Taxes in Guatemala

So how is Guatemala's business community responding to the call by the United States to raise its share of resources to fight organized crime and drug trafficking through increased taxation? (The Economist, Christian Science Monitor, IPS, Washington Post)

The same way they've always responded. Roberto Ardon, Executive Director of the Coordinating Committee of Agriculture, Industry and Finance (CACIF), says that there is no need to create more taxes on business and that

"there are many areas where we can improve (income), for example, smuggling, control and improvement of internal controls of public administration."

As is well-known, Guatemala has one of the lowest tax rates in the world and one of the poorest and most unequal societies in the Western Hemisphere.  Several presidents (with varying degrees of intensity) have tried to carry out some reform to expand the tax base and increase government revenues.  For the most part, each effort has failed.  

Any serious attempt at bringing the criminal violence under control and establishing a sustainable level of economic growth is going to take years of robust investments in health care, education, and job creation programs as well as private sector investment. It doesn't really matter how much the US and intergovernmental organizations are willing to provide this year or next.

As part of the 1996 peace accords, the government agreed to raise its tax revenues as a percentage of GDP (or tax ratio) up to 12% by 2000. Today, the tax ratio remains at approximately ten percent. President Alvaro Colom has pushed reforms that will marginally increase Guatemala's tax rate in hopes of increasing government revenue. In general, the opposition had been calling for Colom to carry out two reforms before they would consider any tax increase.  First, the government needs to implement greater spending cuts than those proposed by the Finance Ministry. Second, Congress and the private sector had called on Colom to go after those who evade taxes before adding any new ones. 

They also argued that when the economy was growing at a good rate any tax increase would stifle growth and undo years of productivity. In the last few years, however, they have taken the opposite approach in argued that the government cannot raise taxes in such a poor economic environment.  Jobs will be lost and the economy will deteriorate further. (They’re like US Republicans.) Now they won’t agree to pay more in taxes until the government puts an end to smuggling. Smuggling!!!

Regardless of any success the administration might have in reducing government spending and limiting tax evasion, the private sector will most likely not accept any meaningful tax reform. For the last decade, they have defeated almost every attempt at an increase even when the international community was more focused on the country. I don’t see how this situation is going to change during the last few months of Colom’s administration.

Will the next president push tax reform? If Sandra Torres wins, she probably will. However, Guatemalan elites were reluctant to add to the government’s revenue the last four years because they thought the money was going to go in to her social programs. General Molina? It’s possible, but I haven’t read anywhere that raising taxes is much of a priority to him.

If history is any guide, I wouldn’t be optimistic about the Guatemalan government raising additional revenue via taxation.