San José, Costa Rica, since 1956

Tax Plan Causes Quibbles

What began as a disagreement over the proposed tax plan this week turned into a war of words between President Abel Pacheco and the Legislative Assembly’s most outspoken deputy.

During his weekly television and radio address on Sunday, the President accused Libertarian deputy Federico Malavassi of stalling the legislative commission charged with studying the government’s Permanent Fiscal Reform Package and “playing politics with an issue of vital importance to the country.”

“Only deputy Federico Malavassi of the Libertarian Movement was opposed to the agreement and barred the reforms from being approved before Dec. 31 of last year,” Pacheco said. “… Once again, the Libertarian Movement, through deputy Malavassi, is trying to impede the functioning of the commission studying the fiscal solution.”

Malavassi, a member of the commission, this week challenged the President to a televised debate on the potential effects of the government’s proposed tax

PACHECO, however, declined to debate and refused to retract his statements.

“My obligation as President is to tell the people the truth. I’ve done that already,” Pacheco said during Tuesday’s weekly cabinet meeting.

“Debating is ridiculous,” Pacheco told reporters. “He [Malavassi] has already spoken and expressed his point of view. If he wants to sue me, he can go ahead. It’s a free country. I’m pleased we can have this discussion; it’s a sign of democracy. We are both passionate individuals who defend our ideals.”

The Libertarians have suggested a referendum to let Ticos decide how they should be taxed.

FRUSTRATED by the slow pace at which the tax plan is moving through the Legislative Assembly, the Executive Branch last week retaliated by slashing an important part of the 2004 budget, affecting the country’s infrastructure, environment and social welfare programs, among others.

And while the special legislative commission rushes to finish studying and modifying the tax plan before next Thursday’s deadline, a recent poll suggests four in five Costa Ricans oppose any additional taxes.

Different groups that participated last year in drafting the original tax plan expressed concern this week over recently proposed changes to the plan.

IN December, after 15 months of debate, a mixed commission that included representatives from every legislative faction, business chambers and other groups unveiled what was believed to be the final version of the tax plan (TT, Dec. 5, 2003). The government adopted the plan and submitted it to the Legislative Assembly as a bill.

Despite several attempts by Malavassi to block the bill, a nine-member legislative commission was created Feb. 5 to study the tax plan. The commission, which includes Malavassi, was given until Feb. 26 to make last-minute changes (TT, Feb. 13).

With the tax package, the government hopes to increase revenues by an amount equal to 2.56% of the country’s gross domestic product (GDP), thus reducing the government’s fiscal deficit.

This, in turn, would make it possible for the government to reduce the percentage of the government’s budget that is financed through the sale of foreign-debt bonds.

THIS year, 24.7% of the government’s budget will be spent on interest payments on existing foreign-debt bonds. To make matters worse, nearly 50% of the 2004 budget is being financed through new foreign-debt bonds that will result in even higher interest payments in the future (TT, Jan. 23).

Ongoing tension between the Pacheco administration and the Libertarians began escalating last week, when Finance Minister Alberto Dent stormed out of a meeting with the legislative commission reviewing the fiscal reform package. Dent said he lost his patience after Malavassi issued his eighth motion of the day questioning the tax plan.

After leaving the Feb. 11 meeting, Dent accused Malavassi of “deceiving” the Costa Rican people by “purposely and with a grin on his face” stalling the tax plan.

“Deputy Malavassi is applying the same tactics he has been applying over the last 18 months by attempting to impede the detailed study of the bill,” Dent said.

“It saddens me to see how Malavassi, with a mocking smile, has blocked the bill’s discussion, putting at risk the country’s stability as if it were all a game,” he continued.

AFTER returning to his office, Dent fulfilled threats made earlier in the month to make emergency cuts to this year’s budget if legislators didn’t move forward with the tax plan.

The cuts – referred to as “Plan B” –slashed ¢72 billion ($171.4 million, roughly 1% of the country’s GDP) from the budgets of 15 different government ministries and several social programs.

The institution hardest hit by the cuts will be the Public Works and Transport Ministry (MOPT), which will be deprived of ¢24.3 billion ($57.9 million) – about 31% of its annual budget.

The Labor Ministry, which would play an increasingly important role if the U.S.- Central America Free-Trade Agreement (CAFTA) is approved by legislators, stands to lose ¢13.6 billion ($32.4 million) – 24% of its budget.

Large cuts would also be made to the Culture, Planning and Environment ministries, as well as to programs that supply housing bonds to poor families and foster community development.

WHILE the directors and beneficiaries of many of the programs that would be affected blasted the cuts, Dent expressed no regret about slashing the budget.

“My responsibility is to maintain the country’s economic stability, and I am willing to do that at any cost,” Dent said.

On Wednesday, the Libertarians applauded the budget cuts, calling them “proof that it’s possible to reduce public spending.”

In a statement, they said the fiscal deficit should be combated through spending cuts instead of additional taxes –although they did question the government’s choice of budget cuts.

“THE government has two choices,” the party argued. “It can choose to limit the resources for education, health care and security. Or it can dedicate itself to eliminating pork barrel spending on trips, representation expenses, luxury trips and consulting, among other things.

By making this choice, the Executive Branch will show Costa Ricans who comes first – the population or privileged bureaucrats.”

The Libertarians also offered, “free of charge,” to help Dent cut ¢600 billion ($1.43 billion) in unnecessary spending from the 2004 budget.

Dent said the spending cuts will be revoked if the deputies approve the tax plan before the government’s April 30 deadline.

BUSINESS chambers this week blasted Malavassi for obstructing the tax plan. They also expressed outrage over many of the changes the new commission is proposing.

“The commission threw the plan that everyone had agreed to out the window,” said Samuel Yankelewitz, president of the Union of Private-Sector Chambers and Associations (UCCAEP). “What we did in 18 months, the commission aims to do over in 18 days. This is disheartening. This frustrates all the sectors that took part in the discussion. It leaves us with a bitter taste in our mouth.”

According to a poll released Feb. 13 by CID-Gallup and the daily La República, 83% of Costa Ricans, regardless of their income or education, said they were against any tax increase.

Two-thirds (66%) of those polled said the government would misuse the additional funds the tax plan would generate. The poll’s margin of error was not disclosed.

WHEN asked about the potential effects of the tax plan, 44% of business leaders who participated in UCCAEP’s quarterly business-confidence survey last month (see separate story) said the tax plan would be detrimental for their companies, only 16% said it would be beneficial, and the rest thought it would have no effect.


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