In order to fund the proposed public sector wage hike, Lebanon’s Parliament is scrounging for cash. In their desperation, lawmakers have proposed one of the most morally hazardous ideas in public finance: taxing some profits twice. Not only is this an unfair idea, it is fiscally irresponsible and blatantly lacking in forethought.
Double taxation is not only bad for the banks who would have to pay twice, but also for the country. Instituting such an economically unsound principle by legislative fiat would leave a very black smudge on Lebanon’s record as an investor-friendly environment — as if it needed yet another.
At issue is a 7 percent non-deductible tax on interest banks earn on government-issued treasury bills and certificates of deposit. Currently, banks pay a 5 percent tax on these earnings but are then allowed to deduct them from their year-end corporate profits so they are not taxed twice. Making this tax non-deductable is a clever way to disguise a massive tax hike as a small 2 percent rise.
Meanwhile, double taxing profits on government debt could go badly wrong. If investors know they will be taxed more on government securities, they may demand higher returns, sending interest rates higher and making sovereign debt servicing more expensive — the last thing needed in a country with systemic debt-related deficits.
But more broadly, double taxation erodes the legitimacy of the taxation system as a whole. What’s to stop a greedy state from double or even triple taxing more bank profits or those of other businesses? Going down this road is dangerous, leaving any company successfully operating in Lebanon fearful that it might be next while deterring businesses looking to expand here in the future.
The range of other taxation measures the legislature is considering will cut into banks’ profits — as all such taxes do — but these measures are modest, not deceptively packaged, don’t threaten state finances and steer clear of double taxation.
Many bankers are publicly arguing that a hike in corporate taxes from 15 to 17 percent is unacceptable. Further, they argue that they would be hit hardest as they are most transparent about their earnings. It is as if they are being punished for being honest, they argue, and will only encourage tax scofflaws to continue hiding their earnings.
This argument has merit; the Ministry of Finance should be much more aggressive in ensuring all companies pay their fair share. However, the 2 percent increase will not break the banks.
Bankers also argue that a proposed 2 percent hike in the capital gains tax will likely lead to capital flight. Such a scenario is unlikely. First, a World Bank review of interest rates for depositors shows that in 2013, rates in Lebanon were higher than many other countries in the Middle East and North Africa. Despite a higher tax, attractive rates will likely still lure in deposits.
Additionally, no serious amounts of capital flew out of the country when the current 5 percent tax was first introduced. It is doubtful that this increase will have a different effect. Finally, this tax is neutral for the banks themselves as their customers will pay it.
Ideally, the state would make no new fiscal commitments, but Lebanon is in an economic emergency. Wages all around are too low, and teachers and civil servants are being particularly deprived of fair pay. The state must act, and act responsibly by both giving its employees a raise and finding a way to pay for it. This is triage, and greater taxation is simply a necessity.
Modest new taxes should be swiftly approved by parliament, but the MPs must avoid the double taxation proposal. Despite their protests, the banks can afford to pay a bit more. Tax them — don’t kill them.