Oct 11, 2019 in Analysis

How US and Saudi Arabia Raise Revenue

Saudi Arabia and the United States are allies and they have strong economies. The economy of Saudi Arabia is one o the strongest in Middle East, while that of United States is the best in the whole world. However, the economies of these two countries are dependent on a number of things. For example, the economy of the United States depends on a wide variety of technological products that it is importing to various parts of the world. These products include computers, mobile phones, vehicles and electronics. The economy of United States is also dependent on military sales, and it is one of the largest sellers of military arms to the world. It therefore means that one of the methods that the government of United States uses to raise revenue is through taxation, that it charges multi-national companies operating in it. It is important to explain that the taxes which corporate organizations pay in United States are one of the highest in the world.       

It is high because of the concepts of double taxation where the corporate organization pays more than one type of tax to the US government. This is on the profits that the corporate organization makes. Saudi Arabia also gets majority of its revenue from taxation. Unlike United States, the country has a single taxation policy. This is a system where companies only pay one single tax. The income of its managers and shareholders are not taxed. All that they have to do, is to pay Zakat. This is a religious form of alms giving. This paper provides an analysis of the methods the US and the Saudi Arabian government uses to get revenue. The major argument of this paper is that despite the different nature of their economy, the use of taxation is one of the major ways that these governments use to collect revenue. Other methods include the use of bonds, fines and penalties, borrowing, and raiding of funds.                          

Taxation Policy of United States and Saudi Arabia

Double taxation occurs where the US government charges its corporate organizations taxes in two manners. It charges them on profits they get in their foreign operations, and the profits they get in their domestic markets. This is an indication that these companies are paying double taxes to the US government, and this forces majority of these companies to seek mergers and acquisitions with foreign companies so that they may escape the harsh taxation policies of the US government. The economy of Saudi Arabia is highly dependent on oil; therefore its major source of revenue is proceeds emanating from the oil revenue. In fact, oil wells are controlled and owned by the government, and most of the policies touching on the kingdom centre on how to control oil prices, and produce a give barrel of oil per day. This is the reason Saudi Arabia is a major member of OPEC, which is an oil cartel that seeks to control the prices of the product. The reason for its active participation in the OPEC is because it earns 90% of its revenue from oil sales.                                                                 

However, the country is now diversifying on the methods which it can use to raise revenue. It is now charging electricity fees, and fuel levies for purposes of raising revenue Other methods it uses to raise revenue is the disposal of its foreign reserves, and the issuance of bonds in its stock market and foreign equity market. The reasons for the adoption of these strategies are because of the significant drop in the oil prices. Another important method that Saudi Arabia uses for purposes of collecting revenue is revenues it garners from tourists and pilgrims. This is because annually, millions of people visit the holy city of Mecca, for purposes of fulfilling one of the conditions of Islam. That is paying homage to Mecca. This makes Saudi Arabia to be one of the countries that normally attracts millions of people to its borders. 

Despite the differences in their economic positions and the structure of their economies, the government of Saudi Arabia and that United States use taxation as the major method of collecting revenue for the state. This is a method that almost all government uses to collect revenue.   

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Differences and Similarities in the Taxation Policies of United States and Saudi Arabia

Saudi Arabia and United States rely on taxes as a major method to use in raising revenue.  However, their taxation system is different. Saudi Arabia operates the Zakat system of taxation. Under this system of taxation, wealthy people in Saudi Arabia have an obligation to pay taxes, at a base rate of 2.5%. However, this type of taxes is not paid by the poor. This is because under Islamic teachings, poor people should not be subjected to taxation, and the money collected from the rich has to go to the poor. Under the concepts of Zakat, money that is collected by the Saudi Arabian government goes to charity. This money is used to fund social welfare programs, and other programs whose objectives is to help the poor and raise the standard of living for the people of Saudi Arabia. Therefore, Saudi Arabia considers this type of policy as a taxation policy, and a major method the government uses to raise revenue. In fact, the government of Saudi Arabia has a fully fledged ministry that is responsible for collecting Zakat contributions. 

The ministry under consideration is called the ministry of Zakat and Taxation. This ministry is very powerful, and whoever occupies the office as the minister, the person has a significant trust from the King. The ministry is responsible for providing policy directions, and hiring Zakat collectors, whose role to identify people who are eligible to pay the money in accordance to the laws of Islam. Under Islamic laws, an individual who qualifies to pay the contributions must satisfy a minimum requirement, in terms of the wealth the person has, or his revenue. The minimum qualification for an individual to pay the Zakat is a person who has monthly revenue of more than 1020 dollars. This is then calculated at a base rate of 2.5%. This taxation policy of Saudi Arabia is one of the lowest in the world. This is when compared to the income tax rate of United States. For example, in United States, the income tax rate stands at 10%. This is the lowest amount of money an individual will pay to the government. To some extent, it is possible to compare the income tax of United States to the Zakat system of Saudi Arabia. 

This is because these taxes are charged on the working population. In United States, the amount of money and rates used in taxing the income tax varies. The lowest is 10%, while the highest value of tax an individual can pay is 39.6%. The people who are paying 10% are low income earners. These are people whose salary ranges between 0 to 9275 dollars. These are considered low income earners. On the other hand, people with a salary range of about 500,000 dollars are subjected to an income tax rate of 39.6%. The argument in coming up with these two different policies is based on the fact that the government seeks to promote equal economic development. To achieve this objective, it has to tax the rich and the poor people differently. The rich have to pay more taxes when compared to the poor. This is a system that Saudi Arabia does not tolerate. It considers this as economic exploitation. Therefore, to protect the poor, the government does not charge any taxes on their incomes. However, on the rich, the government will use a base rate of 2.5%. This is because the country seeks to treat everybody equally. Apart from the Zakat system, the country also has a taxation policy that targets residents and non residents of the Kingdom.  

The taxes are charged on the profits that these people garner while engaging in business. This is irrespective of the source of money used in starting the business organization. It is important to explain that under this taxation policy, the Kingdom does not tax people on the income they get from their salaries. The taxes are directed on the profits they get while doing business in Saudi Arabia. Furthermore, people who have invested in shares are not taxed on the dividends they receive from these shares. This is because of the strict prohibitions of Islamic laws that prevent the state from imposing unnecessary taxes on individual. The taxes paid on the profits a company makes stands at 20%. However, this 20% is charged on a non-resident person in Saudi Arabia. These are people who have come to Saudi Arabia to do business and make money. But on a citizen of Saudi Arabia, the government charges a flat tax rate of 2.5%. 

There are a number of reasons the Saudi government charges these different rates of taxes to the Saudi Nationals and their foreign counterparts. The first intention is to encourage Saudi nationals in investing in trade. This is the reason the government charges very low taxation rates on the profits that these people gain while engaging in entrepreneurship. The justification of charging 20% on foreigners is for the money to remain in the Saudi economy. The intention of the government is to prevent a large amount of money from moving out of the Saudi Arabian economy, and being invested in other parts of the world. This is also the justification that is given by the Saudi government when they insist that foreigners willing to do business in Saudi Arabia, must partner with the locals for a license to be issued.

In United States, there is a double taxation system on business personalities and entities. The US government treats corporate organizations independently, from the shareholders and the people working in them. For example, the profit that corporate organizations and business entities make is taxed at a rate of between 15% to 39%. This depends on the size of the business organization and the profits that the organization makes. Furthermore, the government charges a 10 to 39% taxation rates on the income that people earn from these business organizations. This includes the gains in the value of the shares they hold and the dividends paid to shareholders. Therefore, it is possible to denote that this system is different from that of Saudi Arabia. It is different because of the concept of double taxation. Saudi Arabia charges taxes on profits alone, while the United States charges taxes on profits the company makes, and the income of the share holders of the company. Take for example, a hypothetical company called Carlstron limited. The company operates in Saudi Arabia and makes a profit of 100,000 dollars. The Saudi government will tax this profit, based on the percentage of shares the Saudi nationals have, and the foreign nationals have. If a foreign national controls 60%, the Saudi government will levy 20% taxation on the profits belonging to the foreign national, and 2.5% on the profits belonging to the citizen of Saudi Arabia.  

The government will not charge taxes on the salaries that these people get while managing the organization. If this was in the United States, the government will charge a flat tax rate of between 10% to 39% on this profit. The government will also tax the salaries of the managers of this organization, and the dividends that each shareholder gets. Therefore, a huge percentage of this money goes to the government. The question to ask, if the Saudi government has a low tax rate, then how does it raise revenue to finance its budget and other sectors of the economy?  

 The answer is the revenues it gets in taxing business organizations that are in the oil and gas industry.  

The economy of Saudi Arabia is highly dependent on oil revenues. Saudi Arabia is the fourth largest exporter of oil, and it uses money it generates in this industry to finance its budget. The taxation rates it charges on companies exploring and exporting oil in Saudi Arabia is very high. The taxation rate stands at 85%. This is one of the largest corporate taxation rates in the world. The revenue that the Saudi government gets from this taxation policy is very high. The oil industry is very sensitive to the Saudi government, that 95% of its activities are undertaken by a government owned company by the name of Saudi Aramco.   

This institution has the responsibility of exploring for oil, and exporting the oil products to other countries. The government thereafter charges 85% taxation rate on the revenues that this company gets in oil sales. The remaining 15% is used by the company to pay wages and for other logistics purposes. Other parastatals also have an opportunity to work for the Saudi government in terms of exploration and exportation of oil. However, the Saudi government has allocated to them, only 5% of the oil industry in the country. These companies are also subjected to the 85% taxation rate in the oil they produce and sale. The reason why Saudi Arabia relies on money derived from the oil industry is because of the high volume of oil that it has the capability to produce. The country has an oil reserve of 260 billion barrels, and it is easy to explore these oil substances. This is because they are found on the surface of the earth. This further makes it cheaper to explore oil, hence at the current market rates of 49 dollars per barrel, Saudi Arabia can still make profits from the sales of its oil substances.       

Another important industry that Saudi Arabia heavily taxes is the gas exploration industry. Saudi Arabia taxes 30% of revenues from companies operating in this industry. This is not as high as taxes raised in the petroleum industry. The reason for charging this low tax rate is because the government seeks to encourage exploration in the gas industry. Despite the differences in the taxation policies of the United States and the Kingdom of Saudi Arabia, there are a number of similarities. One such similarity is the concept of corporate tax. The two governments have realized that in the entrepreneurial industry, they can collect revenue. Basing on this knowledge, they introduced corporate taxes for purposes of sharing a percentage of the profits that these organizations make. The concept of corporate taxes is also used by many countries in the world. However, their rates differ. The concept of corporate taxes is the only major similarity that exists between the taxation system of Saudi Arabia and that of United States. Their differences are large.  

Other differences that exists in the taxation systems of Saudi Arabia and that of United States is on the taxes they charge on expatriates. Saudi Arabia does not levy taxes on road and are services. The country does not also levy taxes on inheritance and council taxes. Other area that expatriates do not pay the Saudi government is on stamp duties, property taxes and television license. However, expatriates pay all these taxes to the US government. It therefore means that life in United States is more difficult than life in Saudi Arabia. This is because the taxation policy of United States is not friendly to its citizens and foreign nationals seeking work in the country.   

Other Methods Used in Raising Revenue

For purposes of raising revenue, the United States and the Saudi government issue out government bonds. For example in August 2015, the Saudi Arabian government issued out a bond that was worth 5.33 billion US dollars. The intention of raising money through the issuance of bonds was to finance its budget. This is because of low revenue that the kingdom was generating in the oil market. As noted earlier, Saudi Arabia heavily relies on oil for purposes of financing its budgets. But with a price of a below 50 dollar per barrel, the Saudi government is unable to raise enough money to finance its budget. However, it should be noted that even if the price is below 50 dollars per barrel, Saudi Arabia still gets some profits. This is the reason it is still continuing to pump in more oil and taking them to the market. These bonds from the Saudi government were sold to local institutions and banking organizations. They had a maturity period of between five to ten years. This is the second time the government issues bonds in the year. The first time was in June, when the Saudi government issued bonds worth slightly above 15 billion riyals.  

The issuance of bonds is one of the major methods the US government uses to raise revenue. One of the bonds that is issued by the US government is called treasury bills. These bonds are issue weekly by the US government, and most of them have a maturity period of 28 days, 3 months, 6 months and 1 year. In selling these types of bonds, the US government uses a concept called the single pricing system, and the minimum purchase price for these bonds is 100 dollars. Treasury bills are one of the most efficient methods the US government is suing to raise revenue. This is because these bonds normally attract a lot of interest from citizens, who purchase them. Furthermore, the United States is viewed as a politically stable government, with good credit ratings. This means that the chances of defaulting are low, hence the money borrowed from the public will be repaid in full. It is important to explain that the use of bonds in Saudi Arabia as a method of raising revenue is different from that of United States. This is because Saudi Arabia rarely uses bonds to collect revenue.

The last time the country used this method was in 2007, during the global financial crisis. Other types of bonds that are issued by the United States are, treasury notes and treasury bonds. Treasury notes have a maturity period of between two to ten years. On the other hand, treasury bills have a maturity rate of 20 to 30 years. It is a long term source of government borrowing. The targets for these types of bonds are institutions and corporate organizations. Government agencies and institutions can also buy treasury bills. For example, China is the largest buyer and holder of US treasury bills. Saudi Arabia on the other hand prefers to use its foreign reserves for purposes financing its budgets. If the country decides to roll out its bonds, then it is an indication of a depletion of its foreign reserves.    

Fines and penalties is another method that the US government and Saudi Arabia uses to earn revenue. These fines and penalties are always imposed on organizations and individuals who have breached the laws of the country. In the United States, Federal laws allow the government to charge fines on certain offences. For example, a court may impose a fine of up to 250,000 dollars on a felony or a misdemeanor. These types of money can also be charged on organizations that breach the laws of United States.  Take for example a company that breaches the Sherman act. The law provides that such kind of a company can pay fines for not less than 10 million dollars. Examples of companies that have violated the Sherman act and paid millions in terms of fines, are Korean airlines, which paid 300 million dollars in 2007. Other companies include Bridgestone Corporation, LG and British Airways. Fines are therefore important methods that the US government uses to raise revenue. Saudi Arabia also has a fine policy that it uses to raise revenue; however, most of these fines are paid to individuals when their rights are breached. Another important method used to raise revenue by Saudi and American governments is through the use of a concept referred to as raiding of funds. Under this concept, the government will invest money for its social security programs in other areas. For example, the US government constantly uses money aimed for Medicare by investing in other areas to garner revenue, and returning it back once it gets the returns. Saudi Arabia on the other hand, uses pension money to invest in other programs, and once a sufficient return is achieved, the government refunds back the cash. 

Conclusion

Imposition of taxes is the major way the government of Saudi Arabia and that of United States use to raise revenue. However, these two countries have different methods and mechanism of raising taxes. The United States government uses a concept called double taxation to tax people and institutions in the country. Under this system, the US government will tax the earnings of an individual, and the profits they generate on other businesses they have. Saudi Arabia on the other hand levies taxes on the wealth or income of an individual, if it exceeds 1020 dollars. This is not the case with United States. The rate of taxes in United States varies, and it stands between 10 to 39% depending on the income of an individual. In Saudi Arabia, the Zakat rates are 2.5% on all people. This is irrespective of the kind of income they have. Other methods that are used for purposes of collecting revenue include bonds and penalties or fines charged on offenders. 

The use of bonds is a popular method the US government uses to collect revenue. An example is the treasury bill that is issued weekly by the US government. The minimum amount of money to buy these bonds is 100 dollars, and the maximum maturity rate for this bond is 1 year. Saudi Arabia on the other hand does not rely extensive on bonds, as a method of raising money. It prefers to use its foreign reserves, and bonds are used when the government is running out of the reserves.  

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