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Sources of Public Finance in an Islamic Economy

Salman Ahmed Shaikh ()

MPRA Paper from University Library of Munich, Germany

Abstract: Since interest is prohibited in Islam, the government in an Islamic economy cannot issue interest based T-Bills, T-Bonds and/or obtain interest based sovereign debt. Based on the literature review, it is argued that neither Prophet Muhammad (P.B.U.H) nor the pious Caliphates (rta) levied any taxes other than Zakah. Accordingly, this study explores the sources of revenue for a government in an Islamic economy. In discussing sources of tax revenue, it is maintained that Zakah is the only tax the government in an Islamic economy can levy. Nevertheless, the government can charge service/performance based fees, duties, charges etc in providing public goods. Furthermore, the profitable operations of state owned enterprises form an important part of non-tax revenues. It is also analyzed that how the non-profitable public institutions like police and courts will be funded. This study also discusses that how the government can finance its deficit keeping in view that interest is prohibited in Islam and Zakah rates are very low and Zakah base is very narrow as per common understanding. The study also gives brief insights into how much Zakah can be collected in Pakistan. Finally, it suggests that the nominal GDP growth linked rate of return can be used to benchmark domestic and external loans including those from IMF, WB and IDA etc.

Keywords: Public Finance; Taxation; Expenditure; Fiscsl Policy; Deficit Financing; Zakat; Redistribution. (search for similar items in EconPapers)
JEL-codes: E62 H2 H3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara, nep-cwa and nep-mac
Date: 2010-04-17
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