New Bill Relieves the Rich, Taxes the Middle Class
By: Mohammad Zbeeb
Published Wednesday, November 7, 2012
A new proposal to fund public sector salary increases would raise taxes on luxury goods, Internet and phone services, bank deposits, and other transactions. But the bill, which the Cabinet is scheduled to discuss Wednesday, contains several provisions which would benefit the wealthy, corporations, and those who committed building violations or built on public coastal land.
The Lebanese Council of Ministers will meet Wednesday night in the Presidential Palace to discuss a draft law that would levy 22 new taxes to pay for salary increases for public sector workers.
The salary increase would benefit tens of thousands of public administration employees, teachers, and armed and security forces personnel. But the bill contains a number of proposals that would raise taxes on many items and transactions for the lower and middle classes while granting special favors to the rich, corporations, and those who benefit from the rentier economy.
Some of its more controversial measures include provisions which would allow building violations to continue up until the end of 2012, reduce taxes for corporations by giving them exemptions on the valuation on some of their fixed assets, specifically real estate, and modify the property law in favor of real estate speculators.
Previous governments over the past three years have attempted to pass some of these measures, but failed due to strong opposition from former labor minister Charbel Nahhas, who has since resigned.
These fees, taxes, and amendments will be included in one bill which contains 37 items and 22 new tax measures and is separate from the budget bill.
The new taxes are expected to raise 2.7 trillion Lebanese Lira (LL) (US$1.8 billion), including LL700 billion ($500 million) in fees which will be collected only once. According to the proposal, this revenue should be sufficient to fund the increase in wages, estimated at LL1.5 trillion ($1 billion).
However, the report attached to the bill is littered with contradicting numbers and does not stick to the same projections throughout. In another segment, for example, it says that the additional income from these taxes will amount to LL2,173 billion ($1.45 billion).
New Taxes to Be Discussed by the Cabinet Today: Increasing the Cost of Telecommunications
If passed, the bill would significantly increase Internet and phone bills.
The government plans to impose a fixed fee of LL2,500 ($1.67) on all monthly bills from mobile phone companies and Internet service providers. This will include both post-paid customers and prepaid cards.
The increase on telecommunications services comes as a surprise, considering the government had only recently started to cave to intense popular pressure by slightly lowering the cost of telecommunications over the past several years.
Lebanese telecom services are among the priciest in the world, with two thirds of bills consisting of taxes and quasi-taxes.
Under the proposed law, telecom customers would pay an extra LL7.5 billion ($5 million) a month in taxes on cellular service, Internet, and home phones, adding up to LL90 billion ($60 million) a year.
The finance ministry projects a yearly revenue of LL80 billion ($53.33 million), indicating that it expects that some customers might cancel their subscriptions or additional phone lines when faced with the rising costs.
The finance ministry admits in its report that a fixed rate on communications will raise the cost of telecommunications for everyone, affecting poor households in particular, but it does not expect this to create any inflationary pressures.
Tax Burden Falls to Small Depositors
The proposed bill also includes a small increase in taxes on personal income from interest on bank deposits, from the current five percent to seven percent. A similar tax on companies is proposed at 15 percent.
The finance ministry expects to raise an additional LL260 billion ($173.33 million) from raising this tax. The study backing up these measures maintains that this increase will not affect bank deposit volumes, which – according to the ministry – are impacted by fluctuations in interest rates, but not by changes in tax rates.
But the proposal is not based on progressive taxation; instead, it would tax all depositors equally, regardless of the amount in their account.
Data from the Central Bank of Lebanon (BDL) indicates a heavy concentration of wealth in the accounts of a relative few. The top 0.8 percent make up half of the total value of deposits, while 70 percent of accounts amount to just 2.6 percent of the value.
This means that the burden of this tax increase will fall on small depositors.
The government justifies its objection to a progressive tax plan saying it wants to protect banking secrecy. Yet even Switzerland, the capital of secret banking, relies on a system whereby secret bank accounts are heavily taxed, but accounts whose owners have agreed to lift the secrecy are subject to lesser taxes.
If this system were adopted in Lebanon, it would benefit thousands of retirees and regular employees with small savings who do not care about banking secrecy.
Real Estate Speculators Rewarded
The proposed bill suggests introducing a 15 percent tax on profits from real estate sales, but the proposal exempts real estate and non-real estate companies from this tax. Moreover, it rewards such companies by allowing them, for one time only and within the period of one year, a tax-exempted re-evaluation of their properties which gained much value in recent years.
The report justifies this exemption saying it is intended to correct the impact of monetary inflation on the changes in real estate prices since 2006.
The finance ministry predicts that this tax will provide LL50 billion ($33.33 million) in income in 2013, following the tax decrease on re-evaluation, but this amount is expected to jump up to LL300 billion ($200 million) in 2014.
Minor Fines for the Theft of Public Seafront Properties
The exploitation of public coastal land, including illegal building, has been rampant for decades. Earlier this year, in the midst of the debate on financing the salary increase for government workers, the Ministry of Public Works issued a report on the scale of encroachment on public beaches.
It found 1,280 encroachments eating up 2,706,904 square meters of recovered sea. This report did not take into account the major sea reclamation projects such as those that took place in downtown Beirut, Dbayeh, Saida, the Beirut airport, and the Military Beach in Ras Beirut, some of which were legalized through questionable processes. This is in addition to encroachment on 412,324 square meters of water surface.
There are also 63 licences whose legality is questionable, infringing on 1,742,065 square meters of beachfront. They pay a mere LL4 billion ($2.67 million) yearly to the Treasury.
Rather than dismantling illegal construction or punishing violators, the new law proposes a fine on all illegal usage of public beachfront equal to five times the fees imposed on “legal” activities.
While the bill emphasizes that this fine should not be considered a legitimization of illegal occupancy, nor does it grant any rights to the occupier, it treats infringement on public beaches as a ‘fact on the ground.’ The proposal is little more than a slap on the wrist for violators of public beach fronts, allowing them to pay a small fine in installments over a five year period.
This provision is projected to bring in a mere LL157 billion ($105 million) total, not annually.
Buying Building Violations
The proposed bill would legitimize building violations by proposing yet another “settlement” of infractions that occurred between 1 January 1994 and 31 December 2012. Violations committed during the civil war and up to 1994 have already been “settled,” and now the government claims it wants to be “fair” to those who continued to commit violations after that date.
It seems the government takes the issue very lightly, allowing and even encouraging violations right up until the end of this year.
The finance ministry admits, in the reasoning behind this proposal, that there are countless violations, but estimates an income of just LL100 billion ($66.67 million) from this settlement process.
The bill proposes a two-tier Value Added Tax (VAT) system, which would raise the VAT from 10 to 15 percent on the import and delivery of cellular devices, their accessories, related electronic devices and spare parts (except those used for manufacturing).
The tax hike will also affect new cars and other vehicles, as well as their spare parts. Salmon, shrimp, and all kinds of caviar will also be affected. The increase will also be applied to tobacco in spite of widespread smuggling which cuts into tax revenue.
The finance ministry estimates that altogether, these taxes will bring an additional income of around LL150 billion ($100 million) in 2013.
The report claims that most of these taxes will not impact poor households, nor will they cause inflationary pressure, although it might cause a drop in vehicle sales and “reduce traffic congestion.”
There are too many new tax measures to list them all, but here are a few: raising the proportional cost of money stamps from LL3,000 to LL4,000 ($2 to $2.67), raising the cost of the criminal record – around 600,000 are issued yearly – from LL2,000 to LL4,000 ($1.33 to $2.67), and increasing fees on every statement sent by a bank to a customer from LL100 to LL500 (7 cents to 33 cents).
Additionally, taxes will be increased on alcohol, public notaries, construction licenses, and border exit fees.
The tax on lottery winnings will also double, from 10 percent to 20 percent.
This article is an edited translation from the Arabic Edition.