Cash-Strapped ISIS Awards Its Killers a Pay Cut

This article first appeared on the Anything Peaceful site.

Documents leaked to CNN from inside ISIS show that the terrorist insurgency/quasi-state is undergoing massive budget cuts, cutting salaries for its fighters and staff by 50 percent across the board.

ISIS soldiers earn between $400 and $1,200 a month, plus a $50 stipend for their wives and $25 for each child, according to the Congressional Research Service.

But running a state at war is expensive. And recent victories for the U.S.-led coalition against ISIS mean that ISIS can't afford to pay its soldiers quite as much as it used to.

"On account of the exceptional circumstances the Islamic State [ISIS] is facing, it has been decided to reduce the salaries that are paid to all mujahideen by half, and it is not allowed for anyone to be exempted from this decision, whatever his position," ISIS's government wrote in a memorandum.

Much of the financial pressure on ISIS may come from U.S. and Russian airstrikes targeting cash stockpiles, oil resources and other assets. ISIS also has to pay for a semi-functioning state, maintaining infrastructure, running schools, subsidizing bread, fighting a war and, of course, murdering vast numbers of people for imaginary crimes.

But ISIS might have a revenue problem as much as a spending problem. ISIS gets most of its money by taxing people in conquered territory, but, as Dan Mitchell has pointed out, the terrorists have recently been discovering the Laffer Curve.

Quoting Adam Chodorow at Slate,

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. ...

ISIS 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 … 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.

No matter how much violence they use, there is no escaping the basic economic reality of incentives: In addition to creating refugees of war and violence, ISIS is now also creating tax exiles.

As people flee Syria and Iraq, businesses close and the economy dies—and ISIS's ability to tax and sustain its war effort is slowly being bled out. This is probably one reason that ISIS views refugees as traitors, as they have not only abandoned the one true caliphate, but they've taken their incomes with them.

Even if they really believe in the cause, if ISIS fighters are at all motivated by money, cutting their pay in half will have a huge impact on recruitment and desertion. Incentives matter, even in a theocracy.

Daniel Bier is the editor of the Anything Peaceful blog on the Foundation for Economic Education site.