The introduction of the Value-Added Tax (VAT) in Lebanon has been hailed as a public finance success. The relative ease of accounting, implementation and collection of the VAT are some of the main reasons behind its popularity and its adoption in more than 130 countries today and in Lebanon since 2002.
The VAT is widely used in countries of the Middle East and North Africa (MENA) region. The principal rates for Morocco, Tunisia, and Turkey are higher than other countries such as Algeria, Lebanon, Egypt and Jordan.
Revenue yield for each percentage of the principal rate is the highest in Algeria. By 2004, VAT receipts constituted 23.6% of total tax revenue in Lebanon, and around 5.1% of GDP in 2005.
In January of 2007 and as part of the reform package presented at the Paris III Conference on Assistance to Lebanese, the government proposed to increase the VAT rate from its current 10% to 12% in 2008, and 15% in 2010.
The tax increase comes in the context of a general agenda of fiscal discipline adopted by the Lebanese government and in an effort to redress the budget deficit from the revenue cuts that resulted from trade liberalization measures that the government had passed.
This paper aims at estimating the incidence of such an increase in the tax rate and at measuring the degree of regressively or progressivity of this policy, by examining the first order effects of the tax increase on households’ real consumption.
This paper develops a simple tool to analyze the change in VAT rate using only household survey data on expenditures and a few price indexes. It uses spatial price variation to estimate an Almost Ideal Demand System (AIDS). This tool should be readily replicable in any context where such data is available and in particular in the many MENA countries that have already adopted a VAT.
Results of the study show the following:
a slight increase in the VAT has a somewhat limited impact on extreme poverty in Lebanon, yet the impact on overall poverty is significant
increasing VAT to 15% translates into a significant rise in both extreme and overall poverty rates, with the overall poverty headcount ratio approaching 50% of the population
this deterioration in economic living conditions is mostly due to the impact of the rising prices on the lower middle class because households currently living just above the poverty line risk falling into poverty as prices increase following the increase in VAT.