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Costa Rica needs more taxes … eventually

From the print edition

Higher taxes are needed to fix the rising debt crisis, said leading Costa Rica economists. 

The Central Bank states that government debt has risen to 5 percent of gross domestic product, or approximately $2.1 billion, and the gap continues to widen. To counter this, President Laura Chinchilla introduced new measures to try to lower the margin. But none of the four main points involve increased taxes. 

Max Soto, director of the Economics Research Institute at the University of Costa Rica, said if new taxes are not announced, then it appears Chinchilla is leaving the problem to future administrations to solve. With the fiscal deficit possibly doubling in coming years, taxes appear to be the only way to bring down debt to a more manageable level. 

“It is necessary,” Soto said. “We don’t have the slightest doubt that [the current government] is kicking the ball downfield. This tends to aggravate the problem, although not to the magnitude of the financial crises in Europe and the United States.” 

Jordi Prat, an economic adviser in the Finance Ministry, agreed that tax reform is a necessity. However, he said it’s unfair to say the current administration is passing the buck. He said the ministry’s recent fiscal reform proposal had the votes to pass. But after a scandal forced out the previous finance minister, the bill lost its support in an often partisan Legislative Assembly. 

Now the goal is to propose a tax reform stripped of the most controversial elements. Prat said new Finance Minister Édgar Ayales needs time to adjust to his role, and build bridges in a feisty Congress.

“Until he settles in, he’s not going to rock the boat more,” Prat said. “[For now,]we’re going to continue working on tax administration, improving tax collection and fighting evasion.”

He added that the ministry only has about eight months to a year to convince lawmakers to approve the bill under Chinchilla because “tax reform is not going to pass in an election year.” The next presidential elections are set for 2014.

Ayales has stated that the key to solving Costa Rica’s debt crisis is to avoid short-term measures and come to a political agreement that will make the financial situation salvageable for the long term. One of his current missions is to do a better job collecting taxes. An estimated 60 percent of Costa Rican residents do not pay taxes, according to the Comptroller’s Office.

Ayales replaced ex-Finance Minister Fernando Herrero, who resigned April 2 after reports showed he underpaid his property taxes at the same time he pushed for a bill that raised taxes for Costa Rican residents. The tax reform bill was shelved soon after, and Chinchilla chose to announce new fiscal measures (TT, April 20, 13). 

In an interview with business weekly El Financiero, Ayales said he wants to implement a value-added tax (VAT) structure in the country. Costa Rica currently uses a mixed sales tax. Prat said a VAT is a more efficient system for taxes here.

A quick fix?

The fiscal measures announced by Chinchilla are four-fold. They ask to create stronger measures to reduce tax evasion, eliminate tax exemptions on many luxury goods, sell government-owned property and create a new fiscal reform bill that would freeze government wages and pensions and reduce political party financing.

Critics do not believe all these manuevers are valid, and see some as shortsighted – in other words, the type of results Ayales hopes to avoid.  

In an editorial by the daily La Nación this week, the paper criticized the latter measure as not going far enough when it comes to reducing government costs. 

Soto said the combined effect of these measures will be “limited.” He singled out selling government property, saying doing so will be “contentious,” and government ideologies could spoil the effectiveness of that step. 

One idea that’s been applauded by the Finance Ministry was shrinking the number of tax-exempt luxury goods. The ministry released a reduced list of tax-exempted items earlier this week. 

Some 90 products now will be charged a 13 percent sales tax, according to a decree published by the Finance Ministry on April 30. Ayales on Monday said the ministry would publish a clarification in response to several questions people have raised regarding the new list.

Ayales said the ministry also would make public a revised text that includes exemptions for bread, milk, tuna, cold cuts, beans and cheese. The newly taxed items are mostly food products and consumer goods bought by higher-income groups. Luxury goods no longer exempted include certain cuts of red meat, lobster, paella rice, salmon, shrimp and fruits like kiwis, peaches, plums and cherries. 

Even if each of these measures do prove efficient, and the government manages to do a better job collecting taxes, economic experts know that tax reform needs to be a reality sooner than later. 

Without it, Prat said, “there’s no way you can sustain the services that Costa Ricans want to receive.”

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