Friday, December 16, 2011

Progressive tax reform in El Salvador

El Salvador's National Assembly Wednesday passed a progressive income tax system proposed by president Mauricio Funes.  The vote was 66 to 17 in favor of the bill, with all deputies in the National Assembly voting in favor of the bill other than members of the right wing ARENA party.

Under the bill, a Salvadoran making $500 or less per month will pay no income tax.  Those between $500 and $6200 will pay 25%, which is the current rate.   Those who make more than $6200, will pay 30%.  In addition, income taxes on businesses were raised to make sure they were paying taxes into the system.

Prior to these reforms, El Salvador had a particularly regressive tax system.  The chart below, based on a study by the InterAmerican Development Bank, shows that the tax burden on Salvadorans as a function of family income.   The lowest 10% pay the highest amount of their income in various taxes at 30%.   The next lowest 10% of the population pay 17%, while the wealthiest 10% of Salvadorans pay only 11% of their income in taxes:



The tax reform passed Wednesday is designed to change the shape of this graph and reduce the tax burden on the poor while raising it on the rich.   The measure is estimated by the government to bring in an additional $170 million in taxes.

The measure was vigorously opposed by big business in El Salvador, but only the ARENA party deputies voted against the bill.


2 comments:

Wayne said...

Tim, I'm beginning to hear some quiet murmurs that the new tax on businesses, particularly those in the duty free zones, have been operating on such slim margins already, that the new gross receipts taxes are going to cause them to look to relocate elsewhere, resulting in increased unemployment and declines in tax revenues, rather than continuing to try to slug it out here. Indeed, and somewhat cynically, many feel that the new taxes won't go any further than the pockets of many in government. Curious to know what other readers are hearing from the business side.

mtnplover said...

Wayne,

Gross receipts taxes are best since they apply to all businesses equally and they are easy for the government to audit. Plus, businesses never really pay taxes - either their customers pay higher prices to cover the tax or the business owners actually pay the tax by getting less profits, even if the tax money is collected by the business in either case.

What is the new gross receipts tax rate and does it replace a profit based taxed? If so, it was smart move by the government to adopt a fairer and sustainable tax method using gross receipts.