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Is the argument clear?
Topic Started: Nov 5 2009, 06:27 PM (93 Views)
Union
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Pyrenees Republic
Can this be logically followed? I am not asking for critiques of the recommendation, merely that it makes sense.

It is a policy recommendation for a class. Meant to be brief, and take the position of a Saudi trade minister.

Thanks for any help :)

Quote:
 
This document will attempt to briefly outline the current financial situation of Saudi Arabia following the financial crisis of 2009, the ascension of Saudi Arabia to the WTO in 2005, along with plans to meet commitments made at that time, and policy recommendations for Saudi Arabian tax reform, with the stated aim to increase diversification of the economy and meet WTO commitments. The overall intent of policy recommendations made herein is to lower Saudi reliance on oil as a chief source of revenue, lower foreign trade barriers to Saudi markets in a controlled manner, and lower unemployment among Saudi male nationals, currently at an estimated 11%.

Saudi Arabia has survived the credit crisis relatively unscathed. Despite budget deficit predictions made at the start of the fiscal year amounting to $17.3 billion, the Saudi government is expected to come out of the 2009 fiscal year with a budget surplus of about $23.7 billion. This is due primarily to higher than expected oil revenues. Saudi GDP has continued to rise at an average of 4% through the crisis, and throughout the last few years. As a result of these figures, it is determined that a recovery program is unnecessary, as no recession has occurred, and that current infrastructure investment programs as outlined in the current Five Year Plan are responsible for avoiding recession from occurring. The fact that oil revenues, which comprise ¾ of government income, continued to rise in a recession environment indicates that the industry is relatively stable during times of crisis. The obvious conclusion is that international recovery, and continued oil revenue are not intertwined, and thus global economic recovery is not necessarily of Saudi concern – to maintain current economic outlooks.

The stated aim, however, of diversification, relies on global recovery, and a restoration of trust in the international banking system. This is due to the process recommended in this document to achieve diversification. WTO rules require, summarizing, a liberalization of Saudi markets in certain industries; these industries are telecommunications, information technologies, pharmaceuticals, civilian aircraft and parts, and industrial chemicals. These industries all fall within the broad spectrum of diversification from oil-based revenue, and it is deemed important to encourage foreign investment in these sectors. Growth in these sectors would do much to lower unemployment, though the high-technical fields these industries represent would require educational focus. To this end, the institution of more technical colleges across the nation would be sufficient, coupled with government-grants to encourage attendance to learn the necessary skills to make Saudi nationals globally competitive. This is a minor recommendation, however, and not the purpose of this document.

On the issue of our current balance of payments – Saudi Arabia has a mean budget surplus of $159.54 billion (in Saudi Riyads, since 2002). Saudi Arabia also has a domestic debt of $218.0 (SR) billion. Current debt can be paid off in less than two years, and is thus not a major problem. A minor recommendation would be to pay it off over 13 years, using 10% of any surplus per year. However, interest payments are currently low enough and Saudi credit at a high enough rating, that immediate pay-off of the debt should be a secondary objective to economic diversification.
The majority of this document will deal with a tax reform proposal aimed to meet the goals given by the WTO and the broader economic goal of economic diversification. Reform is principally centered on the corporate tax, the institution of a land value tax, and the institution of a program of forced savings by Saudi nationals.

Current tax law in Saudi Arabia describes a tax ranging from 30% to 45% on corporate revenue by non-Saudi corporations. This is clearly a major trade barrier, and discourages foreign investment in the Saudi economy. To meet the WTO requirements on liberalization, those industries outlined above will be deemed “economically vital.” This new status will effectively reduce the corporate tax to a half percent. The reason the tax is not removed entirely is due to the current income tax law, which removes income tax from persons invested in corporations that file corporate tax. The result of this reduction on key industries will mean that capital investment will naturally gravitate towards these companies as a means to avoid income tax, while encourage growth of these companies to begin with by offering Saudi Arabia as a near tax-free state within which business can be conducted. This will have the result of encouraging foreign investment in Saudi Arabia, particularly in industries deemed economically vital. At the same time, the continued existence of the corporate tax on other industries, particularly those that are petroleum based, protects Saudi Amarco from foreign competition, and protects national revenue from petroleum reserves. However, an adverse effect of this policy will be that, as national companies are exempt from the tax, and foreign companies will naturally develop only where the corporate tax no longer exists, tax revenue will fall dramatically. This will be recouped in two ways – the first is through increased collection of the income tax, due to a hopeful reduction in Saudi unemployment. The second is through the institution of a land value tax.

The land value tax is an idea developed by American Henry George. It is derived from the intrinsic value of a plot of land, relative to the land around it. It is paid annually, and the rate should be near 100% as possible. This form of taxation, unlike the corporate or income tax actually rewards innovation. It would encourage investors to develop the property they purchase, as only the base value of the land, not the value of the improvements built on the land, is taxed. This tax has been used worldwide with great success – Hong Kong derives 35% of government income from the land value tax. Singapore almost exclusively relies on the land value tax for income, and Taiwan and Estonia each derive significant portions of their own income from the tax. The purpose of this new tax will be to replace lost income due to a reduction in taxation on foreign investments in Saudi Arabia, and maintain the current budget surplus, which can then be redirected to infrastructure programs, such as the petrochemical plant investment currently underway, and other forms of government sponsored programs. These programs can be used to reduce unemployment among Saudi nationals, one of the chief aims of this document.

The final component of the reform is inspired by Singapore, and will take the form of a program of mandatory savings. This will be done by making savings tax-deductible. Under current income tax law, taxation ranges from 0% to 30% on income. The reform this document recommends is allowing individuals to deduct all income they place into long-term savings programs from total taxable income. The land value tax is expected to make up for the reduction in tax revenues. At the same time, these savings create a pool of capital in the banking system, which can be used to invest in the foreign ventures expected to come to Saudi Arabia when the tax reforms take place.
Edited by Union, Nov 5 2009, 06:27 PM.
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Al Araam
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Demigod of Death & Inactivity

I'm no economist, but it looks alright to me.

"Saudi Amarco" should be "Saudi Aramco". There were a couple other areas that need to be proofread, but that one really jumped out at me.
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Tristan da Cunha
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Science and Industry
Looks alright. The only change I have is that the Saudi currency is the riyal, not the riyad.
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New Harumf
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Bloodthirsty Unicorn
Personally - too dense a document. Break it into bullet points, use visuals (graphs, charts). Right now, I get dizzy trying to read it all.
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Union
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Pyrenees Republic
It's not meant to have any of that. It's a memo.
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Sedulius
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Field Marshal
What class it this? I remember having to write memos and the like.
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