In a significant move, Oman is set to introduce a progressive income tax targeting high-income individuals (with salaries above RO 2,000). This initiative shifts towards a more equitable tax system, where higher earners contribute more of their income to government revenues.
Coupled with the existing Value Added Tax (VAT) on spending and corporate tax, this new tax reflects Oman’s comprehensive approach to fiscal policy. While the new tax aims to generate essential funds for public services and reduce income inequality, it also raises concerns about its potential impact on economic growth.
Rationale behind progressive taxation
Progressive taxation ensures that those who can pay more do so, funding essential government services and redistributing wealth to support social programmes. The revenue generated from this tax can be used to enhance infrastructure, healthcare, education, and other public services, ultimately benefiting the broader population.
Additionally, by imposing higher taxes on higher incomes, the government can moderate excessive consumption and speculative investment, fostering greater economic stability.
Potential impacts on economic growth
Despite its benefits, critics argue that progressive taxation could slow economic growth by reducing the incentives for high earners to invest and spend.
Here are some examples illustrating these concerns:
Investment Decisions: An entrepreneur in Oman contemplating a significant investment in a new business venture might be deterred by the prospect of a substantial portion of their profits being taxed.
This hesitation could result in fewer new businesses, stifling job creation and economic growth. Furthermore, this policy might discourage investments that create high-earning jobs and instead favour MSMEs (Micro, Small, and Medium Enterprises).
Promotion and Career Advancement: Professionals close to the RO 2,000 threshold might be discouraged from seeking promotions or career advancements, as the net gain for a professional earning RO 1,999 could be greater than for someone earning RO 2,000; this could lead to a job market where employers are hesitant to promote employees beyond this threshold, which risks additional burdens and costs that may be passed on to consumers, potentially driving up prices.
Brain Drain: Highly skilled professionals may relocate to countries with lower tax rates to maximise their earnings, leading to a “brain drain.”
This loss of valuable human capital could negatively affect innovation and economic growth. France experienced this phenomenon after introducing a 75-per cent tax rate on incomes above €1 million in 2013, prompting some high-profile individuals and businesses to move abroad.
Capital Flight: Investors might shift their capital to countries with more favourable tax regimes, reducing the availability of domestic investment capital and impacting economic growth. In the 1990s, Sweden faced significant capital flight due to high taxes, necessitating tax reforms to lower top marginal rates and attract investment back into the country.
Luxury Goods/Service Industry: If their income is taxed, high-income households might cut back on luxury goods and services.
This reduction in consumption can impact sectors that rely on affluent consumers. For instance, the luxury car and high-end retail industries could see a decline in sales, affecting the jobs within these industries, from manufacturing to sales and service positions.
Fiscal responsibility and regional collaboration
To maximise the benefits of progressive taxation, the Omani government needs to be more fiscally responsible by reducing its size for non-essential entities and promoting a greater role for NGOs.
Additionally, Oman must collaborate with other GCC countries before implementing such a tax.
The region’s governments are directly competing for skilled workers and professionals, evidenced by initiatives like the UAE’s Golden Visa and the forthcoming Green Visa. Introducing progressive taxation without regional coordination could drive high earners and skilled professionals to relocate to neighbouring countries with more favourable tax regimes.
Conclusion
Oman’s introduction of a progressive income tax and existing VAT and corporate tax represents a significant step towards equitable wealth distribution and revenue generation.
However, careful consideration and regional collaboration are essential to mitigate potential negative impacts on economic growth and ensure the country remains competitive in attracting and retaining top talent. As Oman navigates this new fiscal landscape, balancing fairness with economic vitality will be key to its success.
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