Lebanese Economic Tribune - LET Report Number 6

In light of the high inflation rates, dwindling revenue, and a destroyed physical infrastructure, the government of Lebanon has, since 1992, adopted several measures to reverse the deteriorating fiscal situation. Faced with limited access to international financial markets, the government had to rely primarily on domestic borrowing to finance its multiple-objective plan. Although a reasonable progress has been made in upgrading and rebuilding the physical facilities, the reconstruction plan was proven to be of considerable cost. The rapid growth of government spending and the waste in government expenditures have led to a persistent budget deficit resulting in a rapid build up of national debt. In its attempt to reduce the deficit, the government has adopted tax reform with the objective of enlarging the tax base by encouraging compliance and attracting foreign capital to the new tax haven.

Briefly, the government's plan included the following:

• Reduction of the progressive top marginal tax rate on profit from 50% to 10%
• Reduction of the progressive income tax from a high of 32% to 10%
• A 5% flat tax on capital accounts
• A LL3,000 per 20 Liters of gasoline
• A LL2,000 per horsepower on vehicles
• A 5% on hospitality services
• A 2% across the board on imported goods.

Against this background, and with support from the Ford Foundation, the Lebanese Center for Policy Studies commissioned three economists, Drs. Abdullah al-Dah, Ghassan Dibeh, and Wasime Shahine, to examine both the effects of the new lower income taxes and the gasoline tax on income distribution. Upon the termination of the first draft, the authors presented their findings in a workshop that took place in the Commodore Hotel on October 29^th, 1998.

The study was published in April 1999.