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Jordan’s fiscal and monetary policies

Jul 30,2018 - Last updated at Jul 30,2018

Fiscal policy in Jordan has run its course. It is very tight. The government levies about sixty different types of direct and indirect taxes, excluding punitive fines. The tax burden that Jordanians shoulder has reached beyond-optional levels, and an increase in taxes will set the Laffer curve into motion, causing a decrease in total government receipts.

The recent “tobacco factory scandal” attests to this conclusion. The high taxes imposed on cigarettes made it worthwhile for smugglers and illegal producers to take the risk of violating the law. As a result, these smugglers and black-marketers helped themselves to the government stash of cash and took what was not theirs to take.

Thus, the tax profile of Jordan needs to be totally re-visited and re-arranged. It seems, however, that the government’s need for cash is too acute to afford the time required to do that comprehensive tax revision and restructuring.

On the other hand, monetary policy has been performing very well. Yet, it is doing so at the expense of fiscal policy, which has taken the full brunt of economic adjustment as envisaged by the International Monetary Fund.

The rigidity of the monetary policy, and its strict adherence to the rules pegging the Jordan dinar to the US dollar, brought monetary and exchange rate stability. Yet, it made the dinar, both at home and abroad, expensive to both Jordanians and foreigners who want to buy from Jordan.

As a result of higher taxation and soaring cost of oil derivatives, water and electricity, the cost of living went up, while the incremental increase has been cushioned by the strong dinar against major currencies, except the US dollar.

The stickiness upward of the exchange rate and interest rate to both consumers and business is evident.

We cannot afford contractionary monetary and fiscal policies in Jordan. This is a formula of stagnation in the short-run (this year) and it poses a threat of stagflation in the medium run.

Both fiscal and monetary policies are in acute need for new approaches.

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Comments

In its quest to generate more revenue for the treasury the government ought in the meantime adhere to what is referred to in the taxation world as " consumption Tax " and " value added Tax. The individual income tax should be left alone for now as well as the exemptions that go along with it. The same goes for the Corporate Tax since raising the Tax on corporations or financial institutions will cause them to pass the increase downward and back into the forlorn consumer earnings. Consumption-based taxes is based on the level that one consumes, the more one consumes the more taxes one will pay, the less one consumes the fewer taxes one will pay. The same goes for value-added taxes. The same method of consumption would be applied to both individuals and corporations. The same idea is applied to the value added, if one buys a car for JD 50,000 one would have to pay a lot more in taxes than one buying Kia Sephia for JD 3500. The value taxation for the latter case would be much fewer than the former. It would be very difficult at this point in time to collect individual income tax because many individuals are currently working as a self-proprietors, they don't give out receipts, they don't deal with checks or credits and most of their transactions are completed using cash only options. For this reason, it is almost impossible to estimate how much income any of these citizens is generating in terms of annual income every calendar year. Adhering to the consumption option the tax is immediately levied according to the instant consumption. It is in some ways something similar to the fuel variance that is being added to the monthly electricity consumption invoices.

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