Costa Rica Tackles Chronic Fiscal Problems

by Mike Godfrey, Tax-News.com, New York

05 August 2002

Just a month ago, Costa Rica's National University Institute for Social Population Studies found in a poll that a shocking 78% of respondents said they try every day to find new ways of dodging their tax obligations; and more than 50% of taxpayers admit to hiding some of their taxable income from the government.

Most respondents thought that the government could do a better job of spending the money it did collect; and 92% thought that, rather than increase taxes, the government should improve collection techniques.

By the end of the current fiscal year, the nation’s public debt is expected to exceed $750 million or 4.7 percent of GDP, and unless the government can figure out a way to both reduce its expenses and generate more tax revenue, the already substantial deficit will continue to grow.

Still, the poll also found that most citizens believed that new President Abel Pacheco would be able to improve matters, and now Finance Minister Jorge Wálter Bolaños has handed the Legislative Assembly an Emergency Fiscal Plan that in his words "will provide the necessary oxygen to be able to finish this year with some help in reducing the fiscal deficit."

President Pacheco and the Finance Ministry were initially optimistic that the Legislative Assembly would approve the emergency plan within a month, but on Tuesday members of the opposition National Liberation party, who control 16 of the 57 congressional seats, joined the ranks of a growing opposition to the reforms.

The emergency plan, which came just a week after the President said he meant to see the fiscal deficit reduced to zero by the end of his term in 2006, rolls out a series of revenue-generating measures that Bolaños says will go a long way towards relieving the deficit: "This contingency plan, along with another plan to restructure the debt that is currently being considered in Congressional sessions, can give us . . . . close to 40 percent of the central government’s deficit," the Minister said.

The emergency plan would extend Costa Rica’s 13 percent sales tax to services provided by professionals such as doctors, lawyers and accountants, impose an average $200 per year tax on all registered corporations, and take 10% of the net profits of the country's quasi-autonomous institutions, such as the Costa Rican Electricity Institute and National Insurance Institute.

The Libertarian and Citizen Action parties, with 20 seats in the Assembly, say that reforms should include not only new tax requirements, but also measures to ensure both reductions in public spending and improved tax collection. The government replies that it is preparing a set of 'Permanent Reform' proposals which will create a national tax collection institution, eliminate and reform a number of taxes, and reform government pension laws.

The government, Bolaños promised, will also do all it can to reduce public spending: "In this country there are no sacred cows," he said. "We’re going to clamp down on public spending in all of its facets, as much in budgeted spending as in corrupt spending, inefficient spending, (and) duplicated spending."

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