(QCOSTARICA BLOGS) The key ingredient necessary for greater tax collection is a growing nation. If you want to generate more revenues, look for ways to foster productive activity, as opposed to squeezing a stagnant economy. Otherwise, at some point, higher rates and burdensome compliance will kill the golden goose and bring in less revenue.+
Higher taxes compromise employment, disincentivize entrepreneurship, and increase the cost of goods and services, both directly and indirectly. That this would, therefore, undermine the very purpose of tax collection in the medium and long term is only logical.
A tax system ought to be simple, efficient, and neutral, as opposed to a spider’s web of requirements that impede collection. The flat tax, for example, has minimal impact on export development, savings, and investment, when accompanied with a disciplined state of austere spending and institutional order.
On the other hand, the ad hoc approach of the Costa Rican central government has skewed its decision making, lacking technical nous and falling prey to special-interest manipulation. The shortsighted emphasis on immediate concerns has created a climate of uncertainty, and as a consequence, various business undertakings and investments have failed to materialize.
In particular, these fly-by-night attitudes discourage foreign investment in Costa Rica. In just a short while, we shall see striking outcomes in rates of unemployment, competitiveness, and income. Already, according to the Economic Commission for Latin America and the Caribbean (ECLAC), Costa Rica’s foreign investment fell 21 percent in the first half of this year.
This problem takes some unraveling, since to finance the state’s promised internal investments, those in power need an ambitious strategy — relying on taxes, domestic savings, and foreign debt. Those who elected this government and chose this debt-financed course of action, whether they realized it or not, have invited risks for Costa Rica.
Foreign debt, particularly when it is difficult to service, compromises a nation’s sovereignty to the creditors (just ask Argentina), more than foreign investment ever could. This reason alone should temper our tolerance for debt and keep government spending in line with national income.
There is an alternative path: offer a clear, predictable legal framework, free from arbitrary discretion, so as to not suffocate economic growth and social progress. Many of us have learned the virtue of giving, rather than creating; but what has not been created cannot be given.
President Luis Guillermo Solís and his supporters may take great pride in their slogans against poverty and inequality. All evidence, however, indicates they will make us poorer. That is particularly the case for the least advantaged among us, who suffer the most from macroeconomic instability.
higher taxes… that would make the president and the legislature unpopular… and heaven knows no politician wants that … no matter if it is the right thing to do or not!
Well, Ms. Palma, keep studying–and try not to immerse yourself in only libertarian thinking. This piece is an unfortunate conglomeration of correct and incorrect points.
You open with a misleading premise. Yes, all else being equal, tax revenues rise when an economy as a whole grows. However, all else is rarely equal, and it definitely isn’t in Costa Rica.
In Costa Rica a wealthy class growing wealthier (inequality is on the rise) simply isn’t paying its taxes. The numbers vary by the reports, but according to some of them two-thirds of all professionals–doctors, lawyers, dentists, and even accountants–and around a third of all businesses are evading their taxes. The economy can grow from now till doomsday, but so long as tax cheating remains a national sport, a growing economy won’t increase tax revenues. Solís is right that clamping down on tax evasion is the first essential step in correcting the fiscal crisis.
You then present the Laffer Curve (or at least the editor presented it for you, since you implied it). Are you unaware that this has been pretty thoroughly discredited?
True, at some point the wealthy can be taxed so much that investments stagnate and the economy stalls, but it’s also true cutting taxes on the wealthy didn’t work in the US when Laffer presented his curve (on a napkin over dinner in an expensive New York steakhouse with fellow affluent diners) and the Reagan administration invented “trickle down economics” based upon it, and even more true that some of the most vibrant economies in the world have very high marginal tax rates.
It’s also misleading to cite a decline in FDI as an indication that Costa Rica’s economy is declining.
I think if you checked out the numbers, you would find that FDI skyrocketed after the opening of the telecommunations market and huge multinationals like Claro invested heavily in the hopes of grabbing market share. Most of that investment was start-up money, and now that companies like Claro have gained market share, they are sensibly not investing as much.
You might also want to ask yourself whether FDI is always a sign of a healthy economy. Companies like Claro don’t after all plan to keep their profits in Costa Rica, but rather plan to take them home with them. Temporary spikes in FDI may be a bad sign, not a good one.
I do think you are correct that a tax system ought to be “simple, efficient, and neutral”–and that Costa Rica’s is none of these things.
I also agree with your implied criticism of the legislature for being too beholden to special interests and engaging in too much short-term thinking. To my mind, the legislature is the branch of the government in the most constant disarray, the branch that is most likely to sink the fiscal ship, and therefore the branch in most dire need of reform.
However, because I do, your concluding criticism of Solís and his supporters for spouting “slogans against poverty and inequality” strikes me as gratuitous. Actually, I don’t hear many of these slogans coming from Solís (I heard more of them from Chinchilla), but even if he spouts a few, I’m not following how he is at fault.
The fault I think lies in the legislature, not only structurally but today in the form of the pact made between your party and a few others with the PLN. The PLN’s interest is purely political–it wants to win back its losses in 2018–and because of this political interest it actually doesn’t want effective fiscal reform. Its objective is simply to destroy the PAC, and to achieve this objective, it will do everything in its power to prevent Costa Rica’s economy from improving, lest the PAC receive credit.
I think when you get to some of the details, you have some sensible ideas, but your overall ideological framework is dubious and I think you miss the political mark by faulting Solís.
I whole-heartedly support Miss Palma’s views, which are also echoed in my blog of October 20, 2014, entitled, “An Open Letter To The President Of The Republic Of Costa Rica, Guillermo Solis” (in the blog archives on this site).