The executive branch has sent a tax proposal to the congress because the government is spending much more than it is taking in as revenue, and excessive borrowing to cover the shortfall is dangerous, for the country’s reputation as a good borrower would be on the line.
The executive’s proposal appears to be madness. Were it to pass as proposed, businesses of all kinds would close, no longer being able to find customers willing to pay the outrageous increase in taxes, resulting in the shrinking of the tax base, resulting in less total revenue. The shortfall problem just got worse. Those businesses that remain open will do a lot of cash and receipt-less business. People have to survive economically, and getting around onerous and/or stupid government rules is one of the first things used as a survival tactic.
The Costa Rican congress — La Asamblea — which, by the way, enjoys the lower respect ratings of all the government institutions, as reflected in the public opinion polls, implying that it is composed primarily of crooks and idiots, and what few truly honest and intelligent members of congress that are found there are completely neutralized by the others. If you think this is an exaggeration, just look at the history of the passing of the traffic law, which going back to the Asamblea for the SECOND time for revamping. Third time is supposed to be a charm for getting something that makes senses.
This tax proposal is a combination of reform and a new big tax. It is a sales tax of 13 percent bumped up to14 percent, and is a value added tax of 14 percent on things not taxed before, like electricity, water, medical services and private education. The tax exemption part is taking a hit as well. From a couple of hundred tax exempted articles in the canasta básica or the basic cost of living items, the number is reduced to 30, in other words, there will a sales tax on these no-longer-exempted products. Real estate brokers will have a tough time making sales with the proposed 3 percent property transfer tax; that’s a $30,000 tax on a million dollar transaction. Real estate development in the country just took a step backwards.
Before we get too worried that more insanity comes out of the congress, we realize that a game is being played, like children in the school yard. One group asks for the preposterous, the crazy, knowing they won’t get it, but they will get something because the children opposing what they want will feel so proud of themselves for saying “no” that they will give the other side something.
Like most governments around the world where budget deficits constitute a major problem, Costa Rica is no exception, but in my view there will be little public sentiment in favor of a tax increase. To give the government more firewood to keep the public fires burning when there is such waste and inefficiency now, is asking a lot from the taxpayer. I predict as a huge opposition to this tax bill, until there are real signs the government is willing to clean up their poorly run administration, and begins to do so.