The Department of Economics at the Faculty of Business Administration & Economics (FBAE), Notre Dame University-Louaize (NDU), organized on October 30, 2017, a lecture titled, “New Lebanese Taxes and their Economic and Financial Impact” presented by Associate Professor of Finance at NDU Dr. Hassan Hamadi.
Tax Policy is a set of policy that the government seeks to accomplish. As such, these goals have important implications on the economic, financial, social, and political activity. The most prominent of these goals can be summarized, as follows:
- Financing government expenditure.
- Achieving economic growth through the appropriate flow of capital toward the productive and real economy.
- Stabilizing the price of goods and services.
- Reducing the budget deficit.
- Achieving a manner of social justice.
In Lebanon, the tax system is similar to those of developing countries, where per capita income is very low, while Lebanon is classified among countries where per capita income to GDP is medium. One of the main reasons for not having a well-developed tax system in Lebanon is its reliance on more than 75% on indirect taxes. While achieving development goals, taxes should focus on income, wealth, and capital, and redirect a large part of tax revenues toward investment spending. Government expenditure is distributed mainly to debt service (31%), salaries and wages (32%), transfers to Electricité Du Liban (EDL), (9%); therefore, investment expenditure is less than 10%. The ratio of tax revenues to GDP is about 15%, whereas in countries similar to Lebanon, it is about 26%. We, therefore, notice that the state, because of tax evasion, uses the easier option of indirect taxes that affects low-income groups, which negatively affects the purchasing ability of the average citizen. To combat this situation, the government, therefore, should develop a tax system depends more on direct taxes and based on the so-called Personal Income Taxes.
What about new tax proposals, especially those that affect the benefits of depositors? Will the increase in interest tax affect negatively on banks and financial stability? To answer those questions, it is necessary to discuss the primary role of banks in economic growth and interest rates in Lebanon and their impact on bank deposits. Banks are the primary drivers of the economy. By effectively allocating financial resources, they provide the necessary liquidity for profitable investments that create job opportunities in the market. Of course, the effective allocation of capital in this sense means the ratio of loans granted by banks to the private sector, this is because public sector financing is mostly consumer and non-investment financing. In Lebanon, the bulk of loans go to public sector financing (more than 60% of Lebanese banks' profits are from treasury bills); thus, depriving the private sector, especially the key sectors, such as industry and agriculture, of financing enough to create more jobs. Part of the loans granted by banks to individuals are consumer loans (excluding mortgages) that increase the trade balance deficit considering that most of these loans are spent on imported goods. Hence, it is considered that the government should create a better investment environment to encourage the private sector to invest in the real productive sectors and to encourage banks to invest more in the productive private sector and generate jobs.
Based on the above, does the increase in the interest tax reduce the ability of banks to attract deposits and thus the ability of banks to finance both the public and private sectors? Studies have shown that several factors, other than interest and tax on interest, such as capital, solvency and financial and monetary stability, attract deposits. Of course, interests may play a minor role, but a glance at their levels in Lebanon, it becomes clear that interests level granted by banks are high compared with those granted abroad, and therefore a 2% increase in tax on interest income should not lead to escape or loss of bank deposits. The biggest fear for both banks and the government comes from the cumulative budget deficit of 8.8% of GDP. That this fear is justified for the main reason that the inability of the government to control the accumulated deficit in the budget would lead to a financial and economic crisis, such as those that occurred in Argentina between 2001 and 2002, and Russia in 1998, and Turkey in 2001. All these crises resulted from the cumulative deficit in the budget and from the banks financing this deficit. The inability of the government to control the deficit would send negative signals to investors who might lose confidence in the government and its ability to pay off its liabilities, leading to large-scale sale of government bonds, the collapse of the local currency, and a decline in the value of banks' assets, thus negatively effecting banks ‘ability to finance public and private sector. The increase in interest rates in this case to attract deposits could lead to further economic deterioration.
In conclusion, austerity measures must be put in place to reduce the deficit, which poses a serious threat to the government as well as to banks in terms of maintaining their ability to attract bank deposits.