Net tax increase

Minister of Economy and Finance Alberto Vallarino (left) and President Ricardo Martinelli (right) sign Law 49 of September 17, 2009 --- a net tax increase, if you care to put it that way. Photo by the Presidencia

Government raises taxes
by Eric Jackson

Yes, President Martinelli is a man of the right, by Latin American or almost any other standards. However, this supermarket baron does not pursue quite the same economic policies identified as "conservative" in the United States of recent decades --- huge deficits, infrastructures crumbling for want of investment in their maintenance, just so long as there are tax cuts for the rich. Here, the operating principles are closer to what a prior generation of US Republicans advocated: conserve what we have, be cautious about spending on new things and averse to spending on stupid things, pay as you go, and so on. That's not to say that the Martinelli administration doesn't have some capital improvement projects that will involve some longer-term debt on its agenda, but it does intend to pay for things like police, public schools and other governmental operating expenses out of the tax revenues it collects.

That is something of a radical idea in Panama, where the economic elites are not used to paying taxes at levels adequate to pay for the public services that this country needs. The tax system that Martinelli inherited was a Swiss cheese that seemed to have more holes than food, a tax code full of all sorts of exemptions and exonerations and special breaks. (Ask the Minister of Economy and Finance --- during the course of the previous administration he made a ton of money selling his BANISTMO to HSBC, after the government passed a special capital gains tax loophole especially designed for the transaction.)

The legislation was quickly passed by the National Assembly after very little debate, and signed by President Martinelli on September 17 --- the same day that the government released its details to the public.

Among the many provisions of the new code, which has some retroactive provisions but which will generally go into effect on January 1, 2010 we find that:

The merchants in the Colon Free Zone will pay taxes on their business activities for the first time since the Pérez Balladares administration;
Casinos will pay substantially higher taxes;
Income tax will become flatter, with fewer exclusions;
Taxes on tobacco products will go up to 40 percent from 32.5 percent (which was less of an increase than anti-smoking advocates wanted);
There will be a 10 percent capital gains tax on real estate sales, with a three percent of sale price withholding provision;
The IBTM sales tax will apply to more services, including many bank loans and insurance policies.

So what's the bottom line? The Martinelli administration says that it expects the new tax regime will bring in an extra $200 million this next year, "to confront the social costs of the 100/70 program" (the $100 per month for people aged 70 or more who have no pension), and "to give members of the National Police a raise." The government also claims that the new system will make tax collection easier than the old one, be more equitable, and provide increased penalties that will reduce tax evasion.

To read Law 49 of September 17, 2009 in its Spanish original, click here.

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