Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities Mario Mansour and Eric M. Zolt WP/23/34 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2023 FEB * Respectively, Division Chief, Fiscal Affairs Department, International Monetary Fund, and Michael H. Schill DistinguishedProfessor of Law Emeritus, UCLA School of Law, and Extraordinary Professor, African Tax Institute, University of Pretoria. Viewsexpressed are the authors’ and do not necessarily represent those of the IMF, its Executive Board, or IMF management. Theauthors would like to thank Julieta Raquel Ladronis and Fernanda Morales for excellent research assistance, and for theircomments, Marwa Alnasaa, Cristian Alonso, Juan Carlos Benitez, Brenden Crowley, Ruud de Mooij, Michael Keen, PriscillaMuthoora, Rose Nyongesa, Fadia Sakr, Elife Ture, and Charles Vellutini. An earlier version of this paper was presented at theCanadian Tax Foundation’s conference Public Finance in the Real World: A Symposium in Honour of Richard Bird (April 2022).© 2023 International Monetary Fund WP/23/33IMF Working Paper Fiscal Affairs Department Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities Prepared by Mario Mansour and Eric M. Zolt* Authorized for distribution by Ruud de Mooij February 2023 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: Personal income taxes (PITs) play little or no role in the Middle East and North Africa, often yielding less than 2 percent of GDP in revenue—with the exception of few North African countries. This paper examines how PITs have evolved in recent decades, and what they might look like i n t he next 20 years. Top marginal tax rates on labor and business income of individuals have declined substantially, a trend that mirrors reductions in advanced and developing economies. Taxation of passive capital income has changed very little, and the revenue intake from this source remains low throughout the region (less than 1 percent of GDP on average and concentrated in oil-importing non-fragile states). Social security contributions (SSC) have increased in importance i n nearly all MENA countries, and some countries have introduced additional payroll taxes. The combination of reduced marginal tax rates, light taxation of income from capital and business activities, and increase of SSC, have resulted in income tax systems that create disincentives to work and incentives for informality, and contribute little to government revenue and income redistribution. Given differences in economic and political structures, demographics, and starting points, the path to PIT/SSC reforms will vary across the region. Countries with relatively mature PIT/SSC systems, where revenue performance has improved in the past two decades, will increasingly need to balance t he revenue and equity objectives against effciency objectives (in particular labor market incentives and infromality). Countries with no PITs will have to weigh whether a consumption tax/SSC system that mimic a flat tax on labor income is sufficient to diversify revenue away from oil and whether to adopt PITs to address rising income and wealth inequality. Finally, fragile states, who face more political volatility and weaker fiscal institutions, will have to focus on simplicity of tax design and collection to be able t o raise revenue from PITs. RECOMMENDED CITATION: Mansour, Mario, and Eric M. Zolt. 2023. “Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities,” IMF Working Paper 23/34, Washington DC: IMF. JEL Classification Numbers: H20, H23, H24 Keywords: Personal income taxes; social security contributions; payroll taxes; fragile and conflict states; Middle East and North Africa; Gulf-Cooperation Council Author’s E-Mail Address: mmansour@imf.org; zolt@ucla.law.edu WORKING PAPERS Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities Prepared by Mario Mansour and Eric M. Zolt IMF WORKING PAPERS Title of WP INTERNATIONAL MONETARY FUND 2 Contents GLOSSARY ....................................................................................................................................... 3 I. INTRODUCTION ................................................................................................................. 4 II. POLICY DESIGN CONSIDERATIONS.................................................................................. 5 A. Types of PIT Systems ..