The Lebanese Parliament will vote on the 2024 budget today after the Finance and Budget Committee took the lead in reviewing and amending the cabinet’s draft. The current draft increases projected state revenue, but its tax regime is more regressive than in past budgets. Lower- and middle-income groups bear the greatest tax burden, sparing wealthier segments of society and interest groups from paying their fair share. Moreover, the 2024 budget fails to properly tax economic activities that mushroomed during the crisis and allowed a select few to amass wealth. In this article, we examine three economic activities that were largely left undertaxed: real estate transactions, imports, and debt settlements.

Real Estate Sector: A Missed Opportunity for Revenue

Luxury Imports: The Cost of an Artificial Rate

Using the official exchange rate for customs duties through December 2022 essentially subsidized imports. This practice led to revenue losses of about $2.8 billion, including $416 million in duties that could have been applied on luxury goods, such as high-end vehicles and jewelry. These losses highlight a regressive financial policy according to which the state, whether deliberately or not, subsidizes the consumption of the wealthy, eroding much-needed public funds.

Reforming the Tax System

A sustainable and equitable recovery would necessitate measures that not only address causes of future inequality, but also the structural inequalities that have been reinforced by the crisis and caused a major regressive re-allocation of wealth. The current budget does not address any of these urgent measures, and instead compensates for revenue losses through regressive manipulation of the exchange rate. To do so, the following reforms would be critical:

- Vacancy Tax on Property: Implementing a tax on unoccupied buildings to discourage real estate speculation and stabilize housing markets.

- Taxation of Loans and Real Estate Mortgages: Taxing the profits made by individuals who settled their loans at beneficial rates due to currency depreciation.

- Taxation of Undisclosed and Undeclared Revenues: Enforcing taxes on hidden profits and revenues from investments made during the crisis, especially luxury goods and real estate.

- Reform of VAT and Customs Tax: Adjusting VAT and customs tax rates to be more equitable, reducing the burden on end consumers, and correcting imbalances stemming from the use of multiple exchange rates.

These measures aim to establish a fairer tax system, addressing both historical issues and those exacerbated by the recent crisis. The success of these reforms hinges on their thoughtful design, transparent implementation, and the government's commitment to using revenue for social and economic recovery. Establishing a more equitable and efficient tax system will be a critical step in rebuilding Lebanon's economy and restoring public trust.

Debt Settlements: A Windfall for Borrowers

LBP exchange rate disparities created an advantageous situation for borrowers, especially those with loans in foreign currencies. Under Circular 568, real estate loans up to $800,000 could be settled in LBP at the old official rate. This led to borrowers receiving a significant discount on their loans, effectively redistributing wealth from depositors to large borrowers and commercial entities.

The magnitude of these transactions is staggering. Theoretically, at the official exchange rate in place at the time, repayments would have amounted to about $45 billion in real terms. However, since the official exchange rate does not reflect the real value of the local currency on the parallel market, borrowers paid $11 billion. In other words, the discounted amount paid by borrowers since the crisis began totals approximately $34 billion – nearly double the size of Lebanon's current national economy. This is in practice a dramatic redistribution of wealth from depositors to large borrowers and commercial entities, creating market distortions that unfairly benefit credit-dependent companies over those with more robust capital reserves. These profits are considered additional income and should be taxed at a progressive rate; as according to the law, income that is not captured by other taxes is to be taxed at a progressive rate of 4% to 25%.  However, due to obstacles related to the current banking secrecy laws, access to information that would allow the collection of these due taxes is not possible.