Executive Summary

Lebanon’s taxation system has become a major source of distributive inequity. The country’s public finances rely heavily on taxation, and increasingly on indirect taxes, particularly value-added tax (VAT). In the 2024, 2025, and 2026 public budgets, indirect taxes account for 76.3%, 79.9%, and a projected 82.8% of total tax revenues, respectively. VAT alone represents the largest source of tax revenue, contributing 41.5% in 2024, 40.5% in 2025, and a projected 49.4% in 2026. This structure reflects a fiscal model that depends primarily on taxing consumption rather than income, profits, property, or wealth.

The distributional consequences are significant. VAT applies uniformly to goods and services regardless of the consumer’s income level, meaning that lower-income households, which spend a larger share of their income on basic consumption, bear a proportionally heavier tax burden. This is particularly problematic in Lebanon’s current context of deep inequality, declining purchasing power, weakened public services, and rising household vulnerability. Although Lebanon already maintains a list of VAT-exempt goods and services, important gaps remain. Some essential items and commonly consumed processed goods are still taxed, while products with very different social and economic functions may be subject to the same VAT rate. As a result, the current VAT structure does not sufficiently distinguish between essential consumption and discretionary or luxury spending.

This policy brief argues that VAT reform should serve as an immediate entry point toward a fairer tax system. While Lebanon ultimately requires comprehensive tax reform, including stronger direct taxation and improved tax administration, such reforms are politically and institutionally demanding. In the short to medium term, the government can reduce VAT regressivity by expanding the exemption list for essential goods and services and introducing differentiated VAT brackets. Under this approach, reduced rates would apply to basic necessities, standard rates to ordinary goods and services, and higher rates to non-essential and luxury consumption.

For this reform to be effective, the government should establish clear criteria for classifying goods and services, relying on household consumption data, poverty indicators, inflation trends, and social priorities. The exemption list and VAT brackets should be transparent and periodically reviewed. Strong administrative controls, standardized product classification, audit mechanisms, and penalties for abuse are also necessary to prevent misclassification and tax avoidance. A differentiated VAT framework would not replace comprehensive tax reform, but it would provide practical relief to vulnerable households, improve perceived fairness, and help rebuild trust in Lebanon’s fiscal system.

The Inequality Reality in Lebanon

Lebanon stands at a critical juncture. Overlapping economic, social, and political crises have intensified long-standing inequalities and sharply reduced the resilience of vulnerable and middle-income households. Since 2019, the country has experienced a severe economic collapse, marked by the depreciation of the local currency, high inflation, the erosion of purchasing power, and restrictions on depositors’ access to their savings in unofficially insolvent banks. Chronic mismanagement of public resources, widespread corruption, and prolonged political deadlock have further weakened essential public services, including healthcare, education, and social protection. More recently, the Israeli war has deepened these pressures, particularly for residents of the South and Beirut’s Southern Suburbs who have lost homes, livelihoods, and sources of income.

Against this backdrop, inequality in Lebanon has reached alarming levels. An ESCWA survey found that 67% of Lebanese citizens perceive their society as “deeply unequal,” more than double the regional average of 27% (ESCWA 2022). Available data reinforce this perception: the richest 10% of the population control nearly 70% of total personal wealth, while the top 1% alone capture approximately 25% of national income (ESCWA 2022). Lebanon’s Gini coefficient, a commonly used measure of inequality, increased from 0.42 in 2011–2012 to approximately 0.61 in 2022–2023 (World Bank 2024a), reflecting a significant widening of income disparities. At the same time, the country’s middle class has contracted sharply, declining from 57% of the population in 2019 to less than 40% by 2020 (World Bank 2024b).

These disparities are not only a social concern. They have an impact on the relationship between citizens and the state, weakening trust and increasing the risk of social instability. In a context of declining trust in political and economic institutions, failure to address widening inequality may contribute to renewed political unrest, echoing the mass mobilizations witnessed in October 2019. Addressing inequality should therefore be treated as a central pillar of any sustainable recovery strategy.

Taxation is one, among many others, of the state’s most important tools for addressing this challenge. A fair and well-administered tax system enables the state to redistribute resources and wealth, finance essential public services, and reinforce the trust bond between the citizens and the state. Perceptions of having a fair taxation system matter for compliance, as evidence suggests that citizens are more likely to comply with tax obligations when they perceive the system as equitable, potentially strengthening fiscal legitimacy (Domonkos 2016). Conversely, persistent income inequality can weaken redistribution efforts, undermine institutional quality, and constrain long-term economic growth (Chong & Gradstein 2017).

The impact of taxation on inequality depends significantly on the equity between direct and indirect taxes. Direct taxes, such as personal income taxes and corporate income taxes, can contribute to greater equity when designed progressively, with higher-income individuals and more profitable businesses contributing at higher rates. By contrast, indirect taxes, including value-added tax (VAT), generally place a proportionally heavier burden on lower-income households. Since these households allocate a larger share of their income to consumption, indirect taxes reduce their purchasing power more severely and may widen inequality (Ciminelli et al. 2019).

For Lebanon, equitable tax reform is not merely a technical fiscal exercise. It is a necessary component of a broader strategy to restore public trust, protect vulnerable households, and strengthen equality. Building such a system requires reconsidering the current weight of direct and indirect taxation and assessing whether the tax burden is distributed fairly across income groups.

This paper argues that, given Lebanon’s heavy reliance on VAT, reforming its design should serve as an immediate entry point toward a more equitable tax system. The proposed reform is not limited to expanding the current VAT exemption list, although this remains necessary for essential goods and services that weigh heavily in low- and lower-middle-income consumption baskets. It also calls for the introduction of differentiated VAT brackets, whereby reduced rates apply to basic necessities, standard rates apply to ordinary goods and services, and higher rates apply to non-essential and luxury consumption. Such a reform would help enhance fairness and equitability within the taxation system by better aligning tax burdens with households’ consumption patterns and ability to pay. In turn, a more balanced VAT structure can strengthen perceptions of social equality and contribute to rebuilding trust in the fiscal relationship between citizens and the state.

The Political Economy of Taxation: Why Lebanon Depends on Indirect Taxes

Lebanon’s heavy dependence on taxation as the primary source of public revenue to fund public expenditures is rooted in the structure of its political economy model. Since its early formation, the Lebanese economy was largely positioned around services, trade, finance, and intermediation, rather than around a diversified productive base capable of generating alternative sources of public revenue. During the 1950s and 1960s, Lebanon benefited from regional political and economic transformations, including regime changes, the adoption of socialist economic models, and nationalization policies in neighboring countries, which encouraged the movement of private capital toward Beirut. The country also benefited from rising oil revenues in the Gulf, particularly at a time when Lebanon possessed one of the region’s most advanced banking sectors. At its peak, this model allowed the public budget to generate revenues from capital, consumption, and service-based activity, but it did not produce a broader revenue-generating economic structure beyond taxation.

With the outbreak of the civil war, the Israeli invasions, and the successive political, financial, and security shocks that followed, this tax-dependent fiscal model became further entrenched. Rather than moving toward a more diversified productive economy, Lebanon’s public finances entered the debt trap and remained heavily reliant on taxation, with the burden shifting over time between direct and indirect taxes. This historical trajectory helps explain why the Lebanese state today continues to depend overwhelmingly on tax revenues, and why the composition of those revenues has significant implications for inequality, fiscal legitimacy, and economic recovery.

At this point, the reliance on indirect rather than direct taxation is not a coincidence. It is shaped by the broader macroeconomic model of Lebanon, its political setting, elitism perception on governance capacities, and social-demographic realities. Lebanon’s reliance on indirect taxation is the product of a complex action and interaction between administrative practicality, the challenges of a large informal economy, acute fiscal pressures, entrenched political resistance, and deep-seated governance deficits. While indirect taxes provide a fast revenue stream in the short term, they also reflect structural weaknesses that hinder the development of a more equitable and progressive taxation system.

From an administrative standpoint, indirect taxation, mainly VAT, has become a defining feature of the Lebanese taxation system, making it easier to collect. Levied on goods and services, it is embedded in transactions of paying costs, making evasion more difficult and reducing the need for complex enforcement mechanisms. This is particularly nuanced for the Lebanese context, where tax administration systems are outdated and underdeveloped. Moreover, consumption patterns tend to remain relatively stable even during all the political and economic fluctuations Lebanon experiences, making VAT a more stable revenue stream than direct taxes, which fluctuate with income levels.

The country’s ongoing economic crisis, marked by hyperinflation, severe currency depreciation, and drastic cuts in public services, has intensified the need for quick and reliable revenue streams to feed the public budget and help the state finance growing expenses, including the eroded value of salaries, the restoration of public services, and many other pressing needs. In this case, and in the Lebanese context, VAT is not only faster, but it also requires fewer institutional reforms to generate immediate fiscal revenue. This makes relying more on VAT an attractive option for the Lebanese consecutive governments that try to administer the governance situation in Lebanon aside from drafting a strategic plan, especially when facing urgent budgetary needs but constrained by political dynamics to overhaul its tax system.

Indirect taxes also capture revenue from a broader segment of the population, including those operating in the informal sector, because they are tied to consumption rather than declared income. The size of Lebanon’s informal economy further reinforces this reliance. A large shadow economy operates largely outside the formal tax net, making it difficult to track income and enforce compliance with progressive taxation. In such a context, unfortunately, indirect taxes become a practical tool for extracting revenue from economic activity that would otherwise remain untaxed.

Political considerations also play a central role where reforming or increasing direct taxes often provokes strong resistance from high-income groups or politically influential lobbying business elites. Indirect taxes – in our case VAT – by contrast, are less visible to such resistance from individual taxpayers and therefore tend to encounter less political opposition from these influential groups (Fairfield 2015). The influence of powerful interest groups has been constraining the political will to implement progressive, income and capital profit-based taxation, entrenching the current system.

Furthermore, lack of trust from middle-income earners reduces voluntary compliance, adding another layer of hurdles to shift toward a more equitable taxation model (Torgler 2007). In fact, beneath the economic and political dynamics, there is a pervasive lack of trust where many high and middle-income earners doubt that their tax contributions will be used effectively, a belief reinforced by widespread corruption within tax administrations and other state institutions in Lebanon (Kareh 2020).

Lebanon’s Taxation Structure and Revenue Sources

As mentioned, taxation represents the cornerstone of public finance in Lebanon, accounting for the vast majority of government revenues. In the public budgets of 2024 and 2025, tax revenues constituted approximately 78.8% and 81.2% of total government income and are projected to increase to 82.3% in the proposed 2026 budget, underscoring how weak Lebanon is at generating revenues outside taxation.

Nonetheless, this is not the only issue. A composition analysis of Lebanon’s recent budgets shows the real numbers of the country’s tax structure heavily tilted toward indirect taxation. As Table 1 shows, in 2024, indirect taxes accounted for 76.3% of total tax revenues. This share increased to 79.9% in 2025 and is projected to reach 82.8% in 2026. Within this structure, value-added tax (VAT) is the single largest revenue source, contributing 41.5% of total tax revenues in 2024, 40.5% in 2025, and 49.4% in 2026. These figures indicate that Lebanon’s fiscal model depends substantially on taxing consumption rather than income, profits, or wealth, which, as mentioned earlier, puts pressure on households on an inequitable basis, not taking into consideration income levels. In contrast, as Table 2 shows, direct taxes represent a very small share of total tax revenues compared to the VAT share, despite their importance for building a more equitable taxation system. Taxes on income, profits, and capital gains accounted for 8.8%, 11.9%, and 8.5% of total tax revenues in 2024, 2025, and 2026, respectively. Property taxes accounted for 14.8%, 8.2%, and 8.6% over the same period (Lebanese Republic Ministry of Finance 2024, 2025). In a highly unequal society, such a structure depending on VAT places proportionally greater pressure on low- and middle-income households, which spend a larger share of their income on basic goods and services.

Table 1: Breakdown of Total Tax Revenues Compared to the Amount and Share of Indirect Tax Revenues, and VATs in Lebanon’s 2024, 2025, and 2026 Budgets (in Billions of Dollars).

Year	Total Tax Revenues	Total Amount of Indirect Taxes	Total Amount of VAT	Indirect Taxes Share	VAT Share
2026	4.65	3,85	2,3	82.8%	49.4%
2025	4.04	3,23	1,64	79.9%	40.5%
2024	2.72	2,07	1,13	76.3%	41.5%

Table 2:. Breakdown of Direct Tax Revenues and their Shares Compared to the Amount and Share of VAT in Lebanon’s 2024, 2025, and 2026 Budgets (in Billions of Dollars).

		Amount of Direct Taxes		Direct Taxes Share
Year	Total Tax Revenues	Total Amount of Taxes on Income, Profits, and Capital Gains	Total Amount of Property Taxes	Total Amount of VAT	Taxes on Income, Profits, and Capital Gains Share	Property Taxes Share	VAT Share
2026	4.65	0.4	0.4	2,3	8.5%	8.6%	49.4%
2025	4.04	0.48	0.33	1,64	11.9%	8.2%	40.5%
2024	2.72	0.24	0.4	1,13	8.8%	14.8%	41.5%

Lebanon’s dependence on VAT therefore makes it a central arena for addressing tax-related inequity. While VAT may provide the state with relatively predictable revenues, its growing weight in the tax mix risks deepening inequality among citizens unless it is redesigned with stronger equity considerations. Since VAT accounts for the largest and growing share of tax revenues, even targeted adjustments to its design can have meaningful effects on household welfare and perceived fairness. In the long term, Lebanon requires a broader reform of its tax architecture, mainly stronger direct taxation, improved tax administration, and greater capacity to reduce evasion. In the short and medium terms, however, refining VAT exemptions and applying more equity-sensitive treatment to essential goods can help reduce the regressive burden on low- and middle-income households while preserving much-needed fiscal revenues. The next section examines the mechanics of VAT in Lebanon, its structure, exemptions, and shortcomings, and explores how targeted reforms could reduce its regressive burden while preserving fiscal stability.

VAT Design, Exemptions, and Solutions

VAT in Lebanon is a broad-based consumption tax applied primarily at the final stage of consumption. By design, it is an indirect levy that does not differentiate by ability to pay, where identical purchases bear identical tax regardless of income. The result is a regressive pattern in which poorer households, who devote a larger share of their budgets to essentials, face disproportionate effective tax rates. The optimal path remains a thorough and comprehensive reform of the tax system to recalibrate the balance between direct and indirect taxes in a way that supports a broader economic vision, strengthens public finance, and improves distributive fairness. However, this process is politically sensitive and institutionally demanding, particularly given the likelihood that vested interests would seek to shape reform outcomes in ways that preserve existing advantages. Moreover, vulnerable households cannot shoulder the interim burden indefinitely. In this context, the state should refine the operation of VAT to mitigate its regressive incidence while safeguarding fiscal space. VAT adjustment can serve as a practical entry point for this process. While it cannot substitute for a full redesign of the tax system, a differentiated VAT structure can provide immediate to medium-term relief for low- and lower-middle-income households and help set the foundation for a more equitable taxation framework. The long-term equity gains, however, will depend on a broader reform agenda that strengthens direct taxation, improves tax administration, and aligns revenue policy with Lebanon’s social and economic recovery objectives.

Differentiated VAT Rates as an Equity-Oriented Reform

Lebanon already deploys a broad set of VAT exemptions typically associated with essential products and services (Republic of Lebanon, 2001). Exemptions cover:

Exempted Products

Exempted Services

The supply of the following goods and items shall be exempt from the Value Added Tax: Livestock, poultry, live fish, and agricultural food products sold in their natural state. Bread, flour, meat and fish, milk and dairy products and their derivatives, rice, bulgur, sugar, table salt, vegetable oils, pasta of all types, and food preparations intended for infant nutrition. Books and similar printed materials, magazines, newspapers, paper and cardboard used for writing or printing, newsprint in rolls or sheets, and printing ink. Postal and fiscal stamps, and banknotes. Gas intended for household consumption (butane gas). Seeds, fertilizers, animal feed, and agricultural pesticides. Agricultural machinery. Medicines and pharmaceutical substances, including products intended for medical and pharmaceutical use (such as contraceptives, condoms, sanitary pads and towels, baby diapers, and similar sanitary items). Medical instruments, devices, and equipment. Precious and semi-precious stones, synthetic or reconstituted precious and semi-precious stones, pearls, diamonds, gold, silver, and other precious metals. Banknotes and coins in circulation. Aircraft used for the transport of persons and goods. Diesel fuel (“mazout”).

The following transactions, when carried out within Lebanese territory, shall be exempt from Value Added Tax: Services rendered by physicians and by professionals of a medical nature, as well as hospitalization expenses. Education. Insurance and reinsurance, and health benefits provided by mutual funds and employers, together with the related services. Banking and financial services, including Islamic banking transactions, contracts, and instruments. Activities of associations and entities recognized as being of public utility, and those concerned with the care of persons with special needs, the elderly, orphans, children, and persons suffering from mental illness, cancer, or other diseases as may be specified by decision of the Council of Ministers, provided such activities are carried out in furtherance of their stated purposes. This exemption shall not extend to activities carried out on a recurring basis where such exemption would result in unfair competition with taxable entities. Public passenger transport, including transport by taxi. Delivery of gold to the Central Bank. Betting, lotteries, and other games of chance. Sale of built real estate. Lease of built real estate for residential purposes. Farmers’ activities relating to the supply of their agricultural produce. Activities of licensed daycare centers engaged in the field of child care within Lebanese territory.

Despite the breadth of Lebanon’s VAT system, important coverage gaps remain from an equity perspective. Existing exemptions often apply only to goods in their natural or unprocessed form, meaning that commonly consumed processed equivalents, such as tomato paste compared to raw tomatoes, remain taxable despite being close substitutes in low-income consumption baskets. In addition, everyday necessities such as bottled water, hygiene products, and household cleaning products are generally subject to VAT, further increasing pressure on vulnerable households.

The equity concern is further reinforced by the application of a uniform VAT rate across goods and services with very different social and economic functions. For example, a basic food item such as tomato paste may be taxed at the same rate as luxury or high-end products such as caviar, smoked salmon, imported Wagyu beef, or truffle oil. This undifferentiated treatment weakens the fairness of the VAT system because it does not distinguish between essential consumption and discretionary luxury spending.

Accordingly, VAT reform should move beyond a narrow reliance on exemptions and consider both the scope of the exemption list and the introduction of differentiated VAT rates based on the necessity, social value, and consumption profile of goods and services.
This would allow the state to protect low- and middle-income households from excessive taxation on essential consumption, while raising additional revenues from non-essential and luxury consumption.

Under this approach, Lebanon’s current list of exempted goods and services can be reviewed and expanded to include a wider basket of basic necessities. However, exemptions should not be the only policy tool. A lower VAT rate can be introduced for essential goods and services that are widely consumed by vulnerable households but are not currently exempt. This may include selected food products, hygiene items, household cleaning products, bottled water, basic school supplies, and other items that form part of everyday consumption. Applying a reduced VAT rate to such goods would help lower the effective tax burden on households that spend most of their income on basic needs.

At the same time, the government can introduce additional VAT brackets for less essential goods and services. A middle or standard VAT rate can apply to ordinary goods and services that do not fall under the essential basket, while a higher VAT rate can be imposed on non-essential products with lower social priority. Finally, the highest VAT bracket should target luxury goods and services, such as high-end consumer products, luxury vehicles, expensive hospitality services, jewelry, premium leisure activities, and other forms of discretionary consumption associated with higher-income groups.

This differentiated structure would make Lebanon’s VAT system more sensitive to ability to pay. Instead of applying the same rate across most goods and services, it would reduce taxation on basic consumption while increasing the contribution of households with greater purchasing power. In this sense, VAT reform would not replace the need for broader tax reform, including stronger direct taxation and improved tax administration, but it would provide a practical short- to mid-term instrument to improve equity within the existing fiscal framework.

To be effective, the reform should be carefully designed. The government should establish clear criteria for classifying goods and services across VAT brackets, relying on household consumption data, poverty indicators, and social policy priorities. The list of reduced-rate and higher-rate items should be transparent, regularly reviewed, and protected from ad hoc political bargaining. Strong administrative controls would also be needed to prevent misclassification, tax avoidance, and lobbying by interest groups seeking preferential treatment.

Recommendations to Establish a Knowledge-Based Controlled Differentiated VAT Framework

For a differentiated VAT system to improve equity without creating new distortions, the Lebanese government should begin by establishing clear and publicly defined criteria for classifying goods and services across VAT brackets. Classification should not be based on ad hoc political decisions or sectoral pressure, but on a structured assessment of necessity, household consumption patterns, and poverty impact. Goods and services that represent a significant share of low- and lower-middle-income household expenditure should be prioritized for exemption or reduced VAT treatment, particularly when they relate to food security, hygiene, health, education, housing needs, and basic household consumption. By contrast, goods and services associated with discretionary or luxury consumption should be placed in higher VAT brackets, especially when they are primarily consumed by higher-income groups.

To make this classification credible, the Ministry of Finance, in coordination with the Ministry of Economy, the Central Administration of Statistics, and the Economic and Social Council, should rely on household expenditure data, poverty indicators, and inflation trends. This would allow the VAT structure to reflect actual consumption realities. For example, the distinction between essential and non-essential goods should consider how products are used by households across income groups, not only whether they are raw, processed, imported, or locally produced. This is particularly important in Lebanon, where many processed or packaged goods form part of everyday consumption for vulnerable households. A data-based approach would therefore help ensure that reduced VAT rates are directed toward goods and services that genuinely affect household welfare.

The government should also create a transparent review mechanism for the VAT exemption list and differentiated rate brackets. The list of exempted, reduced-rate, standard-rate, and higher-rate goods and services should be published clearly and reviewed periodically according to pre-announced procedures. Such review should take into account changes in prices, consumption behavior, poverty levels, and fiscal needs. This would prevent the VAT system from becoming outdated or disconnected from social realities. It would also allow the state to adjust the system in response to inflationary pressures or economic shocks.

Finally, administrative controls are necessary to prevent misclassification, tax avoidance, and abuse. A differentiated VAT system can only function effectively if goods and services are clearly coded, businesses understand their obligations, and the tax administration has the capacity to monitor compliance. The Ministry of Finance should therefore develop detailed classification guidelines, strengthen audit procedures, and introduce penalties for deliberate misreporting or incorrect classification. Standardized product codes and risk-based audits can help reduce ambiguity and limit opportunities for manipulation. These controls are essential to ensure that reduced VAT rates benefit consumers rather than being absorbed by businesses, and that higher VAT rates on non-essential and luxury goods are properly collected.

Conclusion

Lebanon’s current tax structure places a disproportionate burden on households least able to absorb it. The growing reliance on indirect taxation, and particularly on VAT, has made consumption taxation a central driver of fiscal pressure on low- and middle-income groups. While comprehensive tax reform remains necessary to rebalance the system toward stronger direct taxation, improved administration, and greater fiscal legitimacy, VAT reform offers a practical and immediate entry point.

Expanding the exemption list for essential goods and services and introducing differentiated VAT brackets can help reduce the regressive impact of the current system while preserving public revenues. Such reform must be guided by clear classification criteria, household consumption data, transparent review mechanisms, and strong administrative controls to prevent abuse and political capture. A fairer VAT structure would not solve Lebanon’s inequality crisis on its own, but it would mark an important step toward a more equitable tax system, stronger public trust, and a recovery process that better protects vulnerable households.

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