Expert: new tax law ratifies inequalities

Julio Francisco Báez explains why the Sandinista government’s new Tax Concertation Law was a wasted opportunity to fix structural inequalities in Nicaragua, and why he thinks its implementation next month will be a ‘disaster’

Nicaragua missed a golden opportunity to address structural inequalities under a government that’s having a hard time living up to its socialist billing, according to tax expert Julio Francisco Báez.

The so-called “Tax Concertation Law,” passed by Sandinista lawmakers on Nov. 30, reaffirms Nicaragua’s position as one of the most regressive and unbalanced tax systems in Latin America, Báez said.  

“Nicaragua lost a great opportunity with this law; this isn’t Robin Hood, this is Hood Robin—it’s backwards,” Báez says, referring to Nicaragua’s corporate welfare state that gives massive exonerations to wealthy investors while saddling the poor with a regressive 15% value-added tax (IVA).

What Nicaragua needs is a serious balancing of its tax code, but what it got instead is a feeble reform that does nothing to address systemic inequalities and fails to significantly increase revenue for the poorest government in Central America, Báez laments.

“This law will increase the government’s tax collection by only .02% of the gross domestic product—one fifth of 1%. All this mambo just for that! It’s a joke!” the demonstrative tax expert told The Nicaragua Dispatch in a recent interview. In comparison, Báez says, President Daniel Ortega’s “little tax reform” in 2009 increased tax revenue by .8% — still underperforming by international standards, but four-times more significant than the allegedly comprehensive tax reform passed two weeks ago.

Who is cheering the law? And why are they so happy?

Báez, who is coauthor of the definitive and officially sanctioned tome “Everything about Taxes in Nicaragua,” which is now in its eighth edition, says if anyone has any doubts about whose interests are represented in the new Tax Concertation Law, they only need to look at who is cheering its approval.

In the past two weeks, leaders of the Superior Council of Private Enterprise (COSEP) have been the most vocal boosters of the new law. But that’s probably because they helped write it, and are the only ones who have actually seen what it says, the tax lawyer posits.

Socialist is what socialist does, says Báez (photo/ Tim Rogers)

Báez says Nicaragua’s fiscal reform is the only example he knows of in Latin America where the government and big business sat down together and wrote tax legislation while sharing the same pen. Not even the previous “neoliberal” administrations of Arnoldo Alemán and Enrique Bolaños—both of which passed their own tax laws—gave COSEP the authority to coauthor legislation, Báez notes.

“This is not very becoming of a government that says it’s socialist,” Báez says.

Behind closed doors, the tax expert says, the interests of Nicaragua’s government elites and business elites are not divergent, and the new tax law is proof of their similar agenda.

 “Nicaragua is the most unequal country in Central America and Latin America. And that inequality, which is part of the fiscal system, wasn’t touched in these reforms,” Báez says. “This reform is more of the same; there is no substantial change.”

Virtually all of the progressive elements of Ortega’s original tax reform bill presented in 2009—a comprehensive reform that was quickly put on ice after it spooked the horses at COSEP—were removed from the final version approved by Sandinista lawmakers on Nov. 30, Báez says. 

Opposition lawmakers voted against the tax law, calling it “neoliberal.” Independent economists questioned the secrecy with which a so-called consensus law was negotiated behind closed doors with big business. Analyst Adolfo Acevedo says the new law not only protects all existing tax exonerations for the rich, but reduces their tax burden further by halving dividend taxes from 10% to 5%.

The Sandinistas claim the reform will expand the tax base, reduce evasion, stimulate economic growth and net an additional $416 million in revenue for the government. Báez, however, says the law that passed is essentially the unrecognizable skeletal remains of Ortega’s original proposal for fiscal reform, which included some progressive elements that ended up on COSEP’s cutting room floor. 

“COSEP castrated the original government plan and passed their version,” Báez says. Then the Sandinista union bosses gave their characteristic fist-pumping imprimatur without further fuss or analysis and the government’s great “consensus law” was passed without any additional input, explanation or debate.

Báez says the dearth of any substantially progressive elements in the tax reform left the Sandinistas in the awkward position of trying to call what they had done a victory for the people. But in defending their reform, Sandinista congressman Walmaro Gutierrez apparently was hard-pressed to find any examples of progressive change in the new law, Báez claims.

Instead, the official lawmaker told reporters that consumers of kiwis and imported meats—luxury items for poor consumers—will now pay taxes on those items. What he didn’t say is that consumers have been paying taxes on those items for the past decade, since the Law of Fiscal Equality passed during the administration of President Enrique Bolaños in 2003.

“This is disinformation, telling people consumers will now pay taxes that they’ve already been paying,” Báez says. “Because the law made no steps towards fiscal justice, they are talking about old stuff and trying to sell it to the public as if it were new. It’s pathetic and offensive to the country.”  

 Nicaragua’s corporate welfare state

Nicaragua, according to Báez, spends $500 million a year on corporate tax exonerations—more per capita than any other country in Latin America. It’s not a coincidence that Nicaragua also has the smallest budget in the region.

But instead of looking for new ways to improve the government’s standing by collecting tax revenue from those who can afford to pay, the Ortega tax reform maintained all exonerations—a total of 70 laws and decrees—and even added a few more for good measure.

The application of the law next month is going to be a ‘disaster’, Báez says (photo/ Tim Rogers)

As a result, Báez says, exonerations have become “a cancer in Nicaragua’s tax code,” and lawmakers missed a chance to remove some of those malignant cells in the new fiscal reform

“What is Nicaragua doing? Are we in a business to lose money? Báez demands.

At the very least, he says, Nicaragua needs to start a serious evaluation of all its exonerations and do some cost-benefit analysis of what the country is getting in exchange for pardoning the rich through exonerations. In many cases, Báez argues, the government is losing in the deal. Still, Nicaraguan lawmakers don’t appear interested in producing a balance sheet on exonerations. Instead, the National Assembly continues to dole out more. This year congress passed new laws to give generous exonerations to the Tumarín hydroelectric project, the Supreme Dream of Bolivar Oil Refinery and the inter-oceanic canal project.

In some cases, Báez notes, Nicaragua is just pardoning taxes here that U.S. corporations then have to pay in the United States due to global reporting.

“This is a stupid stimulus because Nicaragua is waiving taxes for U.S. citizens who will just have to pay them in their own country. Nicaragua is subsidizing the U.S. government,” Báez asserts.

All the exonerations make Nicaragua a “stupid partner” in business, Báez said. “We are spending money and still losing.”

Ready or not, here it comes

Curiously enough, Báez’s most serious criticism of the new tax law is not related to its content or omissions, rather its application.  

Though the tax reform was passed Nov. 30 and hasn’t yet been printed or disseminated, it will become the law of the land in exactly two weeks.

The final article of the law reads: “This law will enter into force on January 1, 2013, regardless of whether it gets printed before then in the official daily La Gaceta.”

Báez says the rush to pass the unknown reform into law is not only addlebrained politics (how are government tax agents supposed to enforce a law they’ve never seen?), but it’s also a throwback to medieval times when the king would nail a new tax decree to the castle door and everyone would have to coming running to see what it said (only this time, the “king” might not even get around to nailing the law to the door in time).

Adding confusion to chaos, the new tax law also changes Nicaragua’s fiscal year to begin on January 1, halfway through the current fiscal calendar.

“They are changing the rules of the game at the end of the game by changing the fiscal calendar and passing an unknown law that they are now going to try to apply retroactively, all of which is unconstitutional,” Báez summarized. “This is going to be a disaster.”

  • Chavalo808

    wow. pretty ridiculous…especially starting a “new” fiscal year on jan 1.

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    • Nicaragua Progressiva

      Correct they do not know, but about 50% do not understand the true realities of making money: The realities are more money to the people who produce it, it means more money they have to spend and by doing so this spending produces a multiplier effect that even will benefit you even if you do not agree. The statement and opinions made in this article are as silly as seeing a clown drunk at a children’s party. Meaning out of place and out of his mind! Nicaragua needs a free enterprise, needs some taxes for sure, but needs most of the profits to go the the entrepreneur, if you change this you will see the investors GO AWAY and then who will create employment and wealth in the market? You? Please lets help our Nicaragua become the best country in the world but thinking pro-actively and educating ourselves as where money comes from? Do you know where money comes from? If I would tell you this secret you will be rich… I am NOT telling…. but I tell you this much: it does not come from computers or building or great thinkers… or government…. guess this and you will be well off too! or well to do if you know what I am mean. Less taxes is better! Make no mistake of this…

  • valter Karlsen

    Groupo ladrones y delincuentes nicaraguenses strikes again.Why aren’t these people flogged publicly?

    • Nicaragua Progressiva

      Incorrect! I can understand your feelings, but the Nicaragua needs exactly this in order to promote investors’ confidence and big business which produce larger employment opportunities. Best economies in the world today are those who charge less tax. This gentleman’s opinion the author fails to describes the benefits vs the negatives. Nicaragua with a positive tax reform for the investors is what it needs the most. The Government will never get you off poverty, the Investment Community will! Ortega is doing a fine Job with this… Well done! Ortega, is getting smarter by the day so appears… Never mind this Socialist BS, where does it leave you? with NO employment growth, no stimulation of the economies. Less Taxes is better, simple as that.

  • Ineficient

    If Baez is arguing for higher taxes, as a small business owner, i can tell you that if the government taxes me more, i wont be able to pay my workers and id have to fire a couple of them. That, or raise my prices again (which my customers dont want). We are the second poorest country inthe Americas, we cannot simply take away all the money from the little wealth that we are creating. And do what? Give it to the theives in the government???? So they can send kids to watch a soccer game? no thanks, i help Nicaragua more when i invest my own money.

  • Nicaragua Progressiva

    Nicaragua needs this exact tax law to Promote the entrepreneur, the risk taker, the business owner, the investor continue working hard and intelligently to grow Nicaragua’s poor economy. While I do not share all of Ortega’s political ideology, he is doing a GREAT job making sure we have a fully commercialize market. Look at the GREAT countries in the world Today: Singapore, Hong Kong (for example) Less taxes means more for the local economy, it promotes spending, it promotes investment. In this case, Less taxes is better. The benefits out-weight the negatives.