Taxation’s redistribution effect

Kickstarting the process of change

Photo by: Greg Demarque/Executive

Alain Bifani, director general of Lebanon’s finance ministry, tells Executive that newly enacted taxation will shore up revenue in the public coffer. During an interview at the end of August (before the constitutional court froze the new tax measures) Bifani detailed the tax measures and discussed their impact on segments of the population and on the economy. He said that the new taxation plus the salary scale increase for public sector workers would lead to a redistribution of wealth, but cautioned that this is only a starting point toward leveling a fair system of taxation, and added that now is the time for lawmakers to seriously reform public spending.

E   One of the early responses to the tax proposals was that an increase in taxation would have a subduing effect on the national economy. Can you comment on this notion from the perspective of the Ministry of Finance?

I think it’s an idea that is a bit simple because any tax hike has a negative impact on the economy. But when the economy is suffering from a high deficit, and an increasing public debt, in addition to many other things, then one should expect that the deficit is brought under control, and that, one way or another, we have the breathing space to enable the economy to grow again.

There is an answer that has to come on the revenue side because the government hasn’t been able to contain the expenditures. To the contrary, we’re seeing a rise in expenditure to debt servicing, a rise in salaries, and a long-awaited wage increase. What can you do to contain the deficit? You either go for tax measures or higher debt. Debt has an even bigger and broader impact on the economy, and on the human beings in this economy. So what do you do?

Second, how about the loopholes in the system, where you have people bringing in lots of profits and not [being] taxed at all, like capital gains on real estate. This is outrageous. Of course these people are allowed to make profits, and we want them to. We want banks to be profitable, we want companies to be profitable, we want individuals to be profitable. But we don’t want biases in the system. There is no reason why someone who buys and sells plots of land wouldn’t be taxed, whereas someone who invests in companies, creates jobs, and creates values would be. This is something that’s not only good for revenue, but also good for the fairness of the system.

There is a kind of redistribution effect when you slightly increase taxes on corporations, and when you bring the banks into the 5 percent tax system now at 7 percent. Ideally, yes, I’d like to decrease taxes, but we have to face reality — we can’t have the salary scheme coming in, an increase in debt services, transfers to EDL that are crazy, hiring thousands of people in the system, and at the same time, saying ‘we don’t want to increase the burden,’ it’s just impossible.

E   How much added burden does the Value Added Tax (VAT) increase to 11 percent translate for low income households?

On the small income layer the VAT increase is going to have an impact of 0.35 percent, [so] very little, up to $40 [over one year]. If you consider they spend mostly on housing, education, health, public transportation, insurance if they can, and basic foods of course — all of this is exempt from VAT. Clothing is not, and there are some food and beverages that are not.

E   New tax revenues have been presented as if they’ll offset spending from the public sector wage increase. Can you tell us the aggregate number that would benefit from the wage increase?

My personal argument is the [tax measures] are not meant to offset the salary increase. There is no allocation of resources, those are resources for the budget as a whole. So it would be unfair to say we are taxing people to pay salaries. We are taxing people because we have a huge deficit and those [salary] increases should’ve happened way before all other expenditures took place and became recurrent. It’s true that the figures are more or less the same, and that was the occasion to pass the tax increase.

Who’s benefiting from [the salary increase]? You have an enormous amount of Lebanese households benefiting — I don’t really have a figure, but it is about 200,000. [Some households have several beneficiaries], roughly 10,000 civil servants, about 53,000 in public education, and about 110,000 in the armed forces, plus about 85,000 pensioners and retirees, you have contractuals, and people who work for public enterprises and municipalities.

It’s unfortunate that we ended up having so many people in the public sector because the private sector is not absorbing the workforce anymore. But this is a fact, they are here, and by law, they are allowed to have this increase. The impact is that, somehow, this is going to contribute to bring them up from below the [poverty] line to some sort of a middle class, which the country needs badly. This will remain not enough until the government takes the proper steps to unleash the potential of the economy, allow the economy to grow again, and the private sector to be able to absorb the workforce especially [those] at the higher [level of] skills. What’s badly missing in the country is that we aren’t able to create high value added jobs, and not even low.

E   Do you forecast growth to the salary scale increase figure of $1.2 billion?

The $1.2 billion will grow or not depending on the pace of recruitment that we’re witnessing in the public sector, which has been extremely high in the last year. For good reasons or bad, it doesn’t matter. But what would the good reasons be? For example, the security situation is forcing recruitment in the armed forces — fine. But this doesn’t mean that the solution is always more people. We can be effective differently, and we have to be because Lebanon simply can’t have half of its workforce in the public sector. It’s not normal, it’s not good for the future, and it’s absorbing too much of the meager resources that Lebanon has.

E   With the salary increase, would the public sector’s share in the economy grow?

No, I’m not saying that necessarily it’s going to grow, but it’s one first step that is legally binding, and also, very important for the economy. If you want to increase consumption, you have to increase the number of consumers. When you provide a scale like that, you’re creating the possibility for many Lebanese households to become consumers again. On the other hand, you’re allowing them to live normally, to have their children go to school, to universities, to be able to create something, and create value. Once you do that in the public sector, the private sector has to realign. You can’t let the private sector realign on its own, it’s unfair when you have a system that doesn’t help it grow and create jobs. You have to help them, not by giving subsidies or anything like that, but by creating the proper environment for corporations to grow.

Lebanon simply can’t have half of its workforce in the public sector

This is going to be the next challenge. Otherwise, if we really miss that, the load on the private sector is going to be tremendous because those kinds of measures increase the load on them. It’s important on one hand, but it’s very important to have the proper follow up on the other end.

E   Is there a tradeoff effect? Will inflation eat up some of these gains that people are looking forward to, and how will that be balanced by the Ministry of Finance?

Very roughly, if we look at inflation per se the figures look very stable, and they’re not likely to be high. We’re in the midst of a very low inflation period in Lebanon. After the whole operations that took place with the banks, the inflation didn’t really move, this is where logically the offset happened.

Inflation in general terms, won’t matter a lot. What will matter are specific issues that are going to see hikes. For instance, private schools. It’s clear that if nothing happens, they’re going to increase the fees again. This, and many other issues, will probably eat up something like 15 to 20 percent of the increase. This is a rough estimate, but you will still have about 80 percent net increase for those who are benefiting from the salary increase.

E   Are you expecting redistribution of wealth that’s not going to be just on paper?

Between the tax measures and the salary scale, no doubt redistribution is going to happen. Nevertheless, this is a scale that’s far from being ideal, in terms of how fair it is, where and how and who’s getting what. There are plenty of questions and plenty of things that are still not satisfactory. But again, when you want to start something, you have to have the system move, you have to kickstart the whole process hoping that some kind of positive momentum will take place.

E   What kind of GDP growth rate is the ministry calculating for 2018?

We’re hoping to have 2.5 percent growth in 2018, but the figure is not yet final.

E   In an op-ed for the September issue of Executive, a former minister of finance wrote that the Lebanese tax policy of the last two decades was not very coherent. What is your comment?

My comment is that he’s right. We have to admit that it’s not only the tax policy, it’s the whole fiscal policy that wasn’t coherent at all. When you’re making comments, you can say things very clearly because you are commenting, but when you are a player from within, you have to fight to have some kind of coherence and to introduce what you think is required. For instance, in the tax measures just the capital gain on real estate is something that I’ve been promoting for 17 years, since I joined the ministry. And you have to keep fighting. It was very clear from the beginning, we were a system that taxes labor and investment much more than any kind of windfall income. And this is also a fight that’s going to take a long time because you’re fighting the main interests in the system. And yes, when you have weak governance, you can’t all of a sudden have something coherent put in place. It takes ages, but you have to keep fighting and pushing.

When you have weak governance, you can’t all of a sudden have something coherent put in place

E   Do you see it as your mandate to push for coherence?

One of them, yes. And to tell you that today it’s very satisfactory after all these years? No, it’s far from being satisfactory. We still have a lot to do, but we will keep pushing.

E   One of the things that the business community especially is very sensitive to is tax certainty and predictability into the future. What’s most realistic framework for looking ahead?

What happened now is probably something that won’t witness major changes for at least three years. Which, in terms of predictability, is very good; not to mention that, for the business community, the changes are not huge.

We should keep two things in mind. The first is that we aren’t in tax hell here. The level of taxation is very reasonable. The citizen of Lebanon complains, and he’s right to complain because of the cost of public services. This is what is extremely high. The real burden on individuals in Lebanon is about the cost of utilities, of public services, everything that forces them to take a big cut on whatever is available to them to live properly. Of course they call them taxes because all of this is considered as the cut, but if you really look at the tax burden on low income people, it’s practically nothing.

The second, in addition to predictability, fairness is very important. We’re not yet in a very fair system. We know that and it’s our duty to admit it because if we don’t say how things are, then we won’t improve. But we also have to bear in mind that from 2000 until now, the number of taxpayers in the system has been multiplied by 3.5, which means that the tax authorities are reaching practically everybody now in the system.

Now that we are reaching the margins that we basically have everybody integrated into the tax circle, compliance is also improving. For everybody complaining that the system is not fair and again, she or he are right to complain, and they have to complain because this is how things improve, they also have to realize that the improvement has been tremendous. We’re not coming from nothing, and it’s not still the same system that we used to have.

Those two things in parallel, improving the system as a whole, and improving its administration, are taking place. Maybe too slowly. But at least improvement is taking place on a permanent basis at three levels — policy, administratively, and at the services level. Now you can settle your taxes, check on them using your mobile and e-services. This makes it easy. At the administrative level, we’re reaching roughly everybody in the country, increasing the compliance of most of the sectors and segments of the economy. At the policy level, we’re dealing with the loopholes, bringing more coherence, and decreasing the gap between windfall income and business and labor income.

E   But do you still face challenges like lobbying for or against increases of taxation for products, such as tobacco or alcohol?

Those aren’t really the worst we face, they’re details in the system. Honestly, when it comes to tobacco, it doesn’t have much to do with lobbies. It really has to deal with the fact that the management of tobacco is still very much afraid of smuggling because we had a very tough experience in 1999-2000. At that time, the interim minister was Nasser Saidi, and he decided to increase the rates, and the fall in income was unbelievable. It took us 11 years to come back to the levels of just before the hike. So this is something that is still in their minds, and they can see it. It’s immediate. Whenever you increase slightly, you see flows. Again, the Ministry of Finance is not an island, and we can’t work alone. If the borders aren’t well kept, if the judiciary system doesn’t work well, and if the police isn’t able to enforce the law, then of course you take a hit on your revenue.

Alcohol is different. I believe it’s [the approved tax measure is] not adequate. And the text that was voted was not the text prepared by the ministry, it was amended. And I think it needs to be revisited because it’s harmful to imports and to tourism.

But those aren’t the lobbies that we’re fighting everyday.

E   Which are those?

You have in the system much stronger lobbies who can twist the system to their benefit, just like in any other country. This is part of the game, and we have to admit that it takes a long time to convince, mobilize, and have lobbies facing lobbies.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.

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