184 chapter five
figure, imposing a fixed monetary tax on a commodity would increase
the price per unit by the amount of tax; from P 1 to P 2 , the difference
being equivalent to the tax per unit. In the absence of external effects
and with the market operating under perfect conditions, the supply
curve S will shift upward to SS reflecting a higher social opportu-
nity cost of the commodity. But the new level of supply will reduce
the quantity demanded and supplied from Q 1 to Q 2. This will gen-
erate to the state tax revenue correspondent to the area P 1 P 2 A E,
i.e. Q 2 *(P2–P 1 ). The consumers however will lose the benefit of con-
sumption that is equivalent to P 1 P 2 A C. The consumers’ loss is
therefore greater than the benefit to the state from the tax. The area
AEC is an excess tax burden, or dead loss ( James, 1983). The same
could be applied to reflect the mirror image from the producer point
of view. The dead loss in this case will be the area BEC. The total
dead loss, as a result of imposing the tax, is represented in the area
ABC.
Abù-Yùsuf ’s Muqàsamah taxation system will not suffer the same
disadvantage. The price of the commodities will be free from the
possibility of incurring an increase, other things, as economists say,
being equal. Moreover, Abù-Yùsuf ’s suggestion implied that the
share of the state from the produce will be sold alongside that of
the tax payer, which is more likely to help determine the price by
market forces. After all, the Islamic approach to economics calls for
not fixing the price and leaving it to free market forces, as Abù-
Yùsuf confirmed on this occasion in reiterating the saying of the
Prophet.
PQ2P2P1P3Q1 QD
A
CDE
B
SSSSSS