Value-added tax has many problems

Dear A.M. Costa Rica:

As another correspondent has noted, value added tax, VAT, applies equally to the poor and rich on each item they buy. As the rich spend more, they pay more tax, which in Costa Rica, means that those who are rich and evade tax might pay for the first time.

VAT does raise more revenue, but in Europe, where the rates have been sneaked up each year to around 20 percent in many countries, there have been other problems:

1. As a tax on purchases, every increase adds to inflation and acts as a brake on economic growth.

2. It is easily evaded by those providing and using services who can accept cash without receipts, for example plumbers, electricians, gardeners, doctors, dentists, etc. The service providers do have to pay on their own spending on manufactured products which are easier to track.

3. Smuggling increases from countries with no such taxes.

4. There are many opportunities for fraud. In the UK individual fraudsters are under prosecution or in the the courts for frauds of well over $200 million each. False documentation is usually involved, which is easily obtained here.

In a country such as Costa Rica where tax evasion seems to be considered normal,  there are many accusations of corruption in the legislature, administration and judicial systems, the scope for such fraud could be both proportionally higher than in Europe and enormous.

Perhaps the president’s focus should be more on restricting spending, enforcing existing taxes and vigorous anti-corruption measures. Given the embedded vested interests in stopping such measures, he needs all the luck he can get. We should not be too hopeful.

Chris Clarke
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