A sure election bet: There will be more and new taxes

Whoever is elected this year will have two choices. He can aggressively tackle the soaring national budget deficit, or he can do what other presidents have done: little or nothing and borrow more to pay bills.

A president with vision and the political will needs to raise about $5.8 billion in new revenue to balance the budget. That would mean new taxes, assessments or some other money-raising scheme to extract an average of about $1,320 more from every Costa Rican man, woman or child.

An analysis of the news

Costa Rica officials like to talk about budget expenses in terms of percentage of gross domestic product. That is because in the past the colon changed value every day. Now that the colon is more stable, percentages still are more acceptable politically than raw numbers.

Finance ministry workers also like to use percentages. They report that the 2014 national deficit is about 42.7 percent of the budget.

To say the deficit this year is $5.7 billion cause jaws to drop.

Edgar Ayales, the finance minister, outlined a plan Wednesday to eliminate the annual deficit in five to six years. He also spoke in percentages because proposing to raise $5.7 billion more in revenue each year is not very political.

To his credit Ayales spoke of a smooth transition and a reduction of expenses at the same time. To do what he proposes requires extensive change in the country’s financial laws as well as what the minister called discipline.

There is no way to reach this goal without creating new or collecting increased taxes that average to more than $1,000 per person a year. And even that does not pay off a single dollar of accrued debt.

Expats can be pretty sure that the new  administration at least will propose a value-added tax. Such taxes that are levied at every step in the production process generates more income than a straight sales tax, in part because merchants have a greater incentive to report the sale so they can be reimbursed for the taxes they have paid. So this cuts down on evasion.

Expats also can be pretty sure that the value-added tax will be higher than the current 13 percent sales tax, and it will apply to many more transactions, such as services. And they can be sure that it affects disproportionally those who have money.

Such a tax might be the first step because it is easier to sell to the public. President Laura Chinchilla failed in an effort to pass news taxes because the legislative package was too complex and wide ranging.

Depending on who is elected, the current legislature might be asked to approve new taxes before its term expires May 1.

An A.M. Costa Rica news story Thursday understated the amount of the national deficit due to a computational error. It also said that the deficit was more than 40 percent of the national budget. The Ministerio de Hacienda gives the figures as 42.7 percent.

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