Costa Rica’s almost impossible challenge

Dear A.M. Costa Rica:

There were two apparently unrelated articles in your recent news columns, which will prove to be related.

Firstly, you reported that President Solis plans to crack down on tax evasion and secondly that he plans to raise employment. Most folk would applaud the idea that, if we must have taxes, then they should be collected fairly from all those who are due to pay them. In Costa Rica, the U.S. and most other countries, the rich often legally evade taxes. Here they also illegally evade them on a grand scale.

The problem is that, in macro economic terms, collecting more taxes acts as a brake on the economy. It slows down economic activity and reduces employment. A good example, that affects many expats, is the drive to collect Caja payments from employers of domestic help. This pushes up the cost of employing help. Some will reduce their hiring, causing a rise in unemployment. I am not arguing that the Caja Costarricense de Seguro Social payments should not be made, merely explaining the consequences.

Also, if more of your money is taxed, then you have less to spend. Spending less puts the people out of work who produce the goods and services that you buy. The newly unemployed will also spend less multiplying the problem.

The other result from an increase in tax collections is that it gives big government an excuse for not cutting back on the bloated bureaucracy, as it now has more funding. This is likely to put much of the pressure from greater tax collection on the productive private sector.

To avoid all this bad news, the government should ensure that planned reductions in bureaucracy and public sector employment coincide with efforts to stimulate private sector employment. In enforcing existing tax laws, it needs to reduce the level of taxation to avoid reducing economic activity and employment. It must be especially careful about taxing labor. High labor taxes have already driven large international employers to up sticks and move to lower-cost countries.

Doing these things have proved near impossible for most governments around the world. In this country, where corruption and tax evasion are widespread, it is a real challenge. Good luck to the president. He needs it.

Chris Clarke,


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