ISIS collects taxes—and its effort exposes some big weaknesses.

Even ISIS Needs to Collect Taxes. Does That Threaten Its Hold?

Even ISIS Needs to Collect Taxes. Does That Threaten Its Hold?

Commentary about business and finance.
Dec. 7 2015 4:53 PM

Even ISIS Needs to Collect Taxes

Could that threaten its rule?

Tikrit IS flag mural
A defaced ISIS flag hangs in front of the main gate of the palace of former Iraqi dictator Saddam Hussein on April 5, 2015, in Tikrit after Iraqi forces retook the nothern city from Islamist jihadists earlier in the month.

Photo by Mohammed Sawaf/AFP/Getty Images

A week after the Nov. 13 Paris attacks, U.S. warplanes destroyed more than 100 gasoline trucks in the area of eastern Syria controlled by ISIS. These strikes were meant not just to bloody the extremist group but also to cripple its finances and infrastructure, since ISIS reportedly earns around $500 million a year from illegal oil sales. But as the New York Times recently reported, ISIS raises nearly twice as much each year by selling necessities such as electricity and water and taxing the people living in the areas of Syria and Iraq under its control. These revenue streams may help insulate ISIS from efforts to cut off its external revenue sources. But ISIS is quickly learning what every insurgent group, from Mao Zedong’s revolutionaries to the FARC in Colombia, had to figure out. Revolution is easy. Governing is hard. And there are few things more difficult than taxes.

Operating a country requires money, and that typically requires taxes. The scope and extent of ISIS-controlled territory and the population it controls is disputed and constantly changing. By some estimates, ISIS holds territory roughly the size of Belgium while by others it controls a tattered patchwork of infrastructure and cities. The population in this area is estimated to be between 7 million and 8 million, about the same as the population of Washington state. While ISIS currently collects about $1 billion annually, countries of similar size collect about $16 billion, suggesting that ISIS has a long way to go if it wants to operate like a real state.

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No matter how much a ruling entity collects, taxes aren’t a great way to ingratiate oneself with the governed. And they require a mature administrative state. More than one government has fallen because of its tax policy. ISIS must face these challenges just as any emerging polity does, and its efforts thus far to tax its subjects offer a glimpse into core issues with which any tax system must engage: fairness, efficiency, and administrability. ISIS may have displayed prowess on the battlefield, but it has revealed that it is as stymied and constrained by the complexities of taxation as the rest of us.

First, for taxes not to seem like mere extortion, taxpayers need to see them as legitimate and fair. In a move reminiscent of Ben Carson’s call for a tax inspired by biblical tithing, ISIS has attempted to cloak some of its taxes in a religious mantle by calling them “zakat,” an annual obligation described in the Quran, under which Muslims must distribute 2.5 percent of their wealth to help the poor.

Unlike Carson, who is simply referring to the proportional nature of the tithe as a model for allocating tax burdens, ISIS appears to be claiming that its tax actually is zakat. Some modern Muslim states, including Saudi Arabia, Malaysia, and Pakistan, collect zakat and use the funds for social programs, but ISIS appears only to have appropriated the name, using the proceeds for its own purposes. It has also raised the rate to 10 percent. While this pretense may fool some subjects, twisting the purpose of zakat could undermine ISIS’s claim of religious authenticity, from which it gains some authority.

Second, taxes need to be efficient. Otherwise, they could significantly dampen economic activity, reducing their efficacy. In addition, people will go to long lengths to avoid paying taxes if at all possible. At some point, such avoidance can undermine the tax system. ISIS’s taxes appear to be on the rise—and no more popular in the territory it controls than they would be here in the U.S. As the Times reported, ISIS’s taxes are now so onerous that large numbers of people, who were apparently willing to tolerate ISIS’s religious authoritarianism, are fleeing Syria and Iraq to escape them. At some point people will either rise up or leave, threatening ISIS’s internal revenue source.

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Finally, taxes must be administrable. This affects the types of taxes that ISIS is able to impose. For instance, the Times reports that “[t]he jihadists collect, among other taxes, a yearly share of every harvest and herd of livestock, and make shopkeepers pay a share of their inventory. Infractions like failing to wear proper clothing lead to fines equal to one gram of gold, payable in local currency.” The tax on goods, payable in kind, looks a lot like the biblical tithe. It is readily administrable because it is relatively easy to determine how many cows a farmer has and it obviates the need to value a farmer’s produce.

ISIS also apparently imposes an import tax on those who wish to enter its territory to sell goods, such as ice cream. Such a tax seems relatively easy to impose. However, even this tax requires some administrative infrastructure. Someone needs to ensure that all ports of entry are covered. Moreover, given that not all points of entry can be controlled and that border guards might be bribed, ISIS has had to develop some kind of receipt system to monitor tax collectors and taxpayers. And of course, someone needs to monitor the monitors.

A true income tax would be far more complicated, requiring a clear definition of income and allowable deductions, as well as a sophisticated organization charged with ensuring that those subject to the tax were accurately fulfilling their obligations. Indeed, ISIS appears to understand this, having recently advertised in its English-language magazine, Dabiq, that it “is in more need than ever before for experts, professionals and specialists who can help contribute to strengthening its structure and tending to the needs of their Muslim brothers.”

As that ad suggests, ISIS is taking its efforts to create a new state quite seriously. However, in the tax realm, it is constrained by a lack of administrative resources and the simple reality once sketched on the back of a cocktail napkin by the economist Arthur Laffer: that tax rates can only get so high before they actually drive down government revenues. Given current conditions, ISIS may be near or at the limits of its ability to tax, even if it can recruit jihadi tax accountants to its cause. Thus, while ISIS has some buffer against the West’s efforts to cut it off from external funds, it’s not clear how much room the group has to grow internal revenues. More important, its efforts to do so may do more to damage its prospects than outside forces can accomplish.

Indeed, ISIS’s efforts to create a modern tax state may create an opening of a different sort for the hawks who insist the U.S. do more. Rather than send in ground troops, they might take a page from those who view our tax code as a weapon of mass destruction, responsible for our economic woes. We could make full use of it in the war on ISIS, perhaps by translating it into Arabic in the hopes that the group adopts it. The only question is whether doing so would violate our obligations under the Geneva Conventions.