Just days before President Laura Chinchilla was to publicly announce a badly needed tax reform plan, political support for the plan began to evaporate.
Disagreements within her own National Liberation Party (PLN) over what the tax reform should look like prompted PLN’s leader in the Legislative Assembly, Guillermo Zúñiga, to announce his intended resignation on Jan. 5. An ally of former President Oscar Arias, Zúñiga has not yet made the resignation formal, the daily La Nación reported.
Tax reform has been a key priority for the Chinchilla administration since she took office last May. Chinchilla vowed to make Costa Rica “the first developed country” in Latin America, but without tax reform, that will likely not happen.
“There are a number of situations that make fiscal reform more urgent now than ever before,” Chinchilla said when she announced her plan on Dec. 14.
The full reform plan will be presented as a bill to the Legislative Assembly on Jan. 17. Parts of the proposal have already been made public. According to the Finance Ministry website, Chinchilla is considering increasing by 2 percent the value added tax (VAT) to 15 percent, taxing the income of only the top 10 percent of wage earners, and charging a $200 annual fee to companies not registered as small- or medium-sized businesses.
Heather Berkman, an analyst at the political consulting firm Eurasia Group, said the tax reform proposal in its current form would likely not pass.
“Just look at the [current] political dynamic and the [reaction] in the assembly,” Berkman said. “[By] the reaction of the opposition and the response from people in Chinchilla’s party … it’s clear that this will be an uphill battle.”
The Libertarian Movement is against almost any tax hike, she said, and their left-leaning counterparts in the Citizen Action Party (PAC) oppose a VAT hike, among other items. The pending resignation of ex-Finance Minister Zúñiga, who heads the assembly’s finance committee, is further proof that tax reform has divided lawmakers.
“Negotiations will be extremely difficult and slow, and it is highly unlikely that any meaningful reform will be approved [because] Chinchilla’s National Liberation Party lacks the 29 votes necessary to pass legislation,” a report from the Eurasia Group said.
Berkman believes Chinchilla should have pushed for tax reform at the start of her administration eight months ago. “The longer this drags out, the harder it will be to make it a success,” she said.
Carlos Denton, founder and chief analyst of the polling firm CID-Gallup, agreed.
“It’s about time we see the package,” he said. “They have been fooling around with it for a year. It’s too much time spent on planning [while] not getting anything going.”
Denton also said the tax reform needs to be simple to understand and easy to implement. “Those are the fundamental rules of good taxation,” he said.
Denton noted that the sales tax is easy to understand and implement, but pointed out that a more complicated tax on luxury homes resulted in a 70 percent tax-evasion rate in 2010.
“[Chinchilla] needs to start campaigning. She needs to go directly to people to explain why the reform is needed. She also needs to get her own party behind her,” said Berkman.
PAC assembly leader Juan Carlos Mendoza said that while members of his party understand the need for tax reform, they must be convinced it won’t hurt low- and middle-income families.
“We can support a tax reform if the rich pay like the rich, and the poor pay like the poor,” he said.
On Wednesday, Chinchilla began mounting a public relations campaign to promote the issue. Her first promise was to streamline the government’s budget. She pledged to reduce spending by 20 percent, excluding salaries and pensions, and to avoid creating new government posts except where there is a proven need.
She also promised to crack down on tax evasion by more quickly resolving pending cases and by pursuing tax delinquents.
Yet while these measures will help reduce the deficit, tax reform is crucial to help grow the economy.
“This set of tax measures is indispensible to the goals outlined by the National Development Plan,” Chinchilla said on Dec. 14.
“If we want these goals to have a sustained effect, and if we want to cross the threshold into the developed world, we must be not only ambitious in our proposals, but also responsible in how we go about achieving them,” she said.