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Income tax is first priority

Reorganising the tax system should be one of the main priorities of the new governmnt, according to an influential Lebanese economist.

“Distributing the tax burden with equity in mind is a key issue for economic and political stability. We have a small amount of direct taxation but so much wealth in the country,” said Georges Corm, a business consultant based in Paris who is widely read by the new political leadership in Lebanon.

“Social justice is a big issue in Lebanon. The poor cannot continue to support most of the tax burden,” he said.

Between 80 and 85 percent of government revenue comes from indirect taxation, such as customs, which usually hit people on lower incomes the most.

Mr. Corm expects the new president to lead a reform of the income tax system ­ a demand that dates as far back as 1946, when Lebanese intellectuals began outlining their vision for reconstructing the economy and reforming the state.

“Every successful reconstruction has included a balanced tax system where productive enterprises are encouraged and every strata of the population would contribute to the development effort according to their capacity”

Many executives in Beirut have questioned the wisdom of having a 10 percent flat corporate tax rate in Lebanon.

“Investors are willing to pay 10 or 20 percent more if it means a simpler and more efficient bureaucracy,” said Semaan Bassil, vice chairman of Byblos Bank. “The tax rate is only one factor that investors base their decision on.”

Kamal Hamdan, a Beirut consultant, said that Lebanese citizens have adopted a cynical approach to taxation.

“People wonder why should they pay taxes when there is so much corruption in government. Paying for the debt also has to come from the top.”

Mr. Corm expected the new government to adopt plans to “re-introduce” fiscal discipline and adopt a deliberate style in managing the economy.

“The main part of the deficit is servicing the massive debt which has accumulated since 1992,” said Mr. Corm, estimating that for every dollar spent on infrastructure, $4 or $5 more accumulated in debt. Around $4 billion has been spent on infrastructure but the government has a debt of $18 billion.

“It’s a vicious circle that should stop with better debt management and efficiency in infrastructure building and the economy in general.”

Salim Hoss, the new prime minister, has come out in favor of lower interest rates on Lebanese bonds. Mr. Corm agreed that reducing the cost of debt-servicing was paramount.

“There is really no compelling reason for the difference on the interest paid on domestic and foreign debt,” he said.

“The Lebanese have enough maturity and know the costs at which the debt has been financed are not reasonable. If we continue financing the debt at such high cost everybody would be losing. Nobody has an interest in a crisis,” he said.

Mr. Corm said he expected a new government that is ready for reform to stabilize the growth of the debt and reduce the cost of managing it.

Privatization, added Mr. Corm, would help reduce the debt if there was a clear and transparent legal framework that prevented favoritism.

“We have to look at why public enterprises such as Electricite du Liban are losing so much money and why the price of electricity is so high. If we privatize tomorrow and prices go up then you have done nothing,” he said.

Mr. Corm, who has been warning since 1994 that the policies of the previous reconstruction government were unsustainable, is optimistic today.

“It is clear that the door has been opened to the reform of the management of the country. I’m extremely happy that reformist ideas are being advocated by the president. Arabs everywhere are looking for transparency and fair economic management.”

 

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