Costa Rican President Warns Failure To Reform Taxes May Hinder Economy
by Mike Godfrey, Tax-News.com, Washington
22 November 2004

Costa Rican President Abel Pacheco has announced that he expects the nation's economy to grow by 4% next year, although he has warned that growth may be hindered if lawmakers fail to approve a long awaited tax reform, and oil prices remain volatile.

In an interview with Reuters, Pacheco predicted that 4% growth in gross domestic product will likely be accompanied by inflation of not more than 10%, although he expressed the hope the latter would remain “in single digits.”

Estimates have suggested that economic growth this year will reach 3.9%, with annualized inflation at the end of September reaching just over 9.5%.

In order to bring fiscal deficits down to more manageable levels, Costa Rica is attempting to put in place a package of tax reforms, although continued disagreement between lawmakers over certain provisions has delayed its implementation by many months.

However, Pacheco told Reuters that the deficit will “be impossible to control unless the rich pay as much tax as they should".

Under the plan’s major proposals, income tax in Costa Rica will cease to be levied on a territorial basis, and the top income tax bracket will be raised from 25% to 30% as part of a general overhaul of income tax thresholds.

Other measures will see the 13% sales tax transformed into a value-added tax, extending the levy to services such as legal fees and medical services in addition to payments for goods, whilst corporate tax will be reduced to 25% from 30%. In addition, tax breaks will be introduced to help small and medium-sized business and hi-tech firms.

Pacheco warned also that oil price volatility posed another danger for the economy.

"Now, if oil shoots up there is not a lot I can say. But we believe oil is going to settle at around $40 (a barrel)," he forecast.

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