January 01, 1999 | English | Abdallah Dah, Ghassan Dibeh, Wassim Shahin
The Distributional Impact of Taxes in Lebanon: Analysis and Policy Implications - The Lebanese Economic Tribune (LET)

Chapter 1
 
1. Rationale for Study
2. Survey Design amd Data Collection
3. Plan of Study
 
Rationale and Plan of Study
In a press conference held on December 16, 1997, President Clinton in reference to the complexity surrounding a change in the Federal tax code stated:
“I would not rule out a further substantial action to simplify the tax code. But I will evaluate any proposal, including any one that our people might be working on, by the following criteria: first of all, is it fiscally responsible? Secondly, is it fair to all Americans? That is we don’t want to shift the burden to middle-class taxpayers, to lower income taxes on upper-income people…thirdly, will it be good for the economy? And fourthly, will it actually lead to a simpler tax system?”¹
The goal of our study is to examine one of the criteria specified by President Clinton, specifically, the impacts of taxes on income distribution. The comments made in the press conference reflect the dilemma of policy-makers as they face a trade-off between tax revenue and tax equity, welfare losses and efficiency, and optimal taxation and second-best solutions. The challenge to governments becomes reflected in their designing ways to raise necessary tax revenues while simultaneously minimizing the negative impacts of taxation.
This chapter is organized in three sections. Section one states the rationale for the study. Section two discusses the survey design and data collection process (we survey a sample of 1000 households to compile data necessary for the analysis). Section three highlights the plan and organization of the study.
 
1. Rationale for Study
In the last two decades, major upheavals and turmoil occurred in the fiscal situation of many developing countries. High budget deficits, accelerating national debt, lack of political credibility, inefficient government means of extracting and mobilizing resources, uncertainty concerning property rights and enforcement of contracts, and reliance on indirect and implicit or covert taxation were common features in most heavily-indebted nations. Unprecedented inflationary episodes, financial insolvency, capital flight, rent seeking behavior, and disappearance of long-term private investment projects were the only logical outcomes of the political, administrative, economic, and social problems faced by these counties. These prevailing problems called for drastic changes or reforms that redefined the role of government in the economy with the objective of restoring macroeconomic stability conductive for growth.
In addition to decisive fiscal adjustments exemplified in expenditure reduction and privatization programs to minimize deficits, the reform of various tax systems occupied the forefront of macroeconomic policy-making. To ameliorate the efficiency and effectiveness of their tax structure, many developing countries introduced new techniques to improve tax collection and personnel, tax administration codes and enforcement laws, information of taxpayers, the speed of processing available information, and the mechanism for combating tax evasion and ensuring tax compliance. In addition, many of these countries embarked on policies aimed at changing tax rates and levying additional indirect and value added taxes. The aim of reducing tax rates on income, profits, and capital gains was to encourage work effort and production through incentive, and to reduce tax evasion.
In fact, in the 1980’s and early 1990’s, the majority of Latin American countries and developing countries in Eastern Europe and the Middle-East, such as Lebanon, adopted new measures to reduce the top income tax rate while raising the exemption level for personal income tax. The maximum marginal rate on the corporate income tax was also reduced.
Even though major tax reforms could have positive revenue effects, it is important to consider that changing tax rates and introducing of additional indirect taxes that are regressive in nature could have major income distribution effects. Indirect taxes could also have regional effects if levied on fuel and other petroleum products as well as effects on the price index when levied on intermediate products, consumption goods, and services.
While social, administrative, economic, and political reforms seem to be a pre-requisite for any successful adjustment program, this study examines the income distribution effects resulting from the reform of the direct tax system in Lebanon, and the income distribution impact of levying additional indirect taxes.
 
2. Survey Design and Data Collection
Although revenue enhancement is important in limiting the fiscal deficit, distributional impact of tax reforms and social equity considerations shouldn’t be ignored. Given that all taxes have some distributional impact on household income, expenditures, and living standards, the degree of progressivity or regressivity differs from one tax to another. By comparing pre-tax distribution of income with post-tax distribution, policy-makers can determine whether a specific tax should be imposed given the revenues that this tax is expected to generate (i.e. the terms of trade-off between economic efficiency and equity objectives can be identified) and the possibility of reducing the negative side effects of such a tax.
With the aim of obtaining the necessary data on income distribution and spending patterns of households in Lebanon, we relied on two different sets of data, for the purpose of analyzing tax incidence:
1.A 1997 nation-wide survey on the living standards of Lebanese households, carried by the General Statistics Directorate and published in February 1998.
2.Due to unavailability of reliable data by the time this research project was started (November 1997), a household survey, was conducted by Statistics Lebanon. A nationally representative sample of 1000 households was used. Micro data was obtained using three different dimensions of welfare: demographics, spending and income. The questionnaire used consisted of three main parts:
  A demographic section that specified the characteristics of the sample selected.
  A section directly related to daily, weekly, monthly, quarterly, and annual spending patterns.
  A section related to the different sources of family income. A comprehensive definition of income was used to measure the ability of the household, as a unit, to cope with current and future direct and indirect taxes.
  Both sources of data were used to investigate the progressivity of the current tax system. Finally, analysis of data was conducted using descriptive and inferential statistics.
 
3. Plan of Study
The study is divided into six chapters. Chapter two discusses the fiscal developments and recent tax record in Lebanon. We highlight the imbalance in the record between 1992 and 1997, the evolution of the debt, and the factors that led to its rapid accumulation. Finally, recent tax developments are carefully reported.
Chapter three concentrates on the international experience with tax reforms. We analyze the reform of marginal income tax rates, tax brackets, the introduction of value added taxes, presumptive taxation, taxation on revenues from government bonds, and financial transaction taxes.
Chapter four deals with the distributional impact of the new direct tax laws in Lebanon. Arguing that lower marginal tax rates are necessary to achieve high economic growth, the Lebanese government decided to reduce tax rates on income and profit to encourage compliance and give the private sector an incentive to increase savings and investment spending. Little attention was given to the impact of such policies on equity related issues.
High fiscal deficits for the period 1992-1997 and the governments’ decision to maintain tax rates at very low levels induced the fiscal authorities to introduce a number of indirect taxes. Therefore, chapter five provides empirical evidence on the redistributional impact of indirect taxes (using the gasoline tax as a case study) on households across income levels and in different regions.
Finally, chapter six relies on the results derived in chapters fouand five and on the international experience with tax reform presented in chapter three to present suggestions that can help the government in reducing the deficit while providing a more equitable tax system that aims to lower the income inequality gap.