In the Gulf countries, falling oil prices have created a need to impose new taxes, such as the value-added tax which will be launched in the beginning of 2018; as well as a need to reduce the subsidies enjoyed by residents, including citizens and foreigners. Since such policies are likely to result in a reduction in residents’ living standards, many Gulf citizens have called for levying taxes upon, and cutting subsidies for, foreigners and not citizens, in an effort to protect the living standards of citizens at the expense of those of foreigners. This perspective is generally accompanied by the belief that the foreigners who work in the GCC are lucky, and that their presence in the Gulf reflects the kindness of the Gulf people; and that therefore, it is within the rights of Gulf citizens to require foreigners to bear the burden of austerity in place of citizens, since the foreigners are essentially guests.
Setting aside ethical considerations, this viewpoint suffers from two flaws. First, the simpler matter, which is that the presence of foreign workers in the GCC is neither a humanitarian initiative, nor a charitable project; rather, it represents an economic policy designed to serve the interests of Gulf citizens. Smart policies seek to help citizens by also helping foreigners—when such opportunities arise—and the most salient example in the global economy is free trade: when the GCC countries exchange oil for cars in international markets, both sides benefit, and the transaction does not constitute an act of charity by one side toward the other. In the case of migrant workers in the GCC, the Gulf economics were weak prior to the discovery of oil, due to the desert climate, which diminishes the natural resources that can form the basis of an economy, especially compared to the fertile lands available in western countries. Consequently, when the opportunity to export oil emerged, so too did an opportunity to realize robust rates of economic growth. However, the limited human resources in the Gulf—both in terms of numbers and experience—forced the Gulf countries to import labor in an effort to grow quickly. For example, Saudi Arabia depended critically upon U.S. expertise for the development of its oil sector, which drove—and continues to drive—the economy. This situation persists today, for the Gulf economies require foreign hands in many sectors, due to their experience, and their willingness to work for low wages, which together allow Gulf citizens to consume various goods and services at affordable prices. Accordingly, when a job offer is presented to a foreigner in the Arabian Gulf, it is an opportunity that serves the interests of both sides, and is not an act of charity. Migrant workers are partners in the Gulf economy, rather than guests or beneficiaries of charitable contributions from the citizens. There are exceptions, such as the refugees in Saudi Arabia, but Gulf citizens are yet to demand the imposition of taxes upon refugees, or reduction of subsidies given to them, because they are truly in need of humanitarian assistance. Second, the nominal incidence of a tax differs from its real incidence. When a government levies a tax on a commercial transaction between two parties, it results in a struggle between them over who will bear the real cost, which may differ from who bears the nominal cost. The key determining factor is the ability of each side to secure an alternative to the transaction, and therefore to escape the tax. Whichever party depends upon the transaction, and doesn’t have an alternative, will bear a greater share of the real cost. For example, when authorities impose taxes upon cigarette sales, cigarette retailers are the nominal payers of the tax, and not consumers. However, smokers are addicted to cigarettes, meaning that retailers can raise their prices without experiencing a significant decrease in sales. Accordingly, retailers are able to force consumers to bear the true cost of the tax, despite the nominal burden falling upon retailers. In contrast, if the government levies a tax on Al-Marai brand milk, for example, then the company will be unable to shift the real burden of the tax to consumers, because if it raises its price, its sales will collapse, due to the abundance of alternatives to the consumer, such as Nada, Saudi, and other brands. The same principle applies to migrant workers in the Gulf: if the government imposes a tax on a transaction that involves them such as their hiring, or their purchases, then the extent to which foreigners bear the real burden of the tax depends upon their ability to find an alternative to working in that country, compared to citizens’ ability to find an alternative to foreign workers. In many sectors, Gulf citizens’ dependence upon foreigners evidently exceeds foreigners’ dependence upon Gulf citizens, such as in construction. In such situations, the likely outcome of a tax being levied is an increase in migrant worker wages, allowing them to maintain their standard of living, forcing the Gulf citizen to bear the real cost of the tax via an increase in product prices, despite foreigners bearing the nominal cost of the tax. Migrant workers’ ability to evade the real burden of a tax is augmented if one GCC country imposes a tax without an equivalent tax being imposed in others, due to the migrants’ ability to work in other GCC countries. And even if the GCC countries coordinate, they still collectively represent but one choice among many for migrant workers. This does not mean, however, that there is no way to impose real taxes upon foreigners, or to force them to partake in austerity. However, the decision to do so needs to be based on a realistic calculation over who will bear the real burden of a tax, and not on an emotional assessment of the migrant’s role in the economy. Moreover, foreign workers should be treated as economic partners, not as the recipients of a charitable contribution, in acknowledgment of their genuine contribution to the Gulf’s economic success.
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Omar Al-Ubaydli
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June 2020
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