LEBANON - Lebanon’s income tax has changed surprisingly little since before the civil war. It follows what is known as a schedular system: each type of income, whether a salary, business profits, rent, or bank interest, is taxed separately under its own rules and rates. This design has survived the 1990s reconstruction boom and the 2019 collapse, despite repeated promises to replace it. 

The 1990s and Early 2000s: From Low Rates to the VAT 

After the civil war, direct taxation contributed little to the Lebanese government’s revenues. In 1990, IMF staff noted that direct taxes had been a limited source of revenue even before the war because of collection difficulties, and they saw indirect taxes and fees as the more realistic avenue for revenue diversification. The early reconstruction years, from 1992 until the 1999 budget, reinforced this direction: rates were kept deliberately low to attract capital, with top rates of around 10 percent on wages, professional income and corporate profits by the late 1990s. 

The first significant reversal came with the 1999 budget, adopted in July 1999 as part of a broader consolidation effort. It raised the top rate on wages and salaries from 10 to 20 percent, on professional income from 10 to 21 percent, and on corporate profits from 10 to 15 percent, while doubling the flat tax on dividends from 5 to 10 percent and increasing inheritance taxes. 

The early 2000s brought one of the few times Lebanon effectively managed to shrink its budget deficit. In 2001, the government cut back on spending, reducing its transfers to the state electricity company, bringing the deficit down from about a quarter of GDP to around a fifth. In 2002, it followed up with its biggest revenue reform in decades: a value-added tax (VAT), a sales tax collected at each stage of production and on imports. The VAT brought in an extra 3.6 percent of GDP in its first year and drove most of that year’s improvement. From then on, the VAT, not the income tax, became the centerpiece of the tax system. 

Income tax changed only marginally: notably in 2003, pensions and end-of-service payments became taxable, and a 5 percent tax on bank interest was introduced. The government also promised a full overhaul of the income tax by 2004. But political deadlock soon followed, and that year’s budget ended up with no new tax measures at all. 

Proposals for a Global Income Tax 

The idea of replacing the schedular system with a Global Income Tax was first put forward in 2002 and returned to the agenda several times over the next decade but was never enacted. It was being prepared with IMF Fiscal Affairs Department technical assistance in 2006, reaffirmed as a pillar of the medium-term strategy in 2009, and mentioned again in 2010 as work towards “a more uniform income tax”. By 2011, staff reported that it had stalled. 

With the Global Income Tax on hold, the main instrument for fiscal adjustment became tax on the interest people and businesses earn on their bank deposits. Increases in the interest tax rate were proposed in the 2007, 2009, 2010 and 2012 draft budgets, but were repeatedly not passed by parliament. 

From 2014 onward, a package including higher interest tax, a higher corporate rate, and a new capital gains tax on real estate was frequently debated. The package was designed specifically to offset the cost of higher public sector salaries, and it was enacted only alongside the new salary scale in the second half of 2017. The 2019 budget then raised the interest tax again from 7 to 10 percent, as a temporary measure for three years. 

Income Tax in the Wake of the 2019 Crisis 

When the financial crisis hit in 2019, the currency collapse quietly wiped out most of what the state was collecting in taxes. In response, starting with the 2022 budget, the government began gradually moving the exchange rate used for taxes and customs closer to market rates. By 2023, the IMF was repeating familiar advice: fewer exemptions, fewer loopholes, a modernized corporate tax, a simpler regime for small businesses, and a dedicated office for the largest taxpayers. 

Three decades on, the income tax still works the same way, taxing each type of income separately rather than people’s total earnings. Most changes have simply raised rates on easy-to-tax income like bank interest, often to meet short-term needs, while delaying necessary structural reform. 

A Way Forward 

The IMF’s October 2026 Regional Economic Outlook for the Middle East and Central Asia places the rebuilding and preservation of fiscal buffers at the top of the region’s policy priorities. It identifies three routes to get there: credible fiscal consolidation, stronger domestic revenue mobilization, and more efficient spending. In Lebanon, raising more revenue at home runs largely through tax reform. 

The reform that has come up most often over the past two decades is the one that was never enacted: replacing the schedular system with a unified, progressive income tax. By taxing people on their total earnings, it would bring income that currently falls between schedules into the tax net. It would be among the most significant steps toward broadening Lebanon’s tax base, and it is a reform the IMF has supported since the early 2000s. 

Lebanon’s tax system has itself become a source of inequality, because it relies so heavily on taxing consumption. A 2026 study by the American University of Beirut shows that indirect taxes are projected to make up 82.8 percent of tax revenue in the 2026 budget, with the VAT alone accounting for nearly half. Taxes on income, profits and capital gains, by contrast, bring in just 8.5 percent. Since poorer households spend most of what they earn, a system built on consumption taxes weighs most heavily on those least able to bear it. 

Reform could unfold in two stages. In the short term, the VAT could be redesigned to protect poorer households by widening exemptions for everyday essentials and applying lower rates to necessities than to luxury goods, as the AUB study proposes. In the longer term, the goal would be to rebalance the system toward progressive direct taxes: a unified personal income tax that taxes people on their total earnings, alongside a stronger corporate income tax. 

More than two decades after it was first proposed, such a shift would link what people pay more closely to what they can afford.