Higher value-added tax based on two propositions

The government got the blessing of a visiting International Monetary Fund visitor Monday for its plan for a value-added tax.

In fact, the visitor, Lorenzo Figliuoli, suggested that Costa Rica establish an eventual 15 percent value-added tax to replace the current 13 percent sales tax.

The proposal hinges on the willingness of the public to pay the higher rate and the discipline of government officials to use the new income to reduce the national deficit. Both propositions are uncertain.

A number of government agencies are trying to restore cuts made in the 2015 national budget by a legislative committee. The cuts were modest. But ministries like Salud are protesting and warn of serious deficiencies. The health ministry sought nearly a 10 percent increase in its budget this year.

The Comisión de Asuntos Hacendarios made cuts of about 4 percent, but they must be approved by the full legislature.

The government sees as one advantage of a value-added tax that manufacturers and merchants will be more likely to report the tax because they will be able to recover what they paid to the entity earlier in the supply chain. The value-added tax is collected at every level of production and marketing.

However, if there is no entity collecting tax earlier in the supply chain, as would be the case with lawyers, physicians and accountants, there would be no incentive. In fact, the collection of the current sales tax is so irregular because many vendors just ignore it. Tax inspectors seem challenged to root out the scofflaws.

Another concern with higher taxes is smuggling.

There are continual arrests for smuggling alcohol, cigarettes and even oranges from Panamá and other goods from Nicaragua. An additional 2 percent added to the taxes is certain to increase smuggling, based on traditional economic rules.

The visitor, Figliuoli, suggested a two-step implementation of the tax in a press conference Monday.

Certainly the government will have to study what this might do to international competitivity and also to the tourism industry.

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