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Poverty-Crusader Solís Cannot Give What Has Not Been Created

By: Mariela Palma Cambronero - Dec 9, 2014, 8:04 am

EspañolThe key ingredient necessary for greater tax collection is a growing nation. If you want to generate more revenues, look for ways to foster productive activity, as opposed to squeezing a stagnant economy. Otherwise, at some point, higher rates and burdensome compliance will kill the golden goose and bring in less revenue.

tax-costa-rica-laffer-curve
Art Laffer, a US economist, popularized the economic truism that there is an inevitable trade off between higher tax rates and higher revenues. (Bob Krumm)

Higher taxes compromise employment, disincentivize entrepreneurship, and increase the cost of goods and services, both directly and indirectly. That this would, therefore, undermine the very purpose of tax collection in the medium and long term is only logical.

A tax system ought to be simple, efficient, and neutral, as opposed to a spider’s web of requirements that impede collection. The flat tax, for example, has minimal impact on export development, savings, and investment, when accompanied with a disciplined state of austere spending and institutional order.

On the other hand, the ad hoc approach of the Costa Rican central government has skewed its decision making, lacking technical nous and falling prey to special-interest manipulation. The shortsighted emphasis on immediate concerns has created a climate of uncertainty, and as a consequence, various business undertakings and investments have failed to materialize.

In particular, these fly-by-night attitudes discourage foreign investment in Costa Rica. In just a short while, we shall see striking outcomes in rates of unemployment, competitiveness, and income. Already, according to the Economic Commission for Latin America and the Caribbean (ECLAC), Costa Rica’s foreign investment fell 21 percent in the first half of this year.

This problem takes some unraveling, since to finance the state’s promised internal investments, those in power need an ambitious strategy — relying on taxes, domestic savings, and foreign debt. Those who elected this government and chose this debt-financed course of action, whether they realized it or not, have invited risks for Costa Rica.

Foreign debt, particularly when it is difficult to service, compromises a nation’s sovereignty to the creditors (just ask Argentina), more than foreign investment ever could. This reason alone should temper our tolerance for debt and keep government spending in line with national income.

There is an alternative path: offer a clear, predictable legal framework, free from arbitrary discretion, so as to not suffocate economic growth and social progress. Many of us have learned the virtue of giving, rather than creating; but what has not been created cannot be given.

President Luis Guillermo Solís and his supporters may take great pride in their slogans against poverty and inequality. All evidence, however, indicates they will make us poorer. That is particularly the case for the least advantaged among us, who suffer the most from macroeconomic instability.

Translated and edited by Fergus Hodgson.