Role of Tax Revenues in the Financing of the General Budget in Palestine (1996-2003)

This study sought to identify the most important features of the tax regime effective in Palestine since the Palestinian National Authority (PNA)’s taking over of the financial powers in 1994. It also investigated the size of tax revenues, their components (elements) and their role in financing public expenditure between 1996-2004. Further, this study drew some important trends in the taxation policy and its impact on the Palestinian economy particularly in financing public spending. The significance of this study stems from the importance of the subject it’s dealing with and the implications it has for the future of development in the country which will largely depend on public revenues and public expenditure. This study is also significant because it’s the first serious study to analyses the tax revenues in a comprehensive fashion. To these ends of the study, the researcher adopted a methodology based on the analysis of public revenues, and tax revenues in particular, from one year to another (horizontal analysis) and on comparison between tax revenues and public revenues for every year (vertical analysis). The researcher also made a review of literature on public finance for the sake of building a theoretical frame/background. In his analysis, the researcher depended on the actual figures reported by the PNA in its public budgets. The study was divided into three chapters. Chapter one provided an introduction to the tax system and public budget. The chapter specifically dealt with the development of taxes, their types, their definitions, purposes, characteristics and regulations. It also tackled the public budget, in terms of development and types, and moved on to public spending and public revenues. Chapter two dealt with the nature of the tax structure in the country. It specifically examined the types of taxes applied by the PNA since taking its powers in 1994. The chapter also dealt with direct taxes (income tax, property and land tax) and indirect taxes (value added tax, customs tax and production and purchase tax). Chapter three examined the role of tax revenues in financing the public budget. In section one, the researcher dealt with types of revenues: current, local and tax. He also examined their separate roles in financing the budget. In section two, the researcher highlighted the public expenditure in terms of its economic and functional classification. Results of the study The tax laws, effective in Palestine between 1994 – 2003, were found to be out-of- date and were inherited from Egypt, Jordan, Britain and Israel. There was no growth in tax revenues during those years. The tax revenues combined had contributed an average of 53% while non-tax revenues had contributed an average of 11%. In contrast, grants and foreign aid combined had contributed about 36% to the public revenues. It was also found that the direct taxes only contributed an average of 6.03% to public revenues. The share of income tax revenues of wages and profits amounted to 6% whereas the contribution of property and land tax was about zero (0.03%). The income tax represented some 11% of the tax revenues. In contrast, indirect taxes combined contributed an average of 47% to the public revenues. The share of value added tax and customs was 30% while that of customs duties was 17%. Their contribution to tax revenues amounted to 89% while that of customs and excise was 57%. The customs duties contributed an average of 32%. In addition, it was found that current expenditure represented about 75% of public spending between 1996-2003. The share of capital expenditure (ordinary and development expenditure combined) did not exceed 25%. Spending on wages and salaries took the lion’s share of public expenditure. Salaries and wages took about 47% and represented some 63% of current expenditure. The share of operating expenditure, which includes public utilities, telecoms, fuels and office stationery, represented 14% of public spending and 18% of current spending. Manufacturing expenditure represented some 14% of public spending and 19% of current expenditure. It’s worth mentioning that salaries and wages amounted to some 80% of local revenues. That is, 80% of local revenues were directed towards covering wages and salaries. Security expenditures took 25% of public spending while social expenditure took 26%. In the light of these findings to increase tax collection, the researcher suggested expanding the base of taxpayers to include the PNA’s employees, private sector employees, and the self-employed in all Palestinian areas, and amending the tax scale layers in the Palestinian Income Tax Law #17 of 2004 which became effective at the outset of 2005. The first category of tax layer should be lowered while the last category has to be raised. The number of categories should be also increased. The focus should be on collection of taxes from profits rather than from wages by introducing, in each tax department, division for data collection and investigation with the purpose of taxpaying all people who make income particularly from property and real estate. This is in addition to educating the public about the necessity to obtain clearance unified invoices and present them to tax departments and punishing severely those who do not.