and interest on government loan installments and other public debt. Therefore, not all the funds resulting from the new tax increase will be re-employed into government spending in the economy to stimulate the national economy, noting that the current government spending is directed about 50% approximately to paying wages and salaries as the value of wages and salaries paid in the 2018 budget amounted to 7.873 billion shekels out of the 16.180 billion shekels total current spending in the 2018 budget...and operating expenditures amounted to 2.086 billion shekels in the same year's budget, and therefore current government expenditures are mainly directed to non-investment or non-income-generating sectors...and the economy slows down as a result, because government public spending is considered a main element in the market usually composed of consumers, the investor sector, companies and the government...in addition to net exports in the balance of payments in the external sector... .As we noted, deducting amounts from the public beyond previous levels by raising taxes reduces individuals' net incomes, and thus individuals, in most cases, will not be able to save, noting that individual saving is necessary as it accumulates in banks...to create funds available for lending to investors from the private sector...Thus the goal of raising taxes becomes a burden on individuals, constraining them and reducing their purchasing and saving desires..which in turn overall reflects in a decline in gross domestic product...and therefore it is a bad omen from this viewpoint according to some economists..!!

And I would like to clarify that resorting to the angle that pours into the public revenues pot—namely tax revenues—which as we noted above constitute only 22% of net public revenues, forms what is commonly called the "short tail" ("qasar dhail"), due to the low proportion that this angle—tax revenues—brings in, which is only 22% of net public revenues....Even if we add the non-tax revenues angle to it..they still constitute 32%—that is about one-third of net public revenues..while the share of the clearing bill...which is provided by the Israeli side and estimated at about 68% of net public revenues as appeared in the 2018 budget...is a larger angle for producing funds, despite the Palestinians' lack of control over the stability and regularity of its flow to the public treasury..according to understandings and agreements.!!

As for reducing taxes, they will increase individuals' net income and thus individuals will either spend the differences from the income increase resulting from this reduction..or spend part of it..thereby increasing demand in the market economy and hence increasing gross domestic product, or save another part of it and deposit it in financial institutions..which will be positive because these institutions will be able to increase lending..if that is possible..as we noted earlier..and therefore it is considered a good omen from the viewpoint of some economists!!

The government may both raise and lower taxes at the same time, as we noted earlier and as the Palestinian government showed its intention to do in its draft budget for 2018..approved in early March of last year..which is a good..and balanced..program..and we hope it will be implemented...!
The concepts of raising or lowering taxes have economists who defend each concept; some believe that raising taxes will stimulate the economy..and increase funds for spending and investment, even with the price increases that follow wage increases..and even in the presence of inflation and unemployment..and we note here that having a national currency can help the government address economic disarray whether it is inflationary or contractionary, by using monetary policy and its tools to control the money supply and open market operations and interest rates...increasing or decreasing or stabilizing..something the Palestinian government does not have..which deals in three currencies and has no control over the consequences of its deposits...and lending in the domestic market.!!

Some economists, on the other hand, believe that cutting taxes flexibly and broadening the tax base — as the Palestinian government's budget project for 2018 showed — and improving tax administration methods will attract a larger sector of taxpayers, as the government indicated in the referenced budget that it will adopt such a strategy. It expects a noticeable increase in the number of taxpayers, and increased dialogue and understanding with the private sector to engage in implementing such strategies and strengthen the bonds of trust between the two parties. In addition to stimulating household consumption spending and thereby boosting the market and increasing gross domestic product...
When a government budget runs a deficit, that is when the government's expenditures exceed its revenues — which was estimated in the 2018 budget at 4.584 billion shekel before financing — and the accumulation of this deficit will add a burden to the Palestinian economy in addition to the burden of public government debt...it will lead to continued domestic and external borrowing to finance the budget deficit and to pay arrears and cover financing gaps and interest...which were estimated in the 2018 budget at 305 million shekel (interest)...in light of the difficulty of verifying the continuation of external support, especially after the withholding of financial aid from the United States, which had constituted 13% of total external assistance, whether to support the general budget — which in total amounted to approximately 2.160 billion shekel, equivalent to about 600 million US dollars — or to support development expenditures in the Palestinian economy, which were estimated at about 175 million US dollars...

If the government resorts to financing its financing gaps, interest on its loans, and repayments through local financial institutions, this will disrupt this important sector of the national economy and the private sector will consequently face difficulty obtaining financing for its investments, as its ability to obtain credit from local banks will decline due to the government's crowding out and its influence on financing. This will reduce the willingness of that sector, its companies, and its investors to increase production and expand investment, especially since such competition with the government for funds will raise interest rates and thus increase the cost of borrowing, and will also reduce consumer spending by individuals...as a result of increased taxes..!!

To all of the above we add the dominance of the odious Israeli occupation over all aspects of life in the Palestinian territories occupied in 1967, which has, more or less, paralyzed the government's ability to deploy national wealth sources in Area C to advance the national economy and establish projects there...
It is a difficult test for the government; we sincerely pray that it will correct its course toward solving its financial difficulties, especially since there are unpaid debts of the Palestinian Pension Authority dating back to 1999...entirely unpaid...which rightfully belong to the citizens...
It is a hard matter..!! But increasing taxes across the board...would be an ill-advised measure...!! 10-1-2019