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Proceso 1120
November 3, 2004
ISSN 0259-9864
Editorial: It is better if they pay taxes
Politics: Saca and the business elite
Economy: A fiscal or a legal reform?
It is better if they pay taxes
One of the most frequent arguments used by the important
business companies’ associations to resist the intensified control that the
government is about to exert on them in order to deal with the tax evasion
problem is that this initiative will harm the investments, and that the economy
will be somehow paralyzed. Instead of stimulating the investments, it will drive
them away, and a stagnated economy would put the country’s economic growth in
serious danger. This is an old argument that was used fifteen years ago to
justify that they wanted to be free from the control of the State. Back then
they said that if they had to spend less money on taxes and that if they were
less subjected to the control of the State, they would invest more in the
country and this one would reach the ideal economic growth (6% annually).
Fifteen years later, that economic growth barely touches a 2%, and investments
are not high enough.
At this moment when the procedures are being examined, it could be the time to
analyze this policy of ARENA. It would be necessary to compare the percentage of
revenue that the State has not collected in these years in order to stimulate
the investment of the private sector’s associations when taxes are reduced (and
when there’s a relaxed control) with the total amount of its investments. It can
be said that there is an abysmal difference between both aspects, that is, that
the amount that the private sector has invested in the national economy is very
small if compared with the percentage of revenue that State has not been able to
collect. Capital has been indeed multiplied and accumulated. The capital of
several companies has grown in a considerable manner, but that does not seem to
be a reason to invest in the country, as it was expected. If this hypothesis
were verified, the Saca administration would have to draw the obvious
conclusion: since with fewer taxes and with less controlling mechanisms, the
wealthiest business companies do not invest, if they are taxed in accordance
with the income that they make and to the patrimony that they have, at least
they will pay taxes. It is only fair that they pay taxes since they are not
going to invest in the country and the economy will remain stagnated anyway. By
paying taxes at least they could be able to contribute to finance the public
services.
The most important private business companies do not want the government to
effectively control their operations, as the tax reform presented by the Saca
administration intends to, because it will be more difficult for them to evade
taxes, besides the fact that they pay very little already. A study shows that
more than half of the private business companies pay the amount of taxes that at
the present time they are supposed to pay, that those that pay less taxes are
the sectors of construction, commerce, and transportation. The contribution that
comes from the private business companies through the taxes they pay barely
represents 0.01% of their gross income; not to speak about their debt with the
Social Security System, which involves millions and nobody dares to claim it. It
is scandalous to see that there is just a little more than a thousand
contributors that declare an income tax of no more than four thousand dollars.
The associations of the most important private business companies are not
worried about how the tax measures reduce the rhythm of the economic growth, nor
about how the investment does not satisfy the expectations and that the national
economy remains stagnated, They are only concerned about the threat that those
measures represent for their illegal activities and their privileges.
For that reason, transparency is indispensable in the administration of the tax
reform that has been already approved, just as requested by the gremial of the
most important private business companies, in a reaction that could not hide its
discomfort about four measures that they do not like. This transparency should
also consider the national expense, because this one does not include a detailed
description, and only very few people have access to it. Most people only handle
general information and general amounts. In addition, certain secret documents
such as the one of the Presidential House and the way they make several expenses
should be eliminated with the same principle. Transparency would avoid certain
subsidies that are difficult to explain and would allow the citizenry to have a
better control of the government on a matter that is relevant to all and not
only to the government, or to the private sector. Therefore, it is necessary to
facilitate the social control of the State’s treasury, and in order to do that
it is indispensable to give away the pertinent information. This control is not
an attribution of the association of the most important business companies,
which undertakes an universal representation that it does not have, because it
is the only national sector that counts with the necessary reception when it
comes to reveal their positions on the tax policy.
There is a certain discomfort between the associations that belong to the most
important business companies and the government because the latter did not
accept all of the companies’ demands about making some modifications. There are
very particular reasons for this attitude. Many of its members, at least the
most important ones, in terms of capital, contribute with considerable amounts
to the financing of ARENA. This contribution is so important that the party
handles a list of donors, arranged according to the amount of their
contribution. Those that occupy the first places have a word to say in the most
important decisions; the others are compensated with public positions, according
to their donations. In the private discussions on the tax measures it was
proposed to cut this contribution in order to pay the taxes that the government
demands. Another form to compensate the most generous donors of ARENA is with
the subsidy of the State. In the general budget there are elements destined to
finance their foundations and even their institutions of superior education.
Sometimes, the level of the subsidy is higher than the actual contribution of
the donor. This way, the ARENA administration, with the contributions of the
citizenry, helps to deficiently finance a part of the inadequately called social
responsibilities of the private business companies, by which, in addition, the
latter increase its level of publicity.
Perhaps the vanguards and the leaders of ARENA are different from the ones of
the FMLN, because for ARENA the criterion is the level of contribution that the
donors bring to finance the party’s activities. Transparency would suppress this
kind of privileges and would strengthen the degree of governance, that the
associations of the private sector demand. Therefore, it is better that they pay
their taxes just like any other contributor pays, without privileges of any sort
-and that they finance the activities of their party with their income and their
patrimony. This would be more of an equitable mechanism, not only for those of
us that do not enjoy such privileges, but also for the political parties. For an
acceptable degree of governance it is also better if they pay their taxes,
because governance does not only include the parties, but also the scandalous
differences of the income. In the end, it is better that they pay in order to
get more investments and for the national economic growth.
Saca and the business elite
The tax reform, that all the sectors have complained about
for a long time, started its implementation process just last week. All the
legislative fractions, except the FMLN, approved a first set of reforms, and the
ultimate objective (when mentioning its defenders) is to close the keys of the
fiscal evasion. Nevertheless, this is a subject about which different analyst
seem to have a unanimous opinion. They have indicated that this reform is not
enough to solve the enormous fiscal problems of the country. Many have realized
that to face the social problems and the increasing imbalance of the public
accounts, it will take more than a pompous set of good intentions.
The reform does not contemplate the increase of the taxes, far from doing that
it has not touched the problem of the regressive character of the taxes in
question, a subject that has been touched many times before in relation to the
Salvadoran fiscal system. President Saca and his minister of Hacienda (The
Internal Revenue Service) have been in charge to reveal the details of this
process. They have repeated that they do not intend to increase the fiscal loads
of the businessmen. Even so, several influential businessmen -grouped in the
National Association of the Private Companies (ANEP)- do not appreciate some
decisions of the Executive power. Others dare to compare Saca with a president
who imposes his points of view without consulting his “subjects”. This article
will try to analyze these events. One of the main objectives will be to respond
if Antonio Elías Saca is willing to leave aside the interests of the business
elite, and see the priorities of most Salvadorans.
The complaint of the businessmen
Since Saca announced his intention to implement a tax reform plan he has kept
discussing it with the most important businessmen. After several meetings, they
concluded that the solution to the State’s income problem did not have to do
with an increase of the contribution of the business elite, but with the
reduction of the fiscal evasion level and the extension of the taxation base. In
the words of one of the economic advisers of the campaign of Saca, Eduardo
Zablah Touché, the proposed reform will reduce "the number of cunning people”
and “their dirty tricks will become less important”. In other terms, the present
administration decides to attack those who do not pay their taxes and those that
have increased their profits thanks to corruption.
Despite their initial declarations of support, the ANEP has presented certain
objections to the amendment. Within this amendment, the financial sector has
headed the protests against the government. The mass media summarize this
situation in five the subjects that excessively worry to the unhappy
businessmen. They do not seem to agree with:
a) The possibility to tax the income that comes from the credits that have been
negotiated abroad.
b) The obligation to present account balances and an income tax declaration in
their credit requests.
c) Giving away financial information to the Ministry of Hacienda without the
designation of a special inspector.
d) The idea of paying taxes to the contingency reserves, even when there are
losses, it seems to them that this is a steal.
e) Offering daily information about the credit card operations or debits’ deals
that are made in the country.
In the opinion of Claudio de Rosa, the executive director of the powerful
Salvadoran Banking Association (ABANSA, in Spanish), "these measures go against
the heart of the financial system", because the National Banks would stop being
competitive in Central America. And, in order to survive, they would have to
raise the interest rates. With these measures, "the business that had allowed us
to regionalize our institutions and our aspiration to turn El Salvador into a
financial plaza will disappear, since the international banking system operates
with a mechanism of tax exemption". In the same line, other spokesmen of the
financial sector sustained that the measures will promote "more complicated and
complex controls [ that ] will mean a loss of time for the businessmen".
Some of those in favor to free the businessmen from any kind of control, that is
the main fiscal evaders in the country, recommend "not to set the farm on fire
to kill the ticks". "To raise taxes and mainly to continue collecting them
through on the same group of contributors –according to El Diario de Hoy-, can
negatively affect the profits of the companies, the general levels of
employment, and also reduce the State’s revenue".
In other words, both the bankers and the business elite do not approve of the
measures proposed by the government to neutralize the fiscal evasion. What seems
to be the solution for the preachers of the social rescue labors to finance
several social programs, to face the payment of the pensions, or to simply keep
up with the service of the public debt, for the bankers is just an obstacle that
will ruin their business. Does this mean that the divorce between ARENA and the
business elite is about to begin? Will Saca be able to work without the support
of the ANEP? Is it possible for a government of the right wing to live in a
different dimension and not in the same exact one as the financial system?
Saca against the businessmen?
Despite the complaints, the first set of reforms was approved. Saca clearly
explained his intentions to the rebellious businessmen. "We will probably agree
-the President said- on everything that might not be clear enough, and we will
rewrite some aspects. What we will not agree on, is the fact that we cannot
change what will allows us to collect the funds that the Salvadoran population
is hoping for ". Some describe this governmental logic as a sign of
accessibility and firmness. One of the goals is to be able to negotiate with the
businessmen. But, when it comes to obtain what the government needs to fulfill
some of the promises that have been made to the Salvadorans, Saca says that the
interests of the country occupy the first place. In other words, during the
discussion about the tax reform, Saca had another great opportunity to seem
brilliant. He appears as a good father that demands the same sacrifices from all
of his children. His image of firmness before the recalcitrant businessmen
contributes to enhance his figure as a President with determination.
Nevertheless, these gestures are not enough to speak about a government ready to
face the businessmen. First of all because the reform in question has not truly
analyzed the fiscal problem of El Salvador. The idea of an agreed progressive
tax (in accordance with the income of the citizenry and the businessmen) has not
been discussed, and there is the idea that any tax increase is in itself
detrimental for the country. An extremely neoliberal thesis has prevailed, and
they preach about smaller tax rates for a considerable economic growth.
As a result of all this, in the discussion about the fiscal reform only the
opinion of one sector has been considered. All the concerns of Saca and his
ministers have been revolving around the businessmen. They have explained to the
businessmen that the reform will not substantially alter their profits. The
declarations made by the President on the subject do not leave any room for
doubts. "Thanks to this decision of the Assembly, to approve of these laws, and
thanks to the private business companies, that have been so understanding, is
that we are going to be able to adopt them, when these become laws officially
speaking". In other words, it is necessary to thank the businessmen for being so
magnanimous and for willing to sacrifice themselves.
The political components of the reforms
The fact that Saca has been able to talk the business elite into accepting that
tax evasion will be punished as a crime that can be paid with jail-time, is a
well-known fact and it is necessary to examine it. The fact that the President
has publicly declared, against the interests of the bankers, that he is not
willing to make any concessions in certain subjects connected with the tributary
reform is even more of an admirable deed. In sixteen years at the head of the
Executive power it is the first time that the marriage between business elite
and ARENA seems to display such frictions. However, this is not enough to speak
about a president with an independent criteria, who would be willing to stay
away, if the circumstances required such action, from the support of the private
business companies.
On the contrary, this small confrontation shows the voracity of the Salvadoran
businessmen, no matter how much they try to speak about nationalism and their
alleged identification with the social causes of the country. In fact, they do
not understand any language that might contradict their desire to accumulate
money without scruples, even if this goes against the public State Treasury.
They reject the initiatives aimed to control the fiscal evasion. Therefore,
their leading ideologists continue speaking about the need to increase those
taxes connected with the activities of the traveling salesmen, instead of
closing the gaps in the system that are used by the dishonest businessmen.
The relative firmness shown by Saca and his minister of Hacienda must be
understood in the light of some certainties whereupon the right wing finished
the last presidential elections. That block ended up convincing itself that if
does not neutralize some of its more flagrant abuses against the public State
Treasury and against the Salvadoran consumers, it will be more difficult for it
to keep the control of the State. On the basis of this conviction, Saca becomes
politically stronger. In addition, in the race towards the next elections he
must convince the Salvadorans that he is able to keep his word. The approval of
the tax reform is a merit of the President. From a political point of view, it
has an important meaning, because it seems to have been accomplished in spite of
the disloyal maneuvers of the business elite. This is how the figure of a
president of the right wing can be enhanced, ready to face those that sponsored
his electoral campaign and that control the mysteries of power in the country.
However, for the health of the Salvadoran democracy, this type of confrontations
between the right wing politicians and the group of pressure of the business
elite would have to occur more often. In such case, the country would begin to
standardize itself and the monopoly of a single sector would not occur in the
State’s apparatus. That way, the politicians would stop behaving like exclusive
officials of the most powerful groups, incapable to play their role and
articulate the demands of the different sectors of the national life.
The rebellion of Saca, to call it somehow, nevertheless, is only an action in
the heat of the moment that, in the present conditions, might not become a
permanent institutional attitude. Because, indeed, the political counterpart
that made that reaction possible does not seem able to consolidate itself as an
alternative to the State’s management of the right wing.
A fiscal or a legal reform?
Last week, the Legislative Assembly approved a series of
reforms to the fiscal policy. With them, the State intends to eradicate the
evasion of the Value Added Taxes (IVA, in Spanish) and the evasion of the income
taxes. In order to get ahead, new laws were created and the effective ones were
reviewed in order to strongly sanction all the people and companies that have
pending accounts with the State’s Treasury Department. Those are dedicated to
the contraband of merchandise will also be sanctioned.
The reforms have generated diverse opinions. For the businessmen, its
implementation will slow down the economic activity of the country. The new
legal frame will force many businesses to present their exact accounts to the
State’s Treasury and in that is how they will have to establish their business
and deal with their accounting in a formal manner. This represents for many
companies a very high transaction cost that not all –mainly the micro and the
small companies- of them will be able to bear. In spite of that, an important
amount of businessmen is willing "to run the risk", in order to heal the public
finances. Others think that the reforms exclusively represent a very partial
solution to the fiscal problem of the country, because the mechanisms to collect
more taxes are not enough to face the future needs that the State will have to
face: the payment of the debt and the pensions, as well as a larger amount of
investments in health and education, among other areas.
The congressmen of the FMLN -that did not vote during the meeting in which the
reforms were approved- insist that the transformations are not enough. They
blame the governmental party for not wanting to make more of a complex analysis
regarding the reforms, in order to play it safe for the interests of some
private sectors, specially the banking system.
Most of the businessmen are not willing to accept a restructuring of the tax
rates. For those that think that the State would have to implement a more
complex tax reform, the position of the business companies reveals that this
sector is not willing to pay to a higher Value Added Tax or a higher level of
income tax, without making sure that, previously, all the people that by law
would have to pay for it find themselves actually paying indeed. In that sense,
the efforts that the government is making now would have to be understood
exclusively as the beginning of a greater effort. Now the fiscal pressure will
only rise; but the moment will arrive when the measures that are adopted now
will not be enough to face the enormous amount of needs that the State has.
The fiscal proposal, is it regressive or progressive?
The FMLN wanted to get an early start in the presentation of the fiscal
amendments of the Executive power and handed their own proposal to the
Legislative Assembly; however, the party did not get the necessary support. This
project intends to reorient the public expense for the economic reactivation,
which will help to increase the social expense and the internal demand.
The FMLN considers that to finance the reorientation of the public expense it is
necessary to strengthen the income level of the government through a tax reform
in order to reach at least an average position among the countries of Latin
America in reference to the GNP, which is something close to 16%. This goal will
be achieved, according to the members of the FMLN, through the following
measures: the combat against tax evasion; the establishment of a progressive
fiscal reform able to settle burdens that are directly proportional to the
income level; the extension of the tributary base, and the reduction of the
evasion level.
The goal of the reform proposed by the left wing party is to "reduce the amount
of taxes paid by those who make a smaller income, and progressively raise the
taxes of those who make a considerable income, that is, the wealthy ones". With
this measure, the income tax level paid by the regular people would be
substantially reduced for thousands of contributors.
With the present tax system, all those that make up to $2.154 dollars per year,
are exempt from paying the income tax. Beyond this amount, they begin to pay
their income taxes. In the proposed tax system, all those that make up to
$11,428 dollars per year, will not have to pay the previously mentioned taxes.
The income tax rates will progressively increase for those who make more than
$11,428 dollars per year. For the business owners of the micro, the small and
the medium level companies, a deduction will be established for the same amount
of their income tax.
Before such situation, the economist Carlos Acevedo, one of the coordinators of
the Development Program of the United Nations (PNUD, in Spanish), considers that
technically there are problems in some of the measures proposed by the left wing
party. He indicated, for instance, that "to establish a differentiated income
tax for the banks is to take a sector and to apply a special rate to it, as if
the profits were higher and probably this is somehow true, because the banking
system is profitable, but there are other businesses that are equally of
profitable. That creates disincentives".
As for the IVA, the FMLN proposes a differentiated rate. This would mean that
the larger costs created by the collection of taxes will compensate a possibly
higher revenue. The truth is that the objective of the left wing party is to
create higher taxes for the wealthy, that is why it proposes the application of
the IVA, differentiating high rates for the sumptuous products. Several opinions
of the business sector agree with the idea that a differentiated IVA can produce
negative effects in the national economic scene, since the businessmen, when
observing that such a measure can affect their interests, they simply go
somewhere else, and this action creates a higher level of unemployment. Acevedo
considers that "the principle of creating higher tax rates for the wealthy is
part of a vertical equity, accepted in the tax theory worldwide. The problem is
that it has to be applied in specific political contexts; however, if the
correlation of forces does not allow the FMLN to apply it, it is not prudent to
make such a recommendation".
The intentions of the FMLN are positive, because they are looking for an
equitable goal, but they are not politically viable. In addition, to raise the
collection of taxes by four points of the GNP is not recommendable: this cannot
be achieved drastically, and especially not in the short term.
The position of the private business companies
The reform has caused certain discrepancies between the government and the
private sector. The ANEP says that it is looking forward to the development of
the fiscal reforms approved by the Legislative organ. Raul Melara, the executive
director of the business companies’ gremial, indicated that the position of this
institution has always been willing to collaborate with the combat against the
fiscal evasion, so that the tax base is able to increase: "we hope that the
modifications of the law are accompanied by other measures such as a policy of
transparency for the public administration and a policy of austerity for the
expense".
In this sense, the private sector has adopted the role of an "indirect
inspector" in relation to the State’s decisions, "trying to control the
discretionary behaviors". It is important to ask if what the private business
companies are actually looking for is to protect their own interests and to
influence the decisions of the government. The ANEP presented a document where
it objects thirteen articles of the reform. According to this institution, its
members are not trying to protect a particular sector: "we believe that it is
necessary to create a policy of incentives. We must be conscious that the
revenue will increase if the private investments are increased and if the
economy grows".
The congressman of ARENA, Julio Gamero, supposes that these observations are an
obstacle for the quick approval of the amendments. "This is a barrier for the
fiscal reforms. It is obvious that the ANEP does not agree with some aspects ".
On the other hand, the financial sector also has been unhappy with some of the
measures included in the fiscal reform. The Salvadoran Banking Association (ABANSA,
in Spanish) indicated that certain fiscal reforms are exclusively aimed to the
financial sector. According to the institution, with the approved dispositions,
the banking system would stop being competitive enough in a regional scale, and
would have to focus itself only on the national market. The most crucial reform
for the bankers is the establishment of burdens to the income that comes from
the loans granted by Salvadoran banks located abroad. With such measure, this
system would present certain disadvantages before the credit offers of other
organizations in the area. "We would stop being competitive in the region,
because while the Salvadoran banking system pays 25% in income taxes by
positioning, the banks of each nation wherever there is a competing market would
not have to pay that", said Claudio de Rosa, the executive director of ABANSA.
Although it is certain that there are several measures that worry both the
bankers and the business sector, the government must analyze if these reforms
actually affect the competitiveness of the country in the regional scope.
Otherwise, the position of the State will have to adopt a rigid position in the
application of the fiscal reform.
A peculiar piece of information
A glance at the programming of the regular income that the State waits for in
the next year and the already programmed ones for the present reveal an
important piece of information: in 2005 it is expected to get a higher revenue
through the income taxes than through the IVA (Value Added Tax). This seems to
be an odd idea and it contrasts with the affirmation of the government about
"catching” mainly those that do not pay the IVA.
The current revenue of the State
(in millions of dollars)
2004 2005 Variation
1. Revenue: 1,880.3 2.047.6 167.3
- Income taxes 556.8 640.1 83.3
- Transference of the real estate 13.7 14.3 0.6
- Imports 179.6 209.4 29.8
- IVA 1.059.6 1.093.1 33.5
- Product Consumption 70.0 89.6 19.6
- Diverse sources 0.6 1.1 0.5
2. The revenue that does not 70.5 80.7 10.2
come from taxes
3, Current Transferences 9.2 15.1 5.9
Source: Ministry of Hacienda of El Salvador.
The previous picture could be indicating that the government will focus itself
fundamentally on the persecution of those who do not pay their income taxes.
Whereas the percentage variation of the IVA will increase by 3.16%; more of a
considerable variation will be connected with the income taxes with 14.96%.
However, even though this could happen, it is possible to notice that the
relation between the taxes that are obtained through the IVA (a indirect tax)
and the income taxes (a direct tax) is very different. Consequently, the
taxation structure in the country would continue being basically a regressive
structure.
It is important to implement a range of reforms that are sufficiently coherent
with the economic needs of the Salvadorans and those of the State. This means
that the country has to develop a taxation structure able to generate the
necessary resources, a structure that does not affect the wallets of the poorest
sectors. The option represented by the indirect taxes has the purpose to
stimulate the accumulation of capital process, that is why it is also necessary
to consider that a tax of this nature tends to generate a great level of
inequality and serious social tensions with it.
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