Q COSTA RICA — “We’re taking away the tax breaks for the wealthy (a colloquial term for the upper class),” said Finance Minister Rodrigo Chaves, announcing his new tax package, which aims to increase the Impuesto al valor agregado (IVA) — value-added tax — on basic goods from 1% to 13%.
But what this rhetoric masks is that, in reality, those who will pay the price with a decline in their quality of life will be those in the poorest and middle classes.
The Semanario Universidad reported that this was confirmed by an analysis conducted by Leiner Vargas, a researcher at the International Center for Economic Policy for Sustainable Development (CINPE) at the National University (UNA).
The Vargas analysis shapes and contextualizes the impact of this fiscal measure, which the Laura Fernández administration is considering as a response to the country’s fiscal situation—a situation, incidentally, that was considered “very good” before the end of the previous administration, headed by the current minister, Rodrigo Chaves.
Chaves assured that the lowest-income population would only have to show their cedula (ID card) when buying products to receive a discount corresponding to this percentage, because businesses will somehow have access to the Sistema Nacional de Información y Registro Único de Beneficiarios del Estado (Sinirube) — National System of Information and Single Registry of State Beneficiaries, which shows the people who are in the lowest income quintiles — the poorest population — of the country.
Even if this “personalized IVA” plan were successfully implemented to reimburse low-income individuals for overpaid taxes, the Cinpe-UNA analysis considers the risks of such a measure effectively achieving its intended goals.
Initially, Vargas indicated that this increase in IVA on basic goods would raise revenue from this source from ¢42.065 billion to ¢546.841 billion. This would represent 1% of the Gross Domestic Product (GDP).
“It sounds good in principle, but even applying the refund to the poorest, there’s a data leak affecting at least 50% of those who are poor. Therefore, it would hit households in the second and third income quintiles (corresponding to low- and middle-income families), where the lower-middle and middle classes clearly reside, promoting a highly regressive distribution system, because it’s a tax on goods and services, not on people,” the expert explained.
The poorest population, in the first quintile, receives an average monthly income of ¢321,351. The change would mean 6.7% of their income would have to be allocated to purchasing basic necessities. For the second poorest group (quintile 2), with an average income of ¢604,749, the effect would be between 4% and 5%.
For the other three income groups (quintiles 3, 4, and 5), the effects of the IVA adjustment would be less pronounced. For the middle class, the impact would be between 2.5% and 3.5%; for the middle class, between 1.5% and 2%; and for the upper class, only between 0.6% and 1%.
“Unlike the first group, which spends almost half of its income on basic necessities, the wealthiest group (or ‘Costa Ricans with a crown,’ as Minister Chaves calls them), which has an average monthly income of ¢2,675,743, spends only 9.9% of that amount on these products,” the researcher pointed out.
This expenditure analysis was conducted using the products with the highest weighting in the spending of the first two quintiles, according to the structure of the National Household Income and Expenditure Survey (ENIGH), which are rice, beans, bread and flour, eggs, chicken, beef and pork, dairy products (milk, cheese, cream), and tuna.
When analyzing the spending of the poorest families (first and second quintiles), they spend 44.1% and 28.8% of their income, respectively, giving another dimension to the impact that the IVA increase would generate.
“For a household in the first quintile, the magnitude is equivalent to losing about a month of food purchasing power per year. For the second quintile, which is made up of vulnerable but not poor households, the risk is significant in terms of falling below the poverty line,” Vargas stated.
However, the benefit generated by this new income would be 1% of GDP. If nothing is done about servicing the public debt, within two years those resources would be lost to paying high interest rates, leaving only a 0.6% profit.
