As Winston Churchill once said,” there is no such thing as a good tax.” Tax implementation, in the long run, would create a shift in the supply curve, and tax deduction, in the long run, would discourage workers from working due to the increase of the discretionary income. On January 1st of 2018, the government of Saudi Arabia introduced Sales Taxes (VAT) for the first time in its history. Residents of the Kingdom were encouraged by the government to be an influential element in economic growth. They want to increase the non-oil income, so the dependence on the only income source can get less. However, when COVID-19 hit the world, governments got into a locked-down situation, which drove many companies out of their markets. Due to the pandemic, the government of Saudi Arabia increased the VAT 10% more to be 15%. In this article, we will explore the effect of the new taxes in the private sector and what the government can do to eliminate such effects.
Increases in taxes would have a massive effect on SMEs and, in some manners, to corporations. These changes will increase the cost of outputs, which will drive the prices of goods and services to rise. The rise in prices will decrease the amount of sales hand by hand with the profit. Once SMEs under pursuer, they will find ways to decrease their percentage of the cost. One of the ways to decrease the cost of production is wages. The reduction of wages or employees abandoning is one of the conclusions of reducing the cost of production. Moreover, if possible, these effects will drive some enterprises out of the market.
Once employees get laid off, the unemployment rate will escalate. At that time, the government has to provide welfare to the increasing number of unemployed workers. The increasing amount of welfare will shift the expenditure from infrastructure projects to subsides. These subsidies will not return as profit to the government; instead, people tend to save through tough times and spend wisely on necessity goods and services. This behavior will lead the economy to shrink.After the outcomes of COVID-19, the Saudi government should take into consideration waiving or reducing the VAT to make the economy flourish again. These cuts will drive consumers to spend more and get the supply curve back on its way. As a result of the tax cut policy, the government will have to spend on infrastructure and other projects, slowly getting the economy running. Once the goal has reached, the government can reinstate the 5% VAT to get back the lost non-oil income.
Hussain's Words 