Tax­a­tion’s re­dis­tri­bu­tion ef­fect

Kick­start­ing the process of change

Executive Magazine - - Front Page -

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.


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 defi- cit? 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.


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.


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 house-

holds 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.

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.


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 sta- ble, 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.


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

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

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.

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.


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.


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.

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

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