Income Tax Reform May Get New Life

During the first presidential debate in early September, front-runner Laura Chinchilla, of the National Liberation Party, broached a subject that has been absent from political discussion for more than two years: income tax reform.

“We consider an income tax reform to be something that needs to be reassessed and revised,” Chinchilla told The Tico Times this week. “When the time comes, maybe by May of this year, we will sit down and discuss the idea of improving the system we have in place right now.”

Though Chinchilla’s words may sound promising to those who have hoped for income tax reform in the past, attempts to reform the nation’s income tax code have a poor track record.

On several occasions, ideas for tax reform have been kicked around by policy makers and in the Legislative Assembly, only to have progress quelled by a veto or leap-frogged in priority by more pressing issues.

Most recently, in early 2006, a proposed bill for tax reform got all the way to the Constitutional Chamber of the Supreme Court for review, only to be rejected and eventually scrapped. This came after the administration and the Legislative Assembly devoted months to generating the proposal.

In the face of the elections in February, 2010, it appears that most of the candidates have income tax reform lodged somewhere on their lists of things to rectify in Costa Rica. Both Ottón Solís, the Citizen Action Party candidate, and Otto Guevara, the Libertarian Movement candidate, expressed the need to reform the current income tax policies in the country.

“The income tax system we have now must become more progressive,” Solís told The Tico Times this week. “The system is currently unfair to poorer people and to those without significant means of income. They pay too much in income taxes while the rich pay too little.”

The comment by Solís seems to summarize the concerns of most of those who are calling for tax reform.

In the current income tax system, the rules are undefined and can be manipulated to allow a person or company earning large amounts of money to pay small sums of income tax. And, according to observers, the ability of the wealthy to pay less in income tax has deprived the state of vital support from those who can afford to contribute more, while withholding substantial amounts of money from those who cannot.

The Costa Rican Income Tax

System

While many income tax systems exist around the world, the two predominant systems are the progressive tax system, in which the proportion of taxes levied increases as the income level of the taxpayer increases, and the flat tax system, in which a fixed amount of income taxes are withheld from the earnings of each household.

Costa Rica’s current tax system is a combination of the two.

At first glance, the existing system appears to be progressive. No income taxes are applied to households with earnings of less than ¢586,000 ($990) per month.

Households with earnings of between ¢586,000 and ¢879,000 ($1,490) pay 10 percent in income taxes, and those earning more than ¢879,000 monthly pay a 15 percent income tax. Though this scale appears to be progressive, the tax rate abruptly stops at 15 percent, meaning all households with incomes greater than ¢879,000 only pay a 15 percent income tax. What seems to be a progressive tax scale flattens at 15 percent.

“Costa Rica has created an income tax system very different from those of the rest of the world,” said Alan Saborío, associate director at Deloitte, a consulting firm in San José.