The government has increased taxes, but better collection is what’s needed.
As the government struggles to find new sources of income, many have called on the government for serious action. Georges Corm, the finance minister, chose to raise taxes as the primary way to meet the short-term goals of increasing revenues. But the Lebanese government’s track record on collection has been less than admirable. Instead it relies on customs duties, which are easy to collect and account for close to half of total revenues. The five-year plan calls for tax revenues at 16.8% of GDP in 1999, rising to 20.3% in 2003. But the problem lies in Corm’s approach: His main weapon to try to reach his 1999 figure has revolved largely around tax increases. Indeed, last year’s controversial budget increased the upper limit of income tax from 10% to 15%, doubled dividend taxes from 5% to I 0% and raised taxes on a number of products and services.
Corm’s reasons for the tax hikes? To achieve social justice and improve public revenues. Both goals are commendable and needed. But his definition of social justice is dated. Social justice would be better served by forcing tax evaders to pay their dues and penalizing them for delays. The theory of redistribution of wealth through taxation has been tried and tested throughout the world and has been unequivocally discredited by its utter failure to meet the three basic principles of taxation: productivity, equity and elasticity. Today, the worldwide trend is towards reducing taxes to stimulate the economy, increase disposable income and encourage investments.
The tax hikes have also hurt the competitiveness of the Lebanese economy. The evasion rate reaches 60% of income tax dues, according to Banque Audi estimates. Given the narrow tax base, it was not unexpected that the results backfired and the economy moved from economic slowdown in 1998 into a full-blown recession, depriving the government of much needed revenues.
What’s more, Corm seems bent on a touchy-feely approach of collection, repeating his desire to establish a “new relationship” with taxpayers. It’s still unclear what that means, but he shed light on his approach when he simply “reminded” tax delinquents recently that their 1999 taxes were overdue. This approach can hardly improve tax collection in Lebanon, or anywhere else in the world for that matter. That’s exactly what the US and other governments have long realized.
So what needs to be done? Create a tax collecting body similar to the US Internal Revenue Service (IRS). Indeed, conservative projections have shown that with adequate tax collection and fighting tax evasion, the government could easily treble its revenues from corporate and income tax.
The IRS collects income tax and enforces tax laws, administering a tax system based on voluntary cooperation. The taxpayer fills out a tax return, stating income and the amount of tax owed and then sends the money to the IRS. How can such a voluntary tax system work? Theoretically it shouldn’t since nobody likes to pay taxes, but it’s the powers of the IRS that makes this voluntary system function. The IRS has extraordinary powers to collect and to enforce the tax code. Unlike other US law-enforcement officers, IRS agents have a free hand to peer into and lay claim to bank accounts, pursue debt and to decide whether individuals must forsake their home, all without going through the courts. And, unlike other civil cases, when the IRS sues a citizen the burden of proof is on the taxpayer. As a result, the IRS receives more than 180 million voluntary tax returns annually and has a staff of 86,000 to audit them. In comparison, the FBI, the federal agency in charge of fighting crime, employs about I 0,000 persons.
These powers were mostly held in check by congressional oversight and the IRS’ own rigid code of ethics. But since the 1970s, a legal loophole has allowed the agency to shield itself from many inquiries into its activities and top IRS managers were rarely held accountable for how they achieved their goals. This has resulted in serious abuses. In sensational testimonies in front of the US Senate in 1997, a woman testified to a 17-year battle with the IRS during which the agency mistook her husband for another taxpayer. A Delaware man testified that he had paid the IRS $50,000 he did not owe, out of fear of financial ruin if he fought its false accusations. Other taxpayers told of IRS agents who wrongly seized bank accounts, fabricated evidence and refused to acknowledge payment. As a result, the US Congress approved unanimously an IRS reform package.
An empowered Lebanese Internal Revenue Service would collect taxes from all, indiscriminately lifting the cover from those avoiding payment. An embryonic structure exists for such an agency. Fouad Siniora, former minister of state and financial affairs, started the process of rebuilding the tax department by attracting well-qualified assessors and auditors, simplifying and automating operations, retraining staff and moving towards computerization. Corm is following in Siniora’s footsteps and plans to increase the number of tax collectors. But the idea of having direct ministry staff collect taxes has become increasingly obsolete as most advanced countries have an autonomous tax collecting body.
The long-term goal should be to form a Lebanese IRS as an independent governmental agency whose functioning is immune from political interference or change in leadership, and to grant it similar powers to those of the IRS. In the meantime the military should be employed to help collect taxes in the short-term until a system is in place. This practice has been prevalent in Russia, where tax evasion is notorious.
The solution to the tax problem is simple: Lebanon needs its own IRS that strikes terror in the hearts and minds of tax evaders but without the military tactics of the Russian government or the abuses of the American IRS and its lack of accountability. When the Lebanese reach the point of paraphrasing a popular American saying, “the only two things guaranteed in life are death and taxes,” everyone would know that a Lebanese IRS is born, and that social justice and public revenue growth are possible without tax hikes.
