On the taxation increase: An interview with Professor Jad Chaaban

Firas Haidar
Editor-at-Large

 

A rumored one percent increase in VAT was met with public outrage and civil protest during the week of March 20. Although a one percent rise in taxes may not seem like a big deal to some, it is actually a slippery slope the public is right in fighting.

Outlook met with AUB professor Jad Chaaban, Ph.D. in Public Economics, to discuss the implications and possible alternatives to such a tax.
“There has always been a budget,” said Chaaban, “but things have been happening relatively in the dark.”

He adds that the tax increase was actually planned before the new government was formed in hopes of generating quick money and making up for the four-plus billion dollar deficit. The main and major flaw in such an increase, according to Chaaban, is the logic behind it and the narrative it adopted.
“What [the government] is saying is that they will finance the wage increase through the increase in VAT,” stated the professor. “They thought that saying they will take this money to give [public employees] an increase in wage, people would be happy.” But people were not.
In fact, everything in the market today would be affected by the one percent increase, which will also round up to a higher value than its initial one. On his Facebook page, Chaaban published an example (via Fadi Ibrahim) of how the increase will go from one thing to another.

You buy a sandwich from a restaurant for 10,000 L.L. TTC. The restaurant charges 9,091 L.L. for the sandwich and pays 909 L.L. for the government. The government increases the VAT to 11 percent. Either the restaurant keeps the 10,000 L.L. price and agrees to lose some money since it will get now 9,009 [L.L.] instead of 9,091 [L.L.] and pays the government 990 [L.L.] instead of 909 [L.L.] or it will increase the price. Knowing the Lebanese people, it will increase the price.
Now you tell me, how much increase the restaurant will impose? 81 L.L. to cover his losses, so the sandwich will cost 10,081 L.L. or round it to 100 L.L. and make sandwich price 11,100 L.L. or impose at least 500 L.L. if not 1,000 L.L. and make it 10,500 [L.L.] or 11,000 [L.L.]?”
Chaaban’s example then goes on to describe how this price increase for food will subsequently increase the rates of public transportation, and plumbing among other things.

The end user will even pay more for products that are not subject to VAT.

“Fresh fruit and vegetables, for example, are exempted from VAT. But nobody buys them from the farm,” said Chaaban. “We buy them from the supermarket. And to get there, there’s a transportation cost, a marketing cost, there’s everything. And this has VAT. So this 10,100 L.L. will effectively become 11,000 L.L. or more.”
Although the tax seems necessary given the demands for wage increase and the deficit, Chaaban suggested alternatives, the first of which was taxing the banks.

As it stands, banks are already paying a 15 percent interest rate, but that’s fixed.

“A small bank that makes $1 million a year and a big bank that makes $400 million a year pay the same rates,” Chaaban explained. “The sum varies, but the rates are the same.”
The professor added that the total bank profit in 2015 was around $2.5 billion, on which they paid roughly $450 million.

“The question is: Can they pay more than 15 percent?” asked Chaaban. “Yes, they can. Should they? I, as well as other people, believe they should.”
According to Chaaban, the banks are making “exceptionally high profit given the context they are operating in,” most of which is coming from public debt.
“They can easily pay 20 percent,” he said. “It’s enough to cover a lot of the deficit and the wage increase.”

Another possible alternative, according to Chaaban, would be a tax on interest revenue, which is currently fixed at 5 percent. Chaaban said that, at the moment, there is almost $300 billion deposited in Lebanese banks; six times the $50 billion Lebanese GDP.

“It’s rent. You don’t work for it,” stated Chaaban, “and a lot of economists think that this isn’t productive because it takes away money from other possible investments.”

Chaaban suggested the government tax these deposits and with the tax money subsidize electricity for factories, speed up the internet, etc. “We call this social justice.”

When it comes down to it, that’s what taxes are all about: redistributing wealth, generating money for the government, and correcting failures and risky behaviors. However, these two alternatives do not seem like viable options given the current government members and their shares in these concerned banks.

A third, more feasible alternative, according to Chaaban, would be to cut down wasteful spending in areas like the port, the airport, the Electricité du Liban, etc. (all numbers can be found in an article published by Al Modon on March 27, 2017) But he believes such a decision would need a collective political agreement to make sure everyone notices “the ship is sinking, and that we should block all the holes together.”

Chaaban concluded by affirming the proposed 1 percent increase in VAT is undoubtedly a bad move. He forecasted a contraction in economic activity which, in turn, will generate less tax money.

Perhaps the negative effect of such a tax, in part due to the protests that rose against it, has become evident; the budget proposal has since then been put on hold.

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