Non – subjective fiscal policy with automatic stabilizers could help in stabilizing the cycle of business. In this article, we would argue about how the institution of Zakat acts as automatic stabilizer in an Islamic Economy.
Institution of Zakat as Automatic Stabilizer
Zakat is a must payment to the government on one’s income and wealth in an Islamic economy. Zakat is imposed on everyone who is wealthy enough to pay and the source of income is pure in the eyes of Islam, and through this Zakat is must to be paid on all forms of wealth and income.
Verse 60 of Chapter Al-Tauba lists the heads of Zakat and directs the government in an Islamic economy as to who should be the beneficiaries of Zakat.
"Alms are for the poor and the needy, and those employed to administer the funds; for those whose hearts have been (recently) reconciled (to truth); for those in bondage and in debt; in the cause of Allah; and for wayfarer; (thus it is) ordained by Allah, and Allah is full of knowledge and wisdom (Al-Tauba: 60)".
Beyond Nisab, Wealth Zakat of 2.5% and Income Zakat of 5% (when productive enterprise uses both labor and capital as major inputs) and 10% (when productive enterprise uses both labor and capital as major inputs) is prescribed.
Proportional Zakat Linked with income becomes an automatic stabilizer. When total sum of personal income increases, more Zakat is collected and much remains at governments for the allocation as transfer payments to Fuqura (poor and needy), Masakeen (extremely poor and needy) and Gharimeen (borrowers in trouble).
When the total sum of personal income decreases, Zakat also decreases providing the person a sign of relief as he/she is already going through crisis.
Moreover, the proportional income collecting, Zakat on wealth redistributes wealth too. So, if an Islamic Economy goes unstable and principles fail to recover and increase incomes, wealth Zakat enables the distribution that works independently, and helps them stabilize the extremes of business cycles.
Transfer Payments as Automatic Stabilizer
When the total sum of income of any person declines because of recession, more people will be in need of Zakat. Since Zakat is imposed on both a person’s income and his/her wealth. The redistribution of will always is an operation that will be carried out in an Islamic economy, irrespective of the phase of business cycle. Transfer payments to unemployed, poor, needy etc. will continue if the economy faces a mode of recession.
According to this, it’s easy to believe that low tax rate policy with widen Zakat base will confirm stable situation, increase the sum of demands, motivating the investors by decreasing costs. At the same time, microeconomic unstable situation in market could be resolved by increasing competition and helping to reduce market power.
For further research, visit IEP’s website:
www.islamiceconomics.viviti.com
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