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    Why Raising Taxes in Lebanon is Unacceptable


    The Finance Ministry is currently preparing the budget for 2010. The task is especially difficult as we have been living for a number of years without approved budgets. The task is, however, of extreme importance as no government can function without a modern, logical and sustainable budget. The Finance Ministry seems to recommend the introduction of new taxes and/or increases in some tax rates, specifically raising the VAT rate from 10 to 15 percent and the tax on interests from 5 percent to 7 percent. We understand that the government needs resources, but it will be unfortunate and unjust to do it before starting to undertake some reforms in administration and in its expenditure system and structure. It will be futile to add new taxes or increase tax rates in the current political and administrative environment.

    In any case, the history of tax-rate increases worldwide shows that they seldom produce much revenue especially in times of crisis. History shows that the ability to extract higher revenues from the rich is limited. Higher rates simply cause the rich to shift their income from taxable forms to nontaxable forms or to forms that are taxed at a lower rate. Who ends up paying the new taxes or the higher tax rates? Obviously, the middle and poor classes of society who are not able to do the necessary local or international shifting of income or expenditure.

    Because of the current international financial crisis, many governments are incurring large fiscal deficits. The case of Greece is well known and the country is likely to be supervised soon by the IMF. The US is living beyond its means due mainly to increasing expenditures as a result of fiscal intervention in the economy, and because of the need to finance the wars in Iraq and Afghanistan. Between 2007 and 2009, the French budget deficit increased from 2.7 percent of GDP to 8.3 percent, therefore increasing its public debt from 64 percent of GDP in 2007 to 76 percent in 2009. According to the Maastricht convention which preceded the European monetary union, no country should have a deficit above 3 percent of GDP and a debt above 60 percent of the same GDP. We understand therefore the efforts that need to be carried out on the part of these countries which have misaligned themselves.

    When countries are in a fiscal mess, they usually have four ways to deal with it in periods of financial crisis: First, years of austerity, which is what the Obama administration is doing by freezing some expenditures and cancelling others. Two, governments can create inflation directly by overspending, and indirectly by a cooperating central bank which increases the money supply. This will increase nominal revenues and therefore reduce the deficit. Third, countries can devalue their currency in a fixed exchange rate system or let it depreciate in the market if the system is flexible. Fourth, the government can declare default or implement a debt-restructuring plan to be able to pay it back. In the case of Lebanon and to maintain social and political order, only the first policy can be applied and the Lebanese government should do so. To preserve international recognition and help, the Lebanese government should implement a policy of austerity which should be accompanied by some reform of the administrative structure. It is not acceptable to raise taxes when the current government is not even able to appoint senior officials, including the members of the important banking control commission.

    In any case and before adding new taxes or increasing tax rates, the Lebanese government should review the design of the taxation system so that it achieves the three known objectives: to produce the desired level of taxation, to collect it from the target groups of taxpayers within society given its preferences about equality and inequality, and to collect the revenue using tax instruments that will minimize the loss in economic efficiency. Nobel Prize winner Joseph Stiglitz said that “the optimal tax structure is the one that maximizes society’s welfare in which the choice between equity and efficiency best reflects society’s attitudes toward these competing goals.” Is the Lebanese government undertaking this approach before proposing any increase in taxes?

    Finally and to enhance local and international confidence building measures, the Lebanese government should set its priorities in order, leaving tax increases to a later date.

    Louis HOBEIKA
    The Daily Star

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