The plan, announced by newly appointed Minister of Finance Hani Kadry Dimian, imposes an extra 5 percent annual tax on those whose annual income exceeds 1 million Egyptian pounds (143,000 US dollars) for a period of two or three years, in addition to existing income tax, set at 25 percent for this income bracket.
In a recent interview with Asharq Al-Awsat, Dimian said the move was initially proposed by his predecessor, Ahmed Galal, and aimed to “reinvigorate Egyptian production” and reduce the country’s widening 240 billion Egyptian pound (34 billion dollar) budget deficit.
The deficit currently accounts for some 14 percent of GDP, below the 10 percent target set by the Finance Ministry.
Dr. Mohamed Najjar, an economics professor at Banha University, questioned the efficacy of such a tax during Egypt’s interim period when the country lacks any overall political direction, and called for more substantive economic reforms.
He said: “Why does the finance minister propose a 5 percent tax on high-income earners without a clear economic or political system in place? Because tax is normally proposed and discussed when there is a president and a legislative council in place to issue laws on any proposed taxes, which would allow us to determine whether the next council would have capitalist, socialist or Islamist leanings.”
Najjar added that the current time was not one for “talk about tax increases, but a time to address our economic problems because we do not know whether the forthcoming plans will be short-, medium- or long-term.”
He dismissed the new tax as “nothing more than chatter,” and its announcement as a move to gauge the opinions of the country’s chambers of commerce and business associations.
Dimian told Asharq Al-Awsat that the government was aiming to widen the country’s tax base, easing pressures off those in the lower-income bracket.
“The intention is to distribute the burden across the largest possible number of people and the highest wage earners, with the exception of low-income groups, the groups most deserving of welfare and to whom the state provides support in order to improve their standard of living. Performing these tasks . . . is the constitutional responsibility of the Ministry of Finance and the government.”
But Dr. Samir Morcos, a lecturer in economics at the American University in Cairo, said the announced tax rate, despite its populist flavor, contravened the principles of social justice and was unconstitutional. “The proposed tax on high income earners has roots in history, and its origins come from the public tax on revenue which was imposed on total income and which remained unchanged until it was cancelled twice when it was adjudged to be unconstitutional,” he said. “This description still follows this tax whichever way it is described because it is an affront to social justice.”
He said the tax would be applied several times: first when income was earned from trade or industry activity and again when the earners collected the revenue they earned, “and a third time when five percent is added, which is an affront to justice.”
Morcos added that Egyptian fiscal policy needed tough reforms and not just stopgap measures such as a tax on the rich. “If we look at Egyptian society, we find the number of people who pay tax does not exceed 25 percent of those who should pay, and the difference is a loss which is called tax evasion, which in my personal view is a failure of the Egyptian tax system to reach all people who should be paying tax,” he said.
Morcos criticized the country’s tax system, saying it suffered from a “failure of coordination and an absence of ideas,” and that a massive data-gathering project would be needed to widen the tax base and tackle evasion.
He believed a more efficient way to help plug the deficit would be to tackle illegal activity, rather than punish the legitimate earnings of wealthy individuals.
The government should instead investigate investors and businessmen who fixed land prices in order to buy them at a lower price than their actual value, which was estimated in the billions, he said. That, combined with pursuing funds from tax evasion, would be enough to cover the shortfall in the budget.
Also speaking to Asharq Al-Awsat, Mohamed Ibrahim, chairman of the Future Studies Center at the Decision Support Center, expressed concern regarding the nature of the tax, since it did not “specify any sector or whether it is a tax or a loan, because there are rumors that it may be imposed for a specific period and then refunded, which means we do not know whether it is a tax or a loan.”
However, he added: “In light of these difficult economic conditions, there is no problem for the rich to help support public revenue.”