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One copy of Costa Rica's new tax law.

As a newcomer I’m having some trouble distinguishing between the political parties here in Costa Rica. Although there are many more of them than there are in the States, there are just two that matter. Just like in the States the difference between the two is obvious only to party members. To an outsider, like this writer, there is practically no difference. The primary mission of both parties is to take wealth from the productive economy and use the money to buy political support.

The Costa Rican government runs like most modern democracies, it spends more money than it takes in. It borrows the difference. It then swindles lenders and locals alike by printing truckloads of the local monetary tokens, called Colones (rhymes with baloneys when spoken by gringos). The government then repays lenders and buys votes with the rapidly depreciating paper tokens.

After years of spending more than they take in, printing more money won’t keep up.  Both leading political parties agree it’s time for a massive tax increase. The 57 member legislature is squabbling over the final details of a law that they gleefully project will net the political class an extra $500 million a year, about 12% of annual spending. Supporting politicians speak of the urgent need for the $500 mill as though each supporting voter will receive the full amount in cash the moment the law passes.

That figure is small potatoes by the standards of the Empire of IOU’s, but this is a small country. The population is roughly that of South Carolina. They live in an area about the size of Vermont. Total annual spending by the Costa Rican central government would fund the U.S. Defense Department for less than three days. Luckily for the Costa Ricans, their government doesn’t spend anything on defense. They have no military.

That is not to say the Costa Rican government doesn’t squander tax money, however. They simply don’t squander it on bombs and bullets. The Costa Ricans have a peaceful army of paper pushers. From what I can see that army’s main job is to keep people waiting in long lines to pay small sums and have pieces of paper officially stamped.

The new tax law promises to increase the size of that army substantially. To the political organizations involved, of course, this is a good thing. It will mean more supporters beholden to the party for their jobs, even as it drains the life out of the economy. The new law will change the current 13% sales tax on retail sales to a smaller, less visible Value Added Tax that will be levied at every level of the economy.

That scheme dragoons every business in the country into the tax collection game instead of just retailers. It also creates more complex bookkeeping requirements. Tax will be due only on the value added above the costs of production. The producer will then simply include the new tax in his final selling price.

Because price increases that don’t yield more profit make products less competitive, there will be a powerful incentive to under report added value. A value added tax scheme will provide a rich manure to fertilize broad fields of creative accounting while requiring a much larger enforcement effort.

The Costa Ricans have also consulted American’s favorite bureaucracy, the IRS, for advice on taxing citizens and resident foreigners who earn money outside Costa Rica. (They already tax money earned inside the country.) Without ever considering why Americans might find Costa Rica attractive, the legislature thinks taxing worldwide income is a swell idea. Like lawmakers everywhere they predict their take based on what is called “static analysis.” Static analysis assumes that no one will change the way they do business because of the new tax.

The failed U.S. tax on luxury items like yachts and expensive cars in the 90’s is a good example. Congress slapped a 10% excise on luxury goods. Congress expected to collect many millions in new revenue from rich guys buying yachts and Porches. Instead many fewer luxury cars and yachts were sold. Several U.S. yacht makers went out of business throwing taxpaying, middle-class wage earners out of work. When you figure in the lost payroll taxes, the new tax was a dead loss.

Costa Rican legislators are probably no more venal and corrupt than legislators elsewhere. Costa Rican bureaucrats are probably no more incompetent than other bureaucrats. But in a country where maintenance consists of replacing bridges years after they collapse into the river, a complex new scheme for collecting taxes is not likely to extract any greater wealth from the economy than the current leaky system does.

I have a suggestion that I believe may keep Costa Rica and other democracies from plunging into a morass of new tax rules for no good reason. Before passing the law, simply require the legislators, taking turns, to read the new tax law aloud into the record during regular legislative sessions. That should take several years. They will probably give up or have to seek re-election before any damage is done.