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Volume 16, Number 2
February 10, 2010

economy

Also in this section:
Martinelli's free broadband WiFi access program behind
Cuban eye surgeons leave, government that threw them out complains
Martinelli's tax reforms gradually revealed: flatter, but not so flat
Oregon votes for progressive taxes
A young regional underclass trapped for life
The Panama News download figures
Railroad mirrors canal's woes


Martinelli's tax reforms will shift the burden down the economic scale, cut paperwork, but fall short of a "flat tax"
The sort of "reform" we'd expect from Panama's richest men
by Eric Jackson

It's a propaganda style with which Panamanians have become familiar since Ricardo Martinelli designed the Panama Canal's information policy when he was Minister of Canal Affairs. On the Ministry of Economy and Finance (MEF) website, we are told that "tax reform will benefit the people," and of a MEF "with high levels of transparency." We are assured that "The Ministry of Economy and Finance offers broad disclosure of the tax reform." Entirely missing from the MEF website is a copy of the proposal itself.

The full details will have to wait until the Cabinet Council meets sometime after Carnival. However, the MEF has published a partial summary. Among the changes it advertises:
  • Some 17,000 people who must now pay income taxes (and thus go through the labor and expense of keeping records) will no longer have to do so;

  • More than 92,000 people will get an income tax reduction;

  • 33 different types of documents that used to require tax stamps (timbres) will no longer need these;

  • Business income tax rates will be reduced from 30 to 25 percent;

  • The imputed income tax for high-volume businesses that show no profit (CAIR) will be eliminated;

  • More than 49,500 small and medium-sized businesses will get a tax cut; and

  • People who make more than $50,000 will see their income tax rates cut from 27 to 15 percent.

So, is Panama getting a net tax cut? Not a chance. Only big rich countries en route to financial crises get the luxury of that borrow and spend variety of "conservative" economic policy. In the Third World, international financial institutions and big rich countries insist upon and enforce a more traditional sort of conservative economics, wherein shortfalls in revenues to pay for public services are eliminated by tax and fee increases, spending cuts, the sale of public assets or combinations of these. It doesn't appear that President Martinelli, Vice President Varela and Minister of Economy and Finance Vallarino, three of Panama's wealthiest men, have too many problems with that.

Actually, the tax reform will be a net tax hike to the Panamanian people, with a figure for only part of the reform set by the MEF at a minimum of $100 million.

The principal increase will be in the ITBM sales and services tax, which the Martinelli administration seeks to raise from five to seven percent. It is expected that the sales and service tax will be extended to certain services and items to which it is not presently applied.

So to what extent is that a tax shift to the poor? Considering that ITBM doesn't apply to food bought in stores (although it does in restaurants), medicines or medical services, school tuition and supplies, agricultural supplies, housing, water and electricity bills, it might be said that it becomes a consumption tax on discretionary spending. Plans to increase luxury taxes on firearms, aircraft, boats and jewelry would accentuate this.

On the other hand, it's a bit deceptive to tell people that water bills will be exempted from IBTM without mentioning that the state-owned IDAAN water and sewer utility plans to raise water bills and call the increase a sewer bill.

And what about that promise to eliminate the CAIR? Yes, well --- it's to be replaced by a Minimum Estimated Tax (IME) on all businesses that gross $1.5 million or more and don't show a profit on their books. Plus the airlines, which had not been subject to corporate income taxes, now will be and the banks, which had been paying a 14 percent income tax rate, will see the bill hiked to 16 percent.

A lot of business groups and wealthy individuals are disappointed. On the campaign trail last year Martinelli promised them a flat tax and they expected a more substantial cut in their burden. Some are waiting for another shoe to drop with a property tax reform to come.

On his website, libertarian Boquete developer Sam Taliaferro pans the emerging tax reform as a shell game of sorts. "The idea of a flat tax is to make it simple and easy to know what the government take is on all income and it greatly eliminates cronyism and corruption in collections. With all these machinations come confusion and uncertainty which investors just do not like," he wrote.

Panama's Chamber of Commerce, which objected to Martinelli's October 2009 tax hike --- about $300 million in all, largely through elimination of many tax breaks, raising tobacco taxes, and imposing new taxes on the ports and the Colon Free Zone --- has been silent on this tax reform.

The opposition PRD has had little to say about the Martinelli tax reforms. With many of its leaders facing criminal charges or fearing that they soon will, that party has more pressing concerns. But look for members of its legislative caucus to object that it's a break for the rich at the expense of the poor when the matter comes before the National Assemby.

However, the great majority of Panamanians have no direct relationship with the Ministry of Economy and Finance and won't think too much about the tax component when the prices of many things go up. At least, that appears to be the administration's estimate, which would be supported by the experiences of past tax reforms. The MEF website's promise that "those who make more and spend more will pay more" is likely to be taken at face value by those on the lower end of the income scale.

That doesn't prevent part of the labor movement and most of the left from criticizing Martinelli's tax reform plan from the parts of it that they have seen so far. Radical economics professor and former Social Security Fund director Juan Jované, for example, says that the Martinelli economic policies spell "the death of the middle classes" because "its objective is to reduce the taxes on the wealthiest, which means an attempt to transfer the cost of public services to the working and middle classes." Jované warns that the public has not been shown the most onerous parts of the current administration's fiscal policies.

Also in this section:
Martinelli's free broadband WiFi access program behind
Cuban eye surgeons leave, government that threw them out complains
Martinelli's tax reforms gradually revealed: flatter, but not so flat
Oregon votes for progressive taxes
A young regional underclass trapped for life
The Panama News download figures
Railroad mirrors canal's woes


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