“I say this because the Costa Rican system is very imprecise. The tax is neither progressive nor fixed, and no restructuring has been instituted to change it.”
Saborío, as well as other economists and financial experts consulted by The Tico Times, also said that part of the imprecise nature of the country’s tax system lies in the amount of deductions and exemptions claimed by large companies and wealthier individuals, which are not available to wage earners or those on fixed salaries. Though the tax rate is set at15 percent of the income of wealthier households and corporations, the amount of deductions allowed almost always means that the wealthy actually pay far less in income taxes.
“Businesses that bring in a ridiculous amount of money usually have luxuries and properties that they are able to write off to pay a much smaller amount of taxes,” said Jean-Jacques Oguilve, a business and economics professor at both the NationalUniversity and University of Costa Rica.
“Also, professionals, such as lawyers, doctors and engineers, have the liberty to record their own income levels, and they often pay taxes at a significantly lower level than demanded by their actual earnings. Other workers and laborers can’t do that, and they sometimes pay more income taxes than does someone who makes more money than they do.”
Income Taxes and the Economy
Many politicians and economists believe that the supposed deficiencies in Costa Rica’s income tax system – especially the ability of wealthier Costa Ricans and corporations to avoid paying their fair share – deprives the government of a substantial amount of funds.
Solís, for example, said that only 14 percent of the gross domestic product (GDP) comes from income taxes, adding that a tax reform would generate a figure closer to 20 percent.
If there were to be an income tax reform, the experience of other countries shows that stricter enforcement of a flat tax could quickly improve revenues for the country.
According the International Monetary Fund, when the Russian income tax system moved from a progressive “graduated” tax to a flat tax in 2001, income tax revenues increased an average of 25 percent in the first two years following the change. The flat tax system in Russia also eliminated many deductions and exemptions, meaning most of the people paid the same flat tax rate, which was 13 percent.
Though the flat tax has had success in raising revenues in some countries, many observers say a progressive income tax system would be the better option for Costa Rica.
“I personally don’t think the flat tax would be a good solution,” said Carlos Camacho, general manager of the Camacho Group. “I think if the options were studied, the government would see that it could collect quite a bit more with a progressive tax.”
Will Talk Lead to Action?
The new president of Costa Rica will take office in May, 2010, and it’s unlikely the first item on the agenda will be income tax reform. While the notion does appear to be gaining traction with the top candidates, other issues may push it aside, as happened during the current administration of President Oscar Arias.
“Tax reform is a very political issue,” Oguilve said. “They talk about how they are going to make all these changes when they arrive in power, though often it is not possible.
It is usually bigger and more complicated than they thought. The Arias administration had the same idea, and then spent four years discussing it with no action.”
The real question now is: Will the upcoming administration commit enough attention to the system to actually change it?