Islam introduced the system of zakat, which is a 2.5% annual tax on wealth that is held in the form of gold, silver, currency or other assets for a period of more than a year. The proceeds of this tax are used to promote welfare of the poor. Thus, if a person has forty rupees in his possession and he keeps the money for the entire year, he must pay one rupee as zakat to the government.
It should be noted that this is not an income tax on earnings. Instead, zakat is payable on accumulated wealth and is spent for the welfare of the poor. Zakat is due on all kinds of wealth, whether coins, animals, produce, jewellery or other tradable assets. However, jewellery that women use normally, and especially if they also occasionally share it with less fortunate women, is exempt from zakat. According to Islamic scholars, if jewellery is used only for personal use and is not shared with poor women, zakat should preferably be paid for it. In any event, Islam strictly mandates that zakat be paid on those pieces of jewellery that are not in common use.
Zakat is payable every year as long as the wealth in one’s possession does not fall below the taxable minimum. Zakat is paid not only on capital but also on the accumulated profit that it fetches. The moral basis of zakat is that if anyone, despite all the provisions against excessive accumulation of wealth, still manages to accumulate money, the Islamic government will tax a portion of it every year, on grounds that, because of their hard work, the poor have a right and a share in the wealth accumulated by the rich. Therefore, a system has been put in place to take away the due right of the poor from the rich every year.
A second means for accumulating undue wealth is through the exploitation of mines. Islam deals with this issue by giving the state the right to impose a royalty of one-fifth of the produce of the mine. This fifth is due on any income derived from the mine. Any excess income saved by the owners of the mine for over a year will be separately subject to zakat year after year. In this way, the government has a direct ownership stake in the mines. It also has a share in the money saved from excess income of the mines, which it collects for the benefit of the poor.
Islam also enjoins individuals to offer voluntary charity. It is prescribed for every person and is to be given to orphans and the poor and for the care and support of the weak. This emphasis on charity also helps to redistribute the wealth so that it does not excessively accumulate in the hands of a few.
If despite the above safeguards an individual still manages to leave behind money or property after his death, it would be redistributed among his family members immediately after his death according to the Islamic law of inheritance. Islam does not allow anyone to leave his estate to any single heir, but instead his property must be distributed to all legal heirs. All sons and daughters are given a legal share, as well as parents, wife, and husband, and, in certain instances, even brothers and sisters. The Holy Quran clearly states that no one is allowed to deviate from these rules and pass on his property to a single heir. Islamic law forcefully distributes a person’s property after his death to all legal heirs, and every relative must be given the share prescribed in the Holy Quran.
It is surprising that while people favour interest, which causes great financial inequity in the world, they are against the enforced distribution of the wealth of a deceased among all legal heirs. Instead, they allow a single son to inherit the entire estate, thereby causing wealth to remain perpetually concentrated in a single family.
However, in the Islamic system no matter how wealthy a person, his wealth will be redistributed, generation after generation until his progeny is at the same level as the average person. In this way no matter how large an estate or how vast a person’s wealth, it cannot last more than a few generations. After this time, the succeeding generations would feel the need for generating their own wealth.
The reason for the concentration of wealth in the hands of a few rich people in Europe and the United States is that, under the British law, the eldest son can inherit the entire property, and in the United States, a person may pass on his entire wealth to just a single son. Thus, other children, parents, brothers and sisters, or the spouse may be left with nothing.
Sometimes the super-rich bequeath a large part of their inheritance to the eldest son to preserve family legacies and leave only meagre amounts to other relatives. Islam considers this practice entirely wrong and maintains the welfare of the entire society to be the paramount consideration. No matter how high and noble a family might consider itself to be, Islam wants large estates to be divided and further subdivided over generations so that the poor do not have to compete with large capital owners who prevent the poor from making economic progress.
Thus, in the first place, Islam curbs the inducements and impulses that result in accumulating excessive wealth. Secondly, it forbids spending of money on fulfilling one’s vain desires and other wasteful pursuits. Thirdly, it disallows all such avenues of generating wealth that provide guaranteed profit. Fourthly, it stipulates the payment of zakat and voluntary charity. If despite all these mechanisms, someone is able to accumulate excessive wealth due to his wit and astuteness, and there is a danger that his wealth might hinder the progress of the underprivileged, Islam stipulates that his wealth be distributed among the heirs immediately after his demise.
Thus if a person has ten million rupees and has ten sons, his wealth would be equally divided into one million for each son and then if they each have ten sons the wealth would get further divided into one hundred thousand rupees in the following generation. By the time of the third generation, only ten thousand rupees would be left for a family. This way, even a large estate would get greatly diminished within three or four generations and it would not become a hurdle in the progress of the poor. The disposition of wealth after one’s demise can only be prevented for that part of the property that is given away for the good of the public to a non-profit organization. Obviously, anyone who accumulates capital with a view to supporting the welfare of the poor and the public at large cannot be expected to use unlawful means to earn money.
The Islamic economic system is thus naturally furnished with pruning devices that come into action if someone starts to have excessive amounts of wealth. The excess capital starts to go to the government, or is distributed among other people, or gets distributed among the descendents. Under this system, no one can remain rich forever and no family can maintain its financial dominance generation after generation or be able to subjugate the poorer sections of the society.
It is regrettable that Muslims have not fully followed Islamic guidance on this matter. The teaching about zakat is there but it is ignored. Extravagance is prohibited but they continue to indulge in it. The laws of inheritance are not strictly followed. Nevertheless, there is some partial observance, and consequently, the gap between the rich and poor is less extreme in Islamic countries than in other.
It is still possible that the above-mentioned Islamic injunctions would not fully address the problem of economic inequity. In particular, it is possible that the money that the government collects is diverted back to the rich upper class in various ways. The Holy Quran also addresses this issue and restricts the ways in which government revenue can be spent.