The VAT Directorate headquarters in Beirut. (Credit: PHB/L'OLJ)
In the midst of the ongoing debate on the budget and in particular about taxes and fees, whether in parliament or within various private sector organizations, the public, and media circles, it might be beneficial to address this issue from the standpoint of the social contract principle related to tax policy.
This theory revolves around the fundamental idea that people give up a share of their liberties in exchange for collective protection or services. In fiscal terms, , citizens accept to pay taxes in exchange for public services provided by the state to all citizens. It should be noted however that individuals' or groups' share in these services might not necessarily correspond proportionately to their contribution to tax revenues. When citizens pay taxes, they gain the ability to hold their governments accountable for how the money is spent.
In Lebanon, it is evident that the social contract is broken, even in its fiscal aspect, and thus needs to be renewed. Essentially, citizens hesitate to pay taxes, as they believe they are not receiving the kind of services the state should provide. In principle, they have a point because the Lebanese state, over the years, has failed to adhere to its part of the social contract, failing to provide adequate public services, though these services were not entirely absent.
The state could have provided better services based on the revenues collected. However, what has hindered this is the prevalence of waste and corruption in the public sector. However, the government will not be able to provide these services and improve their quality as needed unless it collects sufficient revenues through taxes. Thus, we are caught in a vicious cycle.
Obviously, the government has a greater role in dealing with this issue and in providing better services to citizens, but citizens themselves must contribute to this because this is a shared responsibility. Hence, efforts should be made to break this cycle. This requires a multifaceted approach aimed primarily at restoring trust in the state and its institutions.
Improving transparency and accountability: Authorities must regularly inform the public about how their taxes are spent by providing information about tax collection and distribution. Periodic audits of tax authorities’ work can give taxpayers a good signal and reassure them that their money is well spent.
Upholding the rule of law and holding officials accountable for their actions will also enhance trust in public institutions. Combating corruption and holding officials accountable for any misuse of tax revenues will significantly address public concerns and make them more willing to pay taxes. This, of course, necessitates an independent and fair judicial system.
Enhancing tax administration through digitalization will reduce corruption and tax evasion while promoting transparency. In addition, reducing personal contacts between taxpayers and tax collectors will contribute to reducing bribery and corruption.
Reducing the tax burden on low-income earners and increasing it on affluent groups will promote better income distribution and help bridge the rapidly widening gap between the affluent and vulnerable segments of society. High-income individuals should realize (and must be convinced) that the taxes they pay will improve their quality of life by creating a fairer and more equitable society. Increasing the gap in income and wealth should promote a safer society and reduce social tensions that could arise from growing disparities and extreme poverty.
Directing tax revenues towards programs and services that have a direct and positive impact on the welfare of the population, such as healthcare, education, infrastructure, poverty alleviation, and income inequality. Tangible tax benefits will enhance the social contract. This may contradict the non-assignment rule in budgeting, meaning all revenues should go to the general treasury without allocation to a specific entity or designated use. However, this step could be beneficial for a limited period to monitor tax revenue utilization. Any success achieved within this framework influences citizens' opinions and makes them less prone to tax evasion.
Involving major taxpayers in tax decision-making and in fiscal policy more generally should help in building consensus and buy in from politicians. Consulting with the groups that pay most of the taxes is beneficial in building support for tax policy, as they are typically the ones who normally oppose tax increases. However, this should be planned well, as it carries some risk emanating from disregarding feedback and suggestions and may lead to the opposite results.
Long-term structural reforms to address the lack of trust between citizens and the government. These reforms might require changes in governance structure, electoral systems, among others, especially in a country like Lebanon with its complex political, sectarian, and religious composition. These reforms are extremely challenging and may take a long time, and hence cannot be relied on to be implemented in the short or medium term.
Tax decentralization in a divided environment helps in improving tax compliance. In the midst of political sectarian divides, citizens might be more willing to pay taxes if they see direct benefits for their own “communities.” They would also be better positioned to monitor tax revenue usage and in the process they influence local-level elections. Of course, this must align with the needs of the central government and the overarching national interest.
Finally, concurrently with all these measures, launching a public awareness campaign about the importance of taxes in enhancing social welfare would be beneficial. This effort can help reduce tax evasion and bolster a sense of national duty.
All the above measures and structural reforms require diligent work and substantial human and financial resources that are currently unavailable. There is a need to increase wages in the public sector and methodically increase revenues by improving tax collection, combating evasion and corruption, and selectively raising some taxes and fees without affecting marginalized groups. Additionally, there is an urgent need to invest in infrastructure and social sectors like health and education, which benefit all citizens. Meanwhile, it is not reasonable to say that the state should not increase any fees or taxes until all the above measures are implemented, as this would hinder the reform process. But continuous oversight by relevant agencies, the parliament, NGOs, and the public at large of tax policy and implementation are essential for sustainable government revenues and the provision of public services.
In conclusion, current and future policymakers must lay the proper foundations for a tax policy characterized by transparency, effectiveness and equity, including having a progressive tax to protect the poor without stifling the business sector or incentivizing it into leaving the country or engaging in significant tax evasion. Conversely, politicians must steer away from populism and short-term interests that often reject any tax increases.
Saade Chami is Lebanon’s caretaker deputy prime minister.
