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Production, waste and taxes

Tuesday, December 20, 2011

Two Central American countries took different approaches last week, in deciding how wealth should be produced and shared.

El Salvador passed a law, which will make companies and higher-income people pay more taxes.

Meanwhile, Costa Rica’s top court may for practical purposes have put an end to the plan by the government of Laura Chinchilla to raise revenue in various ways.

Central Americans, who pay low taxes compared to contributors in rich nations, want better public security, education and health services.
In addition, many of the region’s people would like to see greater equality of income and opportunity.

The problem is that much of Central America’s public sector is inefficient, corrupt, or both.

In this case, doing nothing perpetuates the status quo.

On the other hand, taking more money from the private sector would not do much to improve the quality of public services, nor would there be much transfer of wealth from rich to poor.

The fact that El Salvador was able to increase taxes may be an exception – the result of a deal between President Mauricio Funes’ ruling party and a congressional group led by ex president Antonio Saca, whose image needs a boost, amid allegations that he diverted public funds during his administration.

In Costa Rica, on the other hand, many people objected to proposed tax increases, while the state offered no plan to cut expenses, including the high cost of public-sector salaries.

Close to 20% of the Costa Rican workforce consists of state employees, many of whom make twice as much money as their counterparts in the private sector.

In addition, their jobs are permanent, regardless of whether or not they are productive.

By comparison, in Panama and Guatemala, the public sector accounts for only 10% and 4% respectively, of the workforce.

In order for the region to progress, people with money need to contribute more to public welfare.

At the same time, taxpayers in each country need to believe that their contributions do more than provide a welfare system for the public sector.