By Mahmoud El-Gamal (Rice University)
In Book 16 of the Muwaṭṭaʾ, nestled between Chapter 9 regarding alms taxes on merchandise and money and Chapter 11 regarding alms taxes on livestock (the two main forms of wealth in Arabia), we read in Chapter 10, Report 699 a text that condemns hoarding. The report’s representation of hoarded wealth as a venomous serpent is apt because zakāt serves two simultaneous purposes, one personal and the other social, as indicated by two Qur’anic verses: “Take of their wealth an alms tax, to purify and cleanse them thereby” [9:103] and “So that it may not be a closed circuit between the rich among you” [59:7]
The two functions of zakāt (personal purification and social inequality reduction) are clearly interconnected, although contemporary jurisprudence has focused exclusively on the first. In this regard, the full verse [59:7] lists eligible recipients of redistributed tax revenues that the Prophet Muhammad received from conquered towns. The quoted segment describes the extreme inequality (exclusive concentration of financial resources among the rich) that would likely result without redistributive taxation. Of the six categories of eligible recipients listed in this verse, the last three are groups in financial need (orphans, the poor, and the wayfarer), while the first three (God, his messenger, and the near kin) are understood to include provision of public goods and pursuit of social harmony. In other words, the purpose of redistributive taxation is not merely to alleviate poverty, but also to distribute economic power, so that decisions on public-good provisions are not monopolized by a small number of rich people. In the extreme, society may break into separate classes, as denounced in Report 1715 on segregated rich and poor weddings.
Building on the work of Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, the World Inequality Report 2018 highlighted the alarming trend of accelerating inequality since the 1980s, both globally and within most countries. In his best-selling book, Piketty explained the inevitability of growing inequality in simple terms: As long as the rate of return on capital exceeds the rate of economic growth, the rich will get richer, and the gap between them and the rest of society will continue to widen. Periods of decreasing inequality, such as the 1950s to 1970s, were rare exceptions, and taxation played an important role in keeping inequality in check during such periods. The trend toward greater inequality has varied across the globe, with some countries (e.g. in the E.U.) experiencing less inequality both in terms of relatively slower growth of income shares of the top 1% and relatively slower decline of income shares of the bottom 50% of the population, compared to countries such as the U.S., which exercise less income redistribution and provision of public goods. On the regional scale, Raj Chetty has made significant contributions to our understanding of the rising inequality of opportunity in America, and the positive role that tax-funded interventions can play, for example, to incentivize businesses to move into economically disadvantaged areas.
Some inequality is desirable, because greed and pride are very powerful engines for human behavior, which thus incentivize people to work harder, potentially for everyone’s benefit. Even rising inequality is not necessarily undesirable, because the richer classes invest larger shares of their incomes and wealth, and investment is the engine of economic growth, which potentially benefits everyone. Thus, the Qur’an did not advocate for perfect equality: “God has preferred some of you over others in provision. Those who were preferred should not share their provision to bring about total equality. Why, would they deny God ́s blessing this way?” [16:71]
Extreme inequality, on the other hand, has been shown to cause many problems. The International Monetary Fund has acknowledged in recent research that it can hinder long term economic growth, for example, by causing social unrest and distorting preferences. Studies in economics and political science have shown that it can often lead to the stifling of democracy: Those who control large and increasing shares of economic wealth also control the political processes that determine the rules of future distribution, investment and public spending. Except in the most extreme cases, the level of inequality or growth thereof is determined by each society based on its preferred mix of economic efficiency and equity. And the only way we know how to keep extreme income and wealth inequality in check, as the Dutch historian Rutger Bergman famously chastised the world’s economic and political elites at Davos 2019, is taxation.
The Qur’an states: “Alms taxes are for the poor and needy, those who work to collect them, those whose hearts are to be reconciled, the ransoming of slaves, debtors, in God’s way, and the wayfarer” [9:60]. In his classical juristic compendium the Mughnī, and in reference to this verse, the scholar Ibn Qudāma cited Mālik for the opinion that the order of priority is essential in zakāt distribution, consistent with Report 722 of the Muwaṭṭa’. Although Muslim jurists have often distinguished zakāt, which is one of the five pillars of Islam, from modern forms of taxation, there were clearly no differences in the early days of Islam. The first successor of the Prophet, Abū Bakr, went to war with tribes who withheld this wealth tax from the central Muslim treasury in Madina, famously swearing to fight those who distinguished between the religious obligations of daily prayers and alms taxes. The distinction between religious and secular taxes is further blurred by jurists’ admission that a Muslim government may collect taxes in lieu of the required zakāt on individuals or corporations, as long as the proceeds are spent on the eight legitimate avenues listed in Quran 9:60. In this regard, it is noteworthy that at least four of the eight avenues are clearly redistributive, including the first two (the poor and the needy).
Reports in Book 16 list specific thresholds and percentages for taxation of every common form of wealth during early Muslim history, thus making it clear that zakāt was a wealth tax, not an income tax. Even zakāt on agriculture was really a wealth tax, even though it was specified as 5% of the produce for manually irrigated land, and 10% for land watered by rain. Some jurists argued by analogy to this ruling for zakāt on rented real estate, factory machinery, and other forms of rarely traded capital. In addition, Shīʿa scholars also include income taxes on wages and the like, based on a verse that specifies taxes on spoils of war at 20%, which Sunni scholars only applied in other contexts to buried treasures and extracted minerals.
As reported in the Mudawwana of Saḥnūn, Mālik was keen to prevent legal circumvention, to the point of applying the rules of usury if people were to use pieces of leather as money. Needless to say, Mālik was aware of ways that zakāt payment may be minimized through wealth manipulation, and he condemned it. Thus, Report 714 narrates how the Caliph ʿUmar ibn al-Khaṭṭāb forbade commingling and/or separation of herds to minimize the zakāt owed in respect of livestock. Likewise, Mālik opined in Report 729 that alms taxes on fruit should be calculated conclusively based on estimates before harvest, in order to avoid the potential of underpayment through consumption of fresh fruits immediately after harvest. Likewise, to avoid zakāt-sheltering investment strategies, Report 665 indicates that investors’ tax liability for liquidated capital must be calculated conclusively at the time of liquidation, to avoid short-term redeployment to avoid paying zakāt on idle capital.
The problem of zakāt sheltering is more difficult today, because the main forms of capital are different from those on which the Prophet and early scholars had opined. For example, traditional rules instituted in poor societies exempted homes in which people and their animals lived from zakāt. Reasoning by analogy to exemptions for multi-million-dollar mansions, expensive cars, and private jets seems dubious at best, albeit the norm adopted by most contemporary Muslim jurists. Moreover, today’s middle classes invest mainly in non-tradable human-capital, but reasoning by analogy to farm land, which may justify charging zakāt on their gross income, has not been accepted by jurists. There have been widely divergent opinions on how zakāt should be calculated in connection with investments in financial instruments, some suggesting that a percentage of the market value should be paid, in analogy to the inventories of merchants, while others suggested, in analogy to agriculture, that a percentage of net income should be charged. The latter is extremely difficult to calculate, especially if we incorporate the effects of firms’ debt-leverage ratios to boost returns on equity, even though many jurists continue to forbid using debt finance, at least in its conventional forms. Opinions have been even more divergent on retirement accounts, such as 401K plans. Pre-retirement payment of zakāt on these investments would require investors to pay penalties and income taxes on withdrawals, which lead to dead weight losses for the eventual zakāt recipients.
In the meantime, according to World Bank and Islamic Development Bank data, Muslim societies continue to suffer the highest rates of poverty, malnutrition and illiteracy in the world, and the World Inequality Report lists the Middle East as the most unequal region in the world. If contemporary implementation of zakāt can help in solving this problem, it would first require a modernization of the definition of the tax base subject to zakāt. This in turn requires rigorous secular economic analysis of the consequences of different tax rates on the balance of short-term economic efficiency and growth, on the one hand, and equity and equality of opportunity, on the other, keeping in mind that the latter may be important for long term economic growth and prosperity. Ultimately, decisions on the desired mix of efficiency and equity, both in the short and long term, are political, but they can be informed by rigorous analysis.
Therefore, while Muslims can point to wealth taxes in their tradition to bolster arguments for wealth taxes today, a trend which has been gaining support in some academic and political circles, they cannot claim to offer ready-made solutions that are unique to the Muslim tradition. In fact, the Arabic word for zakāt is a version of the Aramaic word zakuw, which means the same thing. Likewise, the word used in Quran for charitable giving, ṣadaqa, is the Arabic version of the Hebrew tzedakah, which also has the same meaning. Like the parallels between the words for usury – ribā in Arabic, ribit in Hebrew – the injunctions and prohibitions of Muslim jurisprudence were foreshadowed by similar injunctions and prohibitions in Jewish law and Christian canon, and much of the latter, in turn, can be traced to previous human legislations such as the Code of Hammurabi.
Renewed interest in wealth taxes provides a golden opportunity for Muslims to learn from the world’s best economic minds how different tax regimes will impact economic performance, in terms of the mix of efficiency and equity that would result from different regimes in the short and long term. For the rest of the world, pointing to the importance of wealth taxes in Muslim tradition can help to understand Muslim history within the broader human project; building on what came before it, and contributing to what came after it. As the popular management saying goes, “no crisis should go to waste.” The world is coming to the realization that growing extreme inequality is a crisis that is likely to cause significant long term economic, social, and political damage. Revisiting wealth taxes, which constitute a central Muslim commandment, provides an excellent opportunity for scholars, Muslim and otherwise, to collaborate, thus enhancing our understanding and performance, both in the secular and religious realms. In this effort, contemporary social scientists can learn from accumulated human experience, even if it had taken religious forms, as in the case of the Muslim institution of zakāt. Conversely, contemporary Muslim jurists can follow in the tradition of classical jurists, like Mālik, to study this and other religious institutions in light of their desired social impact, and to adjust their rules accordingly for maximal social benefit.
 This may explain the paradoxical continuation of confusing bank interest with forbidden usury in majority-Muslim countries, in which interest rates are much higher than rates of economic growth.