MANAGUA – Strapped for cash and challenged by dwindling sources of income, the government of President Daniel Ortega wants to ask taxpayers to shoulder more of the burden.
With tax revenue on the decline, an economy slipping into recession and more than $100 million in international budget support canceled or suspended due to problems of governance, the Sandinista administration has been unable to make ends meet in its 2009 budget. The president has already requested two budget cuts this year, shaving the original $1.8 billion budget by $106 million. More cuts are expected in the weeks to come, lawmakers say.
“The government has lost access to quick disbursement funds from foreign donors and the budget support group, and this is all going to translate into a slowdown of public spending,” said Liberal Constitutional Party lawmaker Francisco Aguirre, of the National Assembly’s Commission on Budget, Economy and Production.
Though Nicaragua is set to receive an additional $105 million from the International Monetary Fund’s Special Drawing Rights (SDRs), a international stimulus package to give liquidity to the global economic system, Nicaragua is still precariously underfunded.
With this year’s tax revenue expected to be up to 20 percent less than originally calculated, the government is already planning a third set of budget cuts of between $24-50 million, according to administration sources.
To avoid repeating a similar situation in the years to come, the administration is trying desperately to drum up support for a new tax reform measure. The government claims the tax reforms would provide the state coffers with an additional $170 million, slightly more than the amount the Ortega administration has lost in different forms of foreign aid since last year’s municipal elections, in which the Sandinistas are accused of stealing more than 40 mayors’ seats.
“We are adjusting the (tax system) with the objective of creating a more just tax system in the country and reducing the inequities we inherited,” said Sandinista lawmaker and economist Wálmaro Gutiérrez, president of the Commission on Budget, Economy and Production.
Gutiérrez has downplayed criticism of the Sandinistas’ proposal. He dismissed naysayers as “lawmakers, bankers and businessmen” who are looking out for their own financial interests.
While some independent economists concede the Sandinista proposal would make Nicaragua’s tax system “less regressive” than before, others argue it still falls quite short of equitable. Instead, tax experts say, the administration’s proposal calls for a variety of confusing and sometimes contradictory tax shifts that could hinder economic growth and delay recovery from the recession.
“These tax measures are weird,” said economist Adolfo Acevedo, who represents the Civil Coordinator, a civil society umbrella organization. “There is no clear reform strategy.”
Other economists have likened the proposed reforms to a “labyrinth” of tax shifts, making it unclear whether the state will actually collect more or less revenue as a result.
While some industries, such as casinos, would pay more taxes, many businesses would actually pay less.
Even the Sandinistas’ main populist selling point – an increase in income-tax exonerations for low-salaried workers – has some economists scratching their heads. Critics argue that most governments in the world seek tax reforms to expand the tax base to get more people to contribute. But under the Sandinista proposal, fewer people would pay into the system.
By raising the income-tax exemption from 50,000 Córdobas ($2,500 a year) to 75,000 ($3,750 a year), 91 percent of salaried workers would be exempt from paying any income tax at all, according to Acevedo’s analysis of the Sandinista proposal. The rest of salaried workers would pay a progressive income tax of 10 to 35 percent.
Some policy analysts claim it’s a good idea to expand exonerations for the working poor. And union leaders have asked for a higher exemption, up to 120,000 Cordobas.
Edmundo Jarquín, a former policy analyst for the Inter-American Development Bank and head of the left-wing opposition Sandinista Renovation Movement (MRS), said his party’s position is that the exemption should be raised to 100,000 Córdobas ($5,000). Instead, Jarquín said, the Ortega government is just trying to transfer the tax burden to the next income bracket, which isn’t that much better off to begin with.
“To put it in simple terms, those who earn more than $362 a month would pay more taxes,” he said in his weekly radio address.
The Sandinista proposal, which is currently being discussed with private sector leaders in search of support before being presented as a bill, also seeks to reduce business-income tax from 30 to 25 percent. At the same time, the proposal calls for a new flat-rate dividend tax of 10 percent.
As a result of the shifting tax burden, a middle class employee would be taxed 25-30 percent on his or her income, while the wealthiest segment of society, which lives off dividends, would pay only 10 percent.
“There are inconsistencies that worry us as the private sector, because the proposal doesn’t talk about expanding the tax base, rather nailing more taxes on those who already pay,” said Roger Arteaga, president of the Nicaraguan-American Chamber of Commerce (AMCHAM) and former Director General of the General Revenue Directorate (DGI), Nicaragua’s tax authority.
Arteaga said an “intelligent tax reform” would look to expand the tax base, include more people in the formal economy, and get people to pay the taxes they already owe. Instead, Arteaga said, the Sandinista proposal seeks to charge those who pay even more – a strategy he thinks could backfire.
For example, he said, by increasing taxes on the agricultural sector from 1 to 5 percent many agricultural cooperatives could start doing their transactions “off-the-books” to avoid paying taxes all together. So instead of formalizing and ordering the economy, Arteaga said, the tax reform could encourage more informal or black-market economic activity, especially in the countryside. Arteaga is also concerned about the dividend, or capital gains tax, which he calls a “double taxation” on businesses.
“This will hinder the economy,” Arteaga told The Nica Times in an interview. “Why am I going to invest in a business if they are going to tax my dividends? Instead, investors will put their money somewhere else – this will deter investment.”
In broader terms, Arteaga warns, the Sandinistas’ tax reform could have the opposite effect of a traditional economic stimulus plan, which seeks to inject more money into the economy.
“What they are doing here is taking money out of the economy, which will make the recession last even longer,” he said. “This is not the best moment to do this.”
Tax Collection & Traffic Circles
The government has blamed its cashflow problems on the world economic crisis, which has led to a slowing flow of tax revenue from imports and consumption.
For a tax system that is based heavily on sales tax revenue, the drop in consumption is being felt strongly. In July of this year, revenue from sales taxes hit a new low of -3.5 percent, down from 20 percent growth this time last year, according to government numbers.
But the economy shouldn’t be blamed for everything, Arteaga said. The DGI’s new work culture is also a big part of the problem, he charged.
Arteaga said the Sandinista government fired all the trained professionals who worked in the DGI under the previous administration and replaced them with their own loyalists. By doing so, they lost a lot of accumulated professional experience, Arteaga said.
During the government of Enrique Bolaños (2002-2006) Nicaraguan tax officials received extensive training from the U.S. Internal Revenue Service (IRS), German and Japanese cooperation, and the Inter- American Development Bank. As a result, Nicaragua’s tax revenue increased three-fold during those five years, surpassing the combined amount of tax revenue collected during the previous two administrations of Violeta Chamorro and Arnoldo Alemán, Arteaga said.
Since the Sandinistas took over, tax revenue has decelerated. Today’s DGI workers are often used as Sandinista reservists called out to traffic roundabouts to wave party flags in protest of the oligarchy or in celebration of some revolutionary anniversary.
Some DGI employees have even been accused of attacking civil society members demonstrating against the government.
“I call (the DGI) the general directorate of the metrocentro traffic roundabout because it’s no longer the general revenue directorate,” Arteaga said. “They have become a group of gangsters that attack others instead of administering the tax system.” DGI Director General Walter Porras did not return The Nica Times’ requests for comment or interview this week.
Another Way Out
The opposition says President Ortega has another way out of his financial troubles, without resorting to a tricky tax reform that is already facing resistance.
“It’s important to look at the reasons why we are discussing tax reforms at this moment. And that’s primarily because the government doesn’t have the money to pay the budget, and that money was lost because of the accusation of electoral fraud,” said Arteaga. “In black and white terms, the error committed by the government is being paid by those who had nothing to do with it. The government is asking the people to pay for its mistake.”
The head of AMCHAM as well as opposition politicians are urging Ortega to make amends with the foreign community.
Opposition lawmakers, meanwhile, say Ortega needs to account for the hundreds of millions in Venezuelan aid that has entered the country but is managed separately from the budget in private coffers controlled by the ruling family. That money could also be tapped to fill the budget gaps, lawmakers say.
“There needs to be a framework, a strategy and an end game,” said lawmaker Aguirre. “And we need to know how Venezuelan money is being used. There is a lot of money sloshing around in the economy, but it’s not being accounted for and it’s not being used for development.”