The importance of taxes in improving wages and stimulating the economy

Executive Summary:

This paper examines the role of tax policies in improving wages and stimulating economic growth in Syria, amid a critical transitional phase that requires urgent fiscal reforms.

The paper is based on the premise that the current tax system suffers from structural imbalances that limit its ability to achieve social justice and weaken its impact on supporting economic and living stability.

The first chapter reviews the theoretical framework of taxation, focusing on the relationship between taxes, wages, and economic growth, drawing on macroeconomic concepts, Ibn Khaldun’s theory, and the Laffer Curve.

The second chapter provides a thorough analysis of the Syrian reality, highlighting the weakness of tax progressivity, declining purchasing power, and wage deflation, along with the institutional challenges that hinder reform.

The third chapter reviews successful international experiences, such as those of Malaysia, Brazil, Germany, and Rwanda, in using taxes as a tool to improve wages and stimulate the economy, drawing lessons applicable to the Syrian context.

In Chapter Four, a set of practical proposals for reforming the tax system is presented, including restructuring, enhancing fairness, stimulating investment, and linking revenues to wage improvements. The proposals are also integrated with the recommendations of the Syrian Future Movement, which emphasize the need to build a fair, transparent, and growth-enhancing tax system.
The paper concludes that tax reform is not merely a financial measure, but rather a political and social gateway to rebuilding the Syrian state on modern foundations that achieve economic dignity for citizens, restore prestige to the middle class, and establish a new social contract based on justice and citizenship.

Introduction:

In light of the profound economic challenges facing Syria today, there is an urgent need for effective tools to revitalize the economy and improve citizens’ standard of living. While there are many possible policies, taxes remain one of the most prominent tools the state possesses to redistribute resources, achieve social justice, and stimulate economic growth.

Recent years have witnessed a sharp decline in the purchasing power of Syrian citizens, as a result of inflation, the deterioration of the currency exchange rate, and the rising cost of living.

Conversely, wages in both the public and private sectors remain below the desired level, creating a dangerous gap between actual income and citizens’ basic needs.

Hence, this paper proposes an urgent reform vision based on restructuring the tax system to make it more just and effective, so that it can be used as a direct tool to improve wages, stimulate production, and enhance financial and social stability.

The paper also seeks to present practical proposals based on international experience and an analysis of the Syrian reality, with the aim of supporting decision-makers in adopting tax policies that keep pace with the current situation and meet citizens’ aspirations.

Chapter One: The Theoretical Framework of Taxes and Their Relationship to Wages and Economic Growth:

Taxes are one of the most prominent fiscal policy tools used by governments to achieve various economic and social objectives, including financing public spending, redistributing income, and stimulating economic growth.
In the Syrian context, where the economy faces severe structural challenges, taxes emerge as a central tool that can be effectively employed to restore economic balance and improve wage levels.

First: The Concept of Taxes and Their Economic Functions

A tax is a mandatory financial deduction imposed by the state on individuals and institutions, without direct compensation, with the aim of financing public spending. Taxes vary between direct (such as income tax) and indirect (such as sales tax), each with a different impact on the economic behavior of individuals and businesses.
From an economic perspective, taxes perform multiple functions, including:

1. Financing function: securing the financial resources needed to cover government spending.
2. Distribution function: reducing gaps between social classes through progressive tax systems.
3. Incentive or restrictive function: influencing the behavior of consumers and investors through tax incentives or restrictions.

Second: The Relationship Between Taxes and Wages

Taxes are linked to wages through several direct and indirect channels. Directly, taxes affect individuals’ net income, which impacts their purchasing power. Indirectly, tax policies affect the state’s ability to finance wage increases in the public sector and affect operating costs in the private sector, thus affecting employment decisions and the level of wages offered.
In progressive tax systems, where high-income earners pay a larger proportion of the income of the middle or lower classes in taxes, the state can redistribute these revenues to finance minimum wage increases or support social services, creating a more equitable and stable environment.

Third: Taxes and Economic Growth

The relationship between taxes and economic growth is one of the most complex in macroeconomics. While taxes provide the resources needed to invest in infrastructure, education, and health, they can also diminish productive incentives if imposed ill-considered.

Recent studies indicate that:

• High income taxes may discourage private investment and reduce savings.
• Indirect taxes, such as value-added tax (VAT), affect consumption and may be more burdensome for low-income groups.
• Tax incentives, such as exemptions or reductions, can encourage investment in vital sectors and create new job opportunities, which positively impacts wages and growth.

Fourth: Ibn Khaldun’s Theory of Taxes

It is noteworthy that the Arab thinker Ibn Khaldun addressed the relationship between taxes and economic growth centuries ago. He noted that “excessive collection weakens the state,” emphasizing that lower tax rates lead to increased economic activity and, consequently, higher public revenues in the long term.

This view intersects with what is known today as the “Laffer Curve,” which demonstrates that there is an optimal tax level that generates the highest revenue without discouraging economic activity.

Fifth: Taxes as a Reform Tool in the Transitional Phase

In a fragile economic context like Syria’s, taxes can play a crucial reform role if they are redesigned to be more equitable and effective. Instead of focusing on indirect taxes that burden citizens, the direct tax base can be expanded, collection mechanisms improved, and tax revenues directly linked to programs to improve wages and public services.

Chapter Two: Analysis of the Tax Reality, Wage Levels, and Purchasing Power in Syria:

Studying the economic and financial reality in Syria is a prerequisite for understanding the effectiveness of proposed tax policies and determining their ability to improve wages and stimulate economic growth. After the victory of the revolution over the former regime, we found that the Syrian economy suffers from deep structural imbalances, most notably declining public revenues, weak production, and a decline in citizens’ purchasing power.

In this chapter, we analyze the Syrian tax system, wage levels, and purchasing power, highlighting the challenges hindering financial reform.

First: Features of the Syrian Tax System

The Syrian tax system is characterized by complex features, including:

1. Heavy reliance on indirect taxes such as sales tax and customs duties, which are less socially just than direct taxes.
2. Weak tax progressivity, as higher rates are not effectively imposed on high incomes, limiting the state’s ability to redistribute income.
3. Widespread tax evasion, resulting from weak oversight, complex procedures, and a lack of trust between citizens and financial institutions.
4. The multiplicity of tax authorities leads to duplication of collection, policy inconsistencies, and weakens the efficiency of the system as a whole.

The war has resulted in a sharp decline in tax revenues, as a result of the contraction of economic activity, the destruction of infrastructure, and capital flight.

Second: The Salary and Wage Tax

The salary and wage tax is one of the most stable taxes in Syria, given its difficulty in evading it and its direct connection to the public sector. However, this tax suffers from several problems:

1. Withholding rates are disproportionate to income levels, which burdens low-income employees.
2. The lack of flexibility in tax brackets, as they are not updated to reflect inflation and market changes.
3. The failure to link tax revenues to improved wages or social services, which weakens confidence in the tax system and increases feelings of injustice.

Our study showed that 49.23% of workers in Syria are salaried, making the salary and wage tax a central tool in any future tax reform.

Third: Wage Levels and Purchasing Power

Data indicates that average wages in Syria cover only a small portion of the cost of living, especially in light of accelerating inflation. For example:

1. The minimum wage in the public sector does not exceed 500,000 Syrian pounds per month, while the cost of living for a small family exceeds 1.5 million pounds per month.
2. The private sector suffers from significant wage disparities, with no effective minimum wage and no oversight of compliance.
3. Purchasing power has declined by more than 80% over the past decade, as a result of the depreciation of the currency and the rise in the prices of basic commodities.

This decline in wages and purchasing power creates an unstable economic environment, leading to a decline in consumption and a contraction in domestic demand, which hinders economic growth and increases poverty rates.

Fourth: Structural Challenges Facing Tax Reform

Despite the urgent need to reform the tax system, several challenges hinder its implementation, including:

1. Weak administrative and oversight structures in financial institutions.
2. The absence of an accurate database of the real income of individuals and institutions.
3. The informal economy, estimated to constitute more than 60% of economic activity, is difficult to tax.
4. The lack of trust between citizens and the state, due to the lack of transparency in the use of tax revenues.
   These challenges require comprehensive institutional reform, including updating legislation, simplifying procedures, and strengthening oversight, in addition to linking tax policies to improving wages and public services.

Chapter Three: International Experiences in Using Taxes to Improve Wages and Stimulate the Economy:

In light of the economic challenges facing Syria, it is useful to study the experiences of other countries that have successfully used tax policies as an effective tool to improve wages and stimulate economic growth. This chapter reviews selected models from developing and developed countries, analyzing the tax policies they have adopted, the results they have achieved, and the lessons Syria can benefit from in its own context.

First: The Malaysian Experience – Taxes as a Lever for Industrial Growth

In the 1990s, Malaysia adopted a tax policy that stimulated industrial growth, which included:

1. Reducing taxes on small and medium-sized enterprises.
2. Providing tax exemptions to investors in the technology and manufacturing sectors.
3. Linking tax incentives to local labor employment and improving wages.
   These policies led to increased domestic and foreign investment and a significant improvement in average wages, especially in new industrial zones.
   They also contributed to reducing unemployment and achieving economic growth exceeding 7% annually over two decades.

Second: The Brazilian Experience – Progressive Taxation and Social Justice

Brazil has adopted a progressive tax system since the beginning of the millennium, imposing higher taxes on high incomes while reducing taxes on basic goods and social services. These policies have contributed to:

1. Funding wage subsidy programs such as Bolsa Família.
2. Improving the purchasing power of the poor.
3. Reducing the gap between social classes.
   Despite political challenges, studies have shown that these policies have contributed to a 30% reduction in the poverty rate over ten years and increased domestic consumer spending.

Third: The German Experience – Taxes as a Stabilizer in Crises

During the 2008 global financial crisis, Germany used taxes as an economic stabilization tool by:

1. Temporarily reducing the value-added tax to stimulate consumption.
2. Providing tax exemptions to companies that maintained employment.
3. Increasing tax-financed public spending to stimulate aggregate demand.
   These policies helped avoid a deep recession, maintain wage levels, and boost confidence in the German economy, making it one of the fastest-recovering economies after the crisis.

Fourth: The Rwandan Experience – Tax Digitization and Improving Compliance

Despite limited resources, Rwanda succeeded in improving tax collection through digitization. This included:

1. An electronic tax filing system was adopted.
2. Tax incentives were linked to improved wages and youth employment.
3. Procedures were simplified to encourage small businesses to comply.
   This led to a 60% increase in tax revenues over five years, a significant portion of which was directed to improving salaries in the public sector, particularly in education and healthcare.

Fifth: Lessons Learned for Syria

By analyzing these experiences, several applicable lessons can be drawn for Syria:

1. Tax justice is a condition for improving wages: The tax system must be progressive, imposing higher rates on higher incomes and easing the burden on vulnerable groups.
   2- Tax incentives stimulate investment and employment: Tax exemptions can be provided conditionally on job creation and improved wages.
   3- Digitization enhances compliance and reduces evasion: Adopting electronic systems for tax collection and registration facilitates administration and increases revenues.
   4- Linking taxes to public services enhances trust: Citizens should feel that the taxes they pay are being used to improve their lives, not to increase their burden.

Chapter Four: Practical Proposals for Reforming the Tax System in Syria:

In light of theoretical analysis and international experiences, and with an understanding of the Syrian reality, the need for comprehensive tax reform emerges that rebuilds trust between citizens and the state, achieves social justice, and stimulates economic growth. This chapter presents a set of practical proposals based on economic literature, comparative experiences, and the recommendations of the Syrian Future Movement, which believes that financial reform is the starting point for the national recovery process.

First: Restructuring the Tax System

1. Simplify the tax system by consolidating multiple taxes into a unified tax rate that is easy to understand and implement.
2. Abolish the lump-sum income system and replace it with a system based on real income, adopting electronic invoicing and linking data with the Ministry of Finance.
3. Abolish unproductive fees imposed without clear criteria and burdening small traders and citizens.

Second: Promoting Tax Justice

1. Imposing progressive taxes on high incomes, ensuring a fair contribution from wealthy individuals to financing public spending.
2. Exempting low-income individuals from income tax. The new draft law also proposes exempting those with an annual income of less than $12,000.
3. Abolishing the residential rental tax for Syrian citizens, to ease the burden on low-income families.

Third: Stimulating investment and local production

1. Reducing taxes on productive sectors such as industry and agriculture to encourage local growth. We recommend reducing the industrial activity tax from 20% to 10%.
2. Providing conditional tax exemptions for companies that create job opportunities and commit to improving wages.
3. Supporting promising industries such as technology and textiles through tax reductions and providing appropriate infrastructure.

Fourth: Linking tax revenues to improving wages

1. Allocating a portion of tax revenues to finance salary increases, especially in the public sector, with a focus on education and health.
2. Establishing a national fund for wage improvement funded by progressive taxes, managed transparently, and allocated to support the groups most affected by inflation.
3. Link tax policies to social justice indicators, such as the Gini coefficient and poverty rates, to ensure that reforms achieve a tangible impact.

Fifth: Enhancing tax compliance and public trust

1. Fully digitize the tax administration and adopt electronic invoicing to reduce tax evasion and increase transparency.
2. Launch a national tax awareness campaign that explains to citizens how taxes are used to improve their lives.
3. Involve civil society and the private sector in formulating tax policies to ensure consistency and effectiveness.

Sixth: Recommendations specific to the Syrian Future Movement

The Syrian Future Movement, in its vision for financial reform, submitted a study before the liberation and fall of Assad, on March 28, 2024, entitled “Raising Wages in Syria.” In addition to what we have presented in this context, at this stage, we in the Syrian Future Movement’s Economic Office recommend the following:

1. Consider tax reform as a fundamental approach to achieving balance in the public budget, stimulating exports, and increasing investment and savings.
2. Use taxes as a tool to control consumption, by imposing them on non-essential goods and reducing them on essential goods.
   3- Curbing inflation by rationalizing public spending and linking taxes to the ability to pay.
   4- Supporting the private sector to be a partner in development, rather than merely a taxpayer.

Conclusion:

In light of the economic and social challenges facing Syria, taxes emerge as a central tool that can be employed not only to finance public spending, but also to rebuild the social contract, achieve justice, and stimulate growth.
This paper has demonstrated, through theoretical, practical, and empirical analysis, that tax policies are not merely financial measures; rather, they are an expression of the state’s vision of its role in the lives of its citizens and its ability to redistribute resources to ensure dignity and stability.

Improving wages in Syria cannot be achieved in isolation from comprehensive tax reform that restructures the financial system, enhances trust between citizens and the state, and places social justice at the core of economic policies. International experience has shown that progressive taxation, conditional tax incentives, digitization, and linking revenues to improved services are all effective tools that can bring about a real transformation in the economy and society.

In this context, the paper’s recommendations intersect with the political vision of the Syrian Future Movement, which views tax reform as a fundamental gateway to rebuilding the Syrian state on modern foundations.
The Syrian Future Movement does not view taxes as a burden, but rather as a means to achieve a balance between rights and duties and as a tool for establishing the foundations of justice and citizenship. Its vision is to build an economic system that guarantees equal opportunities, stimulates production, and restores the middle class, which is the backbone of any national renaissance.
The movement also believes that the next phase requires a true partnership between the state and society, based on transparency, accountability, and the equitable distribution of wealth.
Hence, adopting a bold tax reform that links revenues to improved wages and services and involves citizens in policy formulation is a crucial step toward achieving political and social stability and paving the way for a new Syria based on efficiency, justice, and dignity.
This paper, presented to decision-makers in Damascus, hopes to be a scientific and practical contribution to building a national economic vision that restores the dignity of the Syrian citizen and places him at the heart of policy, not on its margins.

References:

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   Study Link
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