The proposed salary scale introduces an increase in spending of roughly $1.4 billion in public sector salaries. These funds will come from various taxation schemes, one of the most controversial being an increase in taxes on banks. The proposed bill would firstly increase the tax on depositors’ interest income from 5 to 7 percent. Secondly, it would increase the tax on banks’ interest revenues from various government securities from 5 to 7 percent and disallow deducting these sums from the banks’ income tax bills. Finally, banks would pay 17 percent income tax instead of the current 15 percent. The proposed bill has caused much controversy not only in the ranks of Parliament, but also among economists and members of civil society. Executive invited Ghassan Dibah and Nassib Ghobril to argue opposing sides in this debate.
Here is Ghassan Dibah’s take on the issue.
Even if banks do not make super profits, their activities do not represent a significant enough contribution to the Lebanese economy to warrant the low tax rates that they enjoy today. Tax rates should be higher for economic activities that do not contribute to increases in productivity and to the rise of standards of living in the long run.
The economic function of commercial banks and financial markets was elegantly described by Alan Greenspan, the former chairman of the US Federal Reserve: “The purpose of finance is to direct the scarce savings of society … plus borrowed savings from abroad, if any, to our most potentially productive intellectual and physical investments.” In this respect, it is important to analyze what Lebanese commercial banks do, the nature and the source of their profits and the historical evolution of banks’ profits in the past two decades.
Lebanese banks in the postwar period found three captured customers: the government that sustained persistent budget deficits since 1993, the central bank who desperately found itself increasingly in need of maintaining foreign currency reserves in order to defend the Lebanese currency, and middle income consumers wanting to keep up with the consumerism of the upper classes. This led the assets of the banking system to be split between government T-bills and bonds, deposits with the central bank in the form of certificates of deposits, private sector loans (with significant proportions going to consumption and real estate loans) in addition to foreign assets. None of these destinations of local and borrowed savings from abroad (leading external debt to reach around 170 percent of GDP according to the IMF report on Lebanon in 2012) represent “productive physical and intellectual destinations.”
The financing of public debt deserves special attention. Joseph Stiglitz, the former chief economist of the World Bank and Nobel Prize winner in economics, argued that when banks exploit interest rate spreads by investing in government debt instruments they make profits out of nothing. He specifically said, “If a bank can borrow at close to zero and buy a long-term government bond yielding, say, 3 percent, it makes a nifty 3 percent profit for doing nothing.” The Lebanese banks’ subscription in government debt instrument and central bank CDs is an example of this activity.
From 1993 onward, subscriptions in high interest T-bills by commercial banks became their main source of profits. Excess returns on short-term T-bills were estimated in the mid 1990’s at being around 16 percent and the cumulative excess premiums over foreign returns were 54 percent between 1993 and 1996. Such excess returns were instrumental in propping up banks’ profits and led to very high return on equity ratios (RoEs) of Lebanese banks compared even with Middle Eastern and emerging markets banks (reaching around 33 percent in 1996 and 24 percent in 1998). The accumulation of profits from excess returns can be considered as an ‘industrial policy’ by the central bank aiming at augmenting the capital of banks, which increased from $140 million in 1993 to around $14 billion in 2013 — a 100 fold increase! The claim today that commercial banks do not make excess profits over the normal levels in the world (currently RoE around 14 percent), does not address the fact that high rents were accumulated in the postwar period especially between 1993 and 2000. Moreover, banks’ profits in 2013 remain at 4 percent of GDP while in the US they are around 1 percent of GDP.
A significant proportion of their income is a transfer from the taxpayers making the Lebanese economic structure ‘the backbone of banks’ and not the other way around as claimed by banks. In a recent study it was shown that tax rates in advanced economies can reach top marginal rates of 70 percent without sacrificing efficiency as incomes on the top reflect mainly rents. It is then only fair (in addition to ensuring efficiency) that tax rates on commercial banks in Lebanon rise even to higher rates than those proposed today as the majority of their income is generated from rents and do not reflect their actual contribution to the economy.