Commercializing the System

In the 1960s, an emirate in the GCC had a vision of becoming a world’s trade center. And to fulfill that vision, its Sheikh realized that oil, the once abundant natural resource, is not going to be there forever. Also, he realized that his emirate, one of seven prior to the union, will have to invent new ways of sustaining the emirate’s development. He first established a national travel agency and a main sea port that could handle a capacity of ships beyond those that would sail through the Strait of Hormuz. The idea back then was to better connect the emirate to the world through tourism and trade. When the emirate joined the union with the other six emirates, its plans were expanded to establish a national carrier that would serve the initial idea even better. The carrier did that well as the emirate was promoted as a brand rather than an emirate, with festivals attracting millions and shopping malls making the heat acceptable. However, there is no value added tax, VAT, or other taxes on whatever that is traded. My question is, why?

Taxes, even though they generate high revenues for governments, they do raise an alert to those who are price sensitive and are financially aware of their expenses. And because a 5-7% in many countries is quite significant as the original price of the purchased product increases; the case worsens. Since the economy was just born, but not yet established neither is stabilized; taxes would partially demotivate tourists, traders, and investors from spending money in the emirate. In addition to that, others will not find it suitable as a final retirement destination. As a result of all that was mentioned, the reliance on oil income had to be maintained though reduced over time. Stock markets were established, national companies were introduced and supported, and an indirect tax system was created. Moreover, the emirate was developed for people to want to work and live in it. Hence, all government systems, including the 2-years electronic government vision, worked in synchronization towards marking the life of all residents and visitors better.

As part of the above, a real estate economy was crucial to develop the emirate. For that, foreigners were granted a 99-year visa based on their purchases in projects that government-owned companies were doing. When the financial crisis hit the market, and as most probably was the plan of someone; it slowed down the economic growth of the emirate. And the  truth to be said, it helped expose loopholes in many laws associated with all of the above markets, as well as set the prices of real estate units and others back to their appropriate levels. Consequently, it encouraged global corporations to move their headquarters to the emirate, especially that there is no direct tax system intact. So taxes couldn’t be introduced, but the government has commercialized most of its institutions towards achieving sustainable development and financial stability. An example would be the 2 billion UAE Dirhams generated last year from fees charged on using a main high way. Another example would be charging o5 UAE Dirhams per traveller through its airports.

The examples of how the system was commercialized are many, and because oil income is shrinking; ways had to be invented to pay for the public services provided. This is usually accounted for by countries where natural resources are relatively scarcer or the respective income is not a major component in their GDPs. The logic here, besides spending on public services and national defense, is to guarantee at least a portion of what citizens and residents make as an income is spent in the city or the country. The logic is valid and it’s understandable why many find not having taxes in the mentioned emirate absurd. At a point, even commercializing the system might not generate government income that can coop with the increase in population hence government spending. So should taxes be introduced one day? If yes, should a refundable VAT be introduced or should one that limits sales of unhealthy products but creates a black market for those? Finally, should transferred money by expats be taxed? Note here that these are in billions of UAE Dirhams.