As Lebanon celebrates its recent military victory over Islamic State fighters on this side of the Lebanese-Syrian border and mourns over the recovered bodies of nine army soldiers, local politicians are again embroiled in another battle of sorts: one over taxation.
After many months vacillating over whether or not to issue new taxes, lawmakers agreed in July to the measures. The legislation then sat on the desk of the president for nearly a month before the required signature was inked. But on the last day of August, in a surprising move, the Constitutional Council issued an injunction temporarily freezing the tax hike while it studied an appeal challenging the law, effectively delaying the tax implementation – at least until Lebanon’s highest court issues its final decision in September.
The court’s ruling was just the latest twist in what has been a long and winding road of confusion, where along the way, details were obscured on which new taxes would be introduced or increased, how much more money people and businesses would have to pay, when the new measures would enter into force, and what the revenues would actually be used for. The opacity of the tax adoption process allowed for manipulation of the public conversation from many different sides. Citizens should be informed about proposed taxes, and public and elected officials should explain their necessity in good faith, instead of welding the issue to their political or electoral cause.
For several years, the International Monetary Fund in its annual Article IV paper has argued that tax measures should be passed and that fiscal measures were needed to put the public debt on a sustainable path — irrespective of the salary scale. But the new taxes have been framed to the general public as necessary to pay for a salary increase for public workers — public and elected officials said they needed $1.2 billion for the salary scale, while simultaneously new revenue was being created via increased taxation; it was easy and expedient to link the two. However, tax legislation was not designed to pay the wage scale increase — despite the public narrative and the argument presented to the court — but instead was aimed at shoring up public revenue to close the deficit, which, of course, is being made bigger by the wage increase.
[pullquote] At the highest levels of the Ministry of Finance there is significant awareness of the need for a coherent, and more equal taxation system [/pullquote]
Fix the right problems
Citizens are in the right to complain about the new measures, Director General of the Ministry of Finance Alain Bifani tells Executive in an interview (see Q&A page 44). But Bifani argues the new taxes are necessary for the government to continue treading water financially, that Lebanon’s tax burden is reasonable — though the system could be fairer — and that it is public services that are too expensive. Now that the revenue side has been adjusted, it is time to turn the focus to fixing expenditures and developing a growth environment for the private sector.
The law’s challengers are claiming that the poor will be most affected, when the reality is that much of the new tax burden will hit idle wealth — a capital gains tax on real estate, and a tax on interest. In effect, those who are blocking the tax measures are defending the rich by sticking up for the poor. Whether they genuinely are trying to stick up for the poor cannot be answered, and what the tax blockage will do for the poor in the long run also has no answer. But it is a shame that this is where the battle lines have been drawn rather than focusing effort and political capital on the issue of public finance that matters most: expenditures. And that is a measure of old politics — an initiative that gets shut down by paralysis because buy-in is needed from everyone involved, locking in a situation where there is no progress and all other options are sacrificed by waiting on the first.
Herein lies the crux of the matter. What Lebanon has not had for a long time are clear spending targets and ceilings. The government and Parliament must be transparent in how it plans to and how it spends public money. They must develop and communicate to the general public a strategic perspective on taxes — not moment by moment dealings — and they must set clear spending targets and stick to them. On an institutional level, as much as can be said with due caution, at the highest levels of the Ministry of Finance there is significant awareness of the need for a coherent, and more equal taxation system, and for the situational remedies that are not easy to impose in the short-run. It is not about having bad solutions — those being offered and implemented might actually be relatively close to the best available.