The Strategy of Alaska in Saudi Arabia - Term Paper Example

Should Saudi Arabia Governments Follow The Strategy Of Alaska In Paying Dividends To The Saudi Arabia Citizens From The Oil Revenue? Institution: Date: Introduction The purpose of this study is to establish the efficiency of introducing tax revenue in Saudi Arabia on oil revenue. The study involves comparison of the case of Alaska with Saudi Arabia. The Alaskan government controls revenue from oil on behalf of the citizens and pay dividend to the citizens while they collect tax revenue from the citizens for provision of social welfare. However, Saudi Arabian Government does not collect any tax or pay dividends to the citizens (Ross, 2011). Instead they rely on oil revenue to provide welfare. The recent global decline in oil prices has raised the concern as to whether Saudi Arabia should introduce tax to the citizens but pay dividends to the citizens (Economist Newspaper Limited, 2015). Relying on a single source of income can cause challenges in case of price decline whereas introducing tax can improve efficiency of welfare delivery and improve revenue base for the Saudi Arabian government. Alaska Alaska has an established Alaska Permanent Fund (APF) that requires the government to invest at least a quarter of the revenue it earns from oil on behalf of its citizens. From these investments the APF has diversified mutual fund that has accumulated into a huge resource base in form of asset to the tune of about $28 billion dollar according to a report released in 2004 (Alaska Oil and Gas Association, 2015). Each year the government injects some amount from the oil revenue while they pay a dividend to the citizens annually through the Permanent Fund Divided scheme. For instance, in 2014 the government paid its citizens a total of $1,884 for each qualified Alaskan. The funds are managed through Alaska Permanent Fund Corporation. In Alaska, oil revenue contributes about 92 percent of the total government revenue as of the year 2011. Half of the corporate shares are in the ownership of private and public pension and retirement schemes while individuals own 20% while 27% is owned by asset management companies and financial institutions (Alaska Oil and Gas Association, 2015). The board members and corporate executives own the remaining 3%. This has an implication that when the oil sector is performing well the benefits trickles down to the citizens equitably either through returns from mutual fund investments, pensions, etc. (Dyer & Al-Ghwell, 2012). Therefore, oil earnings benefit the citizens in many way including dividends, better economic growth from states and federal revenues, capital projects, and employment opportunities. Alaska depends almost entirely on oil revenue to run the states operations. After the completion of Trans-Alaska Oil Pipeline Alaska, oil revenue has been steady providing over 85% of the state’s revenue (Alaska Oil and Gas Association, 2015). Because of these the tax revenue has significance to the government and the provision of services to its citizens. Saudi Arabia  Saudi Arabia is one of the largest oil producers in the world. However, contrary to Alaska the oil revenue benefits a few individuals from the royal family (Moss & Majerowicz, 2013). They do not tax the citizens, but the quality of services is very poor in the country. For instance the rate of unemployment stands at 25%, the country has huge public debt, the inequality of assets and wealth is high and the nation exports commodity without economic diversification (Moss & Majerowicz, 2013). Although Saudi Arabia has one of the largest foreign reserves, the declining oil prices has affected the significantly (ACE HOLDING, 2014). They have expressed their interest in using reserve buffer to fund the growing fiscal deficit. Their fiscal balance for 2015 is expected to turn into deficit by about 8 percent points. This will represent a decline of 20 percent points compared to 2012 performance. According to the Saudi Arabia Gazette (2014) Saudi Arabia will have to introduce new taxes as the last resort to counter the effects of declining global oil prices. They may consider the options for adjusting the prevailing taxes, tariffs, and non-oil revenues to enhance revenue. This is because the government cannot slow or reverse the growing government expenditures or subsidy reforms since they have to meet the demands for social welfare (Setser, 2008). The government must remain resilient to the mounting forces of declining oil prices while at the same time working on fiscal policy reforms. According to Hinckley (2015), the decision for not cutting the production of oil despite the falling global prices is an implication for an immediate change. The large oil producing companies including Saudi Arabia’s acknowledgment of declining prices without exercising market power to control the prices is an implication that some immediate actions are necessary to mitigate the effects. Furthermore, the primary responsibility of OPEC is to control the oil prices. However, the current situation may indicate that OPEC is losing the power to control oil prices (Alaska Permanent Funds Corporations, 2012). They rely mostly on Saudi Arabia to achieve stable oil prices across the globe mainly because it huge production capacity and its ability to produce inexpensive crude oil. Analysis Alaska also experiences challenges to the extent of facing a public deficit for various reasons. Because of the declining oil prices the country has a $3.5 billion deficit (DeMarban, 2015). For example, this year the state may pay out about $500 million higher in the form of tax incentives than the production tax revenue they expect. The cause for the rising public deficit has been attributed to government inefficiency in the exercise of its constitutional responsibility to create resources and maximize returns for the citizens (Al-Sheikh & Erbas, 2012). There is a need for government to reduce cost and maximize returns for the citizens. The oil-rich countries such as Saudi Arabia do not charge any tax from their citizens apart from the 2.5% they pay as Zakat as required by the Muslim faith. (The Economist Newspaper Limited, 2015). Lack of taxation for the citizens and businesses has attracted many foreigners in the country to carry out businesses and seek employment opportunities. Although local businesses are not required to pay tax, the foreigners pay a 20% only (The Economist Newspaper Limited, 2015). Currently, the government is exploring new means of raising revenue to counter its rising public debt. Haj pilgrimage is the main non-oil source of revenue. However, this is dependent on government spending and is paid from gas and oil revenue (The Economist Newspaper Limited, 2015). This implies a further decline in oil price will result to increase in government debt for Saudi Arabia. Oil producers lack transparency with their budgets and is ranked last in terms of budget accountability. The government attains some attachment with the public through providing the public with social services such as health, education, infrastructure and security (Moss & Majerowicz, 2013). For example, the oil-rich countries that have huge oil revenue can use some of its expenditures to provide social services to the citizens. This will achieve a balance between private and public consumption. The intention of the Alaskan government to give citizens dividends is to boost their revenue and increase public spending. However, imposing revenue is a health decision because the government diversifies its revenue base and minimizes the risk of depending on a single source of income (Ross, 2011). When the government levies tax from its citizens it uses that money for its expenditure and to provide social services to the public. Furthermore, citizens become more conscious of the government spending and will demand better services and government accountability as is the case of Alaska (Coutinho, 2011). However, the situation is different if the government has the liberty to spend oil revenue as they wish without any pressure for transparency from the public as is the case with Saudi Arabia (Guardian News and Media Limited, 2015). In this case the government becomes reluctant to increase public spending and concentrates on private consumption. This is the main cause of government inefficiency in the Saudi. Inefficiency in Saudi Arabia involves the oil subsidies by the government. This reduces the government revenue because the government pays huge some in the form of subsidies. “Far from beneficial, lower taxes are precisely the problem in resource-rich countries. The lack of reliance on taxation destroys the social contract and leads to low accountability, and correspondingly poor public service delivery” (Moss & Majerowicz, 2013, 7). According to Moss and Majerowicz (2013) a litter of water is expensive that a litter of oil in Saudi. It increases domestic consumption of oil by the rich people who own cars at the expense of export income from exports of oil. Providing of subsidies to the citizens transforms into an indirect way of distributing national revenue to the public (Ali & Flomenhoft, 2011). Taxation Most governments impose tax on common goods to enable consumers make contribution to meet the government expenditure (Tresch, 2014). Payment of tax is the sacrifice citizens make in exchange for common goods such as security, education, healthcare, etc. The decision by the government on whether to tax or not to tax the citizens should be based on equitable and fairness principles such as citizen’s ability-to-pay that tax, the benefit principle and the marginal utility principle. The benefit policy requires people to pay their taxes on the basis of goods and services they receive from the state (Tresch, 2014). For instance they should pay exercise tax on fuel to avail funds for construction of roads, bridges, etc. The wealthier pay must pay more because they obtain more benefits from the government that the poor such as police protection, court system, etc. The marginal utility principle implies that people should pay tax on increasing marginal utility. This implies that lower taxes should be imposed on necessities because they are targets on the poor while higher taxes are imposed on luxuries since rich people spend more on luxuries (Tresch, 2014). This makes taxation more equitable by structuring the taxes in such a way that the rich pay higher than the poor people. The principle assumes that people with higher income or the wealth people should pay more because the money has less value to them in comparison to the poor people. Under the principle of ability-to-pay, “The pattern of sacrifice should honor the theories of horizontal equity and vertical equity” (Tresch, 2014, 173). The horizontal equity implies that persons with same capacity to pay must carry the comparable tax liability. The person with greater necessary expenditures pays lesser than another person with similar income but lower necessary expenditures. In practice this is applied by making provisions for various allowances and tax credits for persons with children to enable them reduce the tax burden for any particular level of revenue (Tresch, 2014). On the other hand vertical equity imposes comparable tax obligations on persons with different resource capacity such that the person with higher income pays higher tax than the person with lower income. This is based on the incremental tax rates imposed on marginal greater revenue. The principle of equality is highly acceptable and considered treat as default policy of taxation (Tresch, 2014). However, there are considerations to be made to determine the extent to which two persons can be termed equals and the extent to which unequal parties can be treated the same during taxation. The computation of the tax involves applying same tax rate on the tax base both vertically and horizontally in order to satisfy the principle of ability to pay (Tresch, 2014). The horizontal equity is based on the uniform tax rate while vertical equity involves use of same tax base on persons considered equal for taxation purposes (Tresch, 2014). Tax efficiency implies minimal cost of tax administration through elimination of economic distortions as a result of taxation. Since it is a requirements for the citizens to pay tax the administrative cost arise as result of government’s assistance to the public to ensure compliance. Tax efficiency A tax efficient policy refers to a taxation process that imposes lower rate than a substitute method while they both achieve equivalent outcome. It eliminates the issue of tax burden that would otherwise arise in case of distortion of taxation process (Tresch, 2014). Although it is easy to evaluate tax burden of a single tax greater burden occurs in case of multiple functions thus making it difficult to estimate. This is the case when the government imposes tax on income because apart from affecting the number of hours worked it may also influence concentration of workers, human capital accumulation, compensation and retirement timing (Tresch, 2014). The effects of taxation on these and many other dimensions would be essential to determine the excess burden of tax. To overcome the difficulties of estimating the excess burden hence efficiency of tax the taxation process includes variants whereby the dependent variable represents taxable earnings. Another challenge is that a tax variation affecting one form of income may offset of reinforce an alternative source of taxable income. This may be the case when an increase in personal income results to incorporation of private businesses such that this reduces the total personal income while it increases the amount of corporate revenue (Tresch, 2014). For instance, assume the Saudi Arabian population (H) is identical but has different taste and ability, the social welfare function can be expressed as W (v1 (p, y1),...VH(p, yH)) where V(p,y) is the individual difference in the population, P = price function and yH represents the lump-sum income (Tresch, 2014). However, by assuming constant yield to scale or fixed producer costs lump-sum revenue can be eliminated. This equation denotes an efficiency theorem since the welfare of the society cannot be improved through imposing another method of once the optimal tax vector t has been applied to determine the price vector p (Tresch, 2014). It should be noted that optimal tax t can be altered by the shape of the public welfare. Therefore, Saudi Arabian government can ensure efficiency of taxation process by determine the optimal price P by use of optimal tax vector t so that incase other processes are applied they cannot improve the welfare of the society. Conclusion Instead of giving such subsidies the government should give dividends to the citizens similar to Alaska and then introduce the tax. This will help the government to increase public consumption, attain equitable distribution of national resources and diversify the sources of government revenue. Taxation can improve welfare of the society because it increase government accountability and citizens will demand for better services since they want the value for their money. The government can achieve efficiency by eliminating lump-sum income and introducing a tax rate through an optimal tax vector to ensure no other method can be applied to achieve better welfare for the citizens. Therefore, Saudi Arabia should consider the importance of having a tax and dividend policies for the citizens to promote the equitable distribution of oil resources and safeguard its revenue base through diversification by taxing all income earners. Reference List ACE HOLDING (2014, October 29). GCC: Oil price decline could lead to budget deficits. Retrieved from http://www.ace-ins.com/content/gcc-oil-price-decline-could-lead-budget-deficits Alaska Oil and Gas Association. (2015). Retrieved from http://www.aoga.org/facts-and-figures/who-owns-big-oil Alaska Permanent Funds Corporations, (2012). Wealth Management Sovereign and Permanent Funds Around the World Alaska Permanent Fund Corporation 2008 Trustees’ Papers, Vol. No. 8 http://www.apfc.org/_amiReportsArchive/2008_TP8.pdf ALI, S. H., & FLOMENHOFT, G. (2011, FEBRUARY 17). Innovating Sovereign Wealth Funds. Policy innovations. Retrieved on 8th June 2015 from http://www.policyinnovations.org/ideas/innovations/data/000186 Al-Sheikh, H. & Erbas, S. N. (2012). THE OIL CURSE AND LABOR MARKETS: THE CASE OF SAUDI ARABIA Working Paper 697 http://www.erf.org.eg/CMS/uploads/pdf/697.pdf Coutinho, L. (2011). The Resource Curse and Fiscal Policy. Cyprus Economic Policy Review, Vol. 5(1): 43-70. Retrieved on 9th June 2015 from http://www.ucy.ac.cy/erc/documents/The_Resource_Curse_and_Fiscal_Policy.pdf DeMarban, A. (2015). BP disputes governors claims on oil tax law. Alaska Dispatch Publishing Retrieved May 25, 2015, from http://www.adn.com/article/20150109/bp-disputes-governors-claims-oil-tax-law Dyer, P. & Al-Ghwell, H. (2012). Moving Forward on Economic Development: Policy Recommendations for Libya’s Next Government. Retrieved on 9th June 2015 from http://www.silatech.com/home/publications/overview/docs/default-source/editorial---blog/moving-forward-on-economic-development-policy-recommendations-for-libya-s-next-government Economist Newspaper Limited, (2015, January 10). Filling a hole. Retrieved May 25, 2015, from http://www.economist.com/news/finance-and-economics/21638159-oil-rich-states-need-find-new-ways-balance-their-budgets-filling-hole Guardian News and Media Limited, (2015). Fuelling the status quo. Retrieved from http://www.theguardian.com/world/2004/apr/05/worlddispatch.oil Hinckley, E. (2015, January 12). Everything Has Changed: Oil, Saudi Arabia, And The End Of OPEC. Retrieved May 25, 2015, from http://www.nasdaq.com/article/everything-has-changed-oil-saudi-arabia-and-the-end-of-opec-cm432119 Ross, M. L. (2011). Will Oil Drown the Arab Spring? Democracy and the Resource Curse. Council on Foreign Relations, Inc. Retrieved from https://www.foreignaffairs.com/articles/middle-east/2011-08-19/will-oil-drown-arab-spring Saudi Arabia Gazette (2014). Crashing oil: Has the time come for GCC countries to tax their citizens? (2014, December 9). Retrieved May 25, 2015, from http://www.albawaba.com/business/gulf-economies-taxation-630791 Setser, B. (2008). $120Oil and the Rise of the Gulf. Retrieved on 9th June 2015 from Http://blogs.cfr.org/setser/2008/04/28/120-oil-and-the-rise-of-the-gulf/. Todd Moss & Stephanie Majerowicz, (2013). Oil-to-Cash Will not Work Here! Ten Common Objections. Washington DC; Center for Global Development; CGD Policy Paper 024. http://www.cgdev.org/sites/default/files/oil-to-cash-wont-work-here.pdf Tresch, R. W. (2014). Public Finance: A Normative Theory, (3rd Ed.). Academic Press: 1- 534. Read More