“The Problem Isn’t Lack of Resources; It’s Fiscal Inequity and Legalized Pillage”

This fiscal law expert offers staggering information and figures to help explain what really lies behind two major and prolonged strikes in Nicaragua today.

Julio Francisco Báez Cortés

Several acute social crises are being played out in the country right now. One of the two main ones is the strike of public-sector doctors and other health workers, who have been demanding a fair salary increase for months now. The other is the on-again, off-again strike of Managua’s urban bus cooperatives, which want a government subsidy to cover the rising fuel prices so they can keep the fare at its current level. The government’s excuse for not responding to the first one is that it can’t increase public spending on salaries by “order” of the International Monetary Fund. The response of both the central and Managua governments to the second is that there’s no money in either of their coffers. What truth is there to these claims?

Stop-gap solutions that solve nothing

The Managua bus cooperatives have been calling periodic strikes for years, arguing that the fare hasn’t increased at all while diesel prices have kept on rising. They’re demanding a fare hike if they can’t get a government subsidy that would enable them to keep the fare where it is now. (Even at its current 2.50-córdoba level—under $0.15—the fare is a hardship for low-income bus users, particularly those who have to change buses, since there’s no transfer system.) Their latest strike in February lasted over a week and ended up in a negotiated truce in which the central government, the Managua municipal government and the cooperatives agreed to finance the subsidy through a special 3% tax on the transnational petroleum companies operating in Nicaragua. This sparked immediate controversy, with some arguing that the oil companies make huge profits and should contribute to the people, while others argued that everybody should contribute. At the risk of sounding like I’m defending the oil companies, I think a fiscal policy targeting one sector in the simplistic, mindless way it was laid out—a new earnings tax based on a flat percentage of gross sales, applicable after the actual income tax (IR) has already been paid—is anti-technical and by any reckoning unconstitutional.

Before they agreed on this new tax, Managua’s mayor was arguing that the fare should be subsidized by imposing a new point-of-sale fuel tax; in other words, those who travel in cars should subsidize those who travel by bus. But that’s no solution either, because the owner of a $60,000 Toyota would pay the same tax as the university professor who has a little used car or the guy from some small town who drives his battered old pickup into Managua loaded with fruit to sell in the market. It would be another regressive tax, in which those who have more don’t pay more; but rather those who have less pay infinitely more. In the long haul, it won’t even serve its intended purpose, because the poor pickup truck driver will have to up the price of his fruit to pay the higher fuel cost. The bus fare would be held at 2.50 córdobas, but passengers would pay more for all the basic consumer items they buy. What kind of solution is that? It’s “candy in hell.”

Who’s concern is this?

Let’s take a closer look at this conflict, which will crop up again and again unless we employ our existing legal resources coherently. I’m referring to the slippery way the government tries to sidestep the political costs of facing up to this transport crisis. Every time it blows up again, it’s impressive to hear President Bolaños say, “This is none of my concern,” putting all the responsibility on Managua’s mayor. None of his concern? Article 105 of Nicaragua’s Constitution ranks transportation as a “basic public service,” right alongside energy, water and communications, determining that it is the state’s obligation to “promote, facilitate and regulate the provision of said services” and that access to them is an “inalienable right of the population.”

The General Land Transport Law, passed in 2005 (Law 524, published in La Gaceta no. 72 of April 14, 2005), was based on that very constitutional principle. Its article 40 establishes the Ministry of Transport and Infrastructure (MTI) as the national regulating body and assigns it responsibility for setting the inter-municipal transport fares. While that same law designates the Managua municipal government as responsible for setting the intra-municipal transport fares, that does not override the MTI’s regulatory role. So, it turns out that this is the executive branch’s concern. Claiming otherwise is an absurd mockery of society that gratuitously contributes to the anarchy that always accompanies the bus strikes.

Article 43 of this law also establishes the creation of a National Land Transport Council, to be made up of MTI, the Finance Ministry, civil society and the transport company owners, as well as the Association of Municipalities of Nicaragua (AMUNIC)—which represents all 153 municipalities. I believe in institutions and think we have to trust them to do their job. In this case, according to the law, it is the Council’s responsibility to come up with the proposal for any fare increase.

Article 76 of this same law says that the MTI, as the regulatory entity, determines the norms related to the fare. This means that before any increase, the MTI must evaluate all relevant criteria. What criteria are we talking about? The law provides the answer: it must consider “the type of service, the cost structure, supply and demand, the sliding currency devaluation, the increase in the price of petroleum and its derivatives, the inflation rate, the profit margins…” The rate increase is just the final step in a formally standardized technical process.

Has anyone ever applied this law? No. Worse yet, the National Land Transport Council doesn’t even exist yet, although the law establishing it was passed by the National Assembly and signed into effect by the President nearly a year ago. It’s both funny and pathetic: we in the Institute of Tax Studies consulted 20 legislators and 4 Managua Council members and none of them knew about this law. How do we explain this?

The situation is even more surprising when we consider another law, passed even more recently. It’s the Energy Stability Law, Law 554, published in La Gaceta no. 224 of November 18, 2005. Its article 2 establishes that Nicaragua’s energy regulatory body must review the oil companies to ensure that their sales margins correspond to optimal operational levels, and gives it the right to establish price controls! If the companies’ operations violate the technical logic of healthy financial practice, i.e., if the evaluation finds surpluses derived from inadequate administration, that surplus can be immediately fed into an Energy Crisis Fund, expressly created by article 8 and “earmarked exclusively for the subsidy of public collective land transport and to complement the subsidy required not to affect consumers of 150 kw/hours or less of electrical energy per month.” Article 2 specifies that 50% of those excess profits must be imputed to domestic gas prices and the other 50% earmarked to the Energy Crisis Fund.

This is a national law and warns the oil companies that any speculation could lead to the competent governmental authority sanctioning them and imposing order, having considered oil a lead product of the economy. Since the Economic Commission for Latin America and the Caribbean (ECLAC) has shown that Nicaragua’s oil is sold at the highest prices in all of Central America, the government could legally act to determine if those high prices are the result of speculative margins on the part of the oil companies. If we have the foundation, force and structure of this law, why invent a new tax that doesn’t stand up under analysis? Why not apply this law instead?

Nicaragua holds records
in Latin America for being in the red

To discuss our possibilities, it might be useful to start with where our country is situated today. Nicaragua’s Gross Domestic Product (GDP)—which represents all the wealth produced domestically, including the significant part that maquiilas and other foreign investors repatriate back to their headquarters—is calculated at under US$5.4 billion for 2006. Let’s now look at its most important deficits.

In first place for its Fiscal Deficit. Let’s start with Nicaragua’s fiscal deficit, which is the differential between governmental spending and tax collection. It is calculated that Nicaragua will spend 22.7% of its GDP and collect only 17.6% of its GDP in taxes. That 5.1% differential is so high (over $275 million) that it puts us at the top of the Latin American list of fiscal deficits. We’re deeply in the red.

In first place for its Trade Deficit. Second is our trade deficit—imports over exports. Our exports in 2005 were valued at roughly US$940 million and our imports at US$2.7 billion; in other words we bought three times more abroad than we produced to sell there. So we’re in the red in this aspect as well, and dramatically. Our trade deficit is also the largest in all of Latin America.

In first place for its Domestic Debt. Another feature that keeps us from being “just one more” Latin American country is our domestic debt, which underwent a radical change last year. We’re now the only country in Central America whose domestic debt exceeds its foreign debt and is more onerous for the economy. Admittedly, this happened in part because of the foreign debt relief the country earned through the HIPC initiative, but it also happened because the interest on two bond issues that make up the bulk of the domestic debt has now matured, tripling the interest service on the domestic debt over what remains of the foreign debt. [In 2000 the Central Bank issued short-term, high-interest bonds to cover the obligations of private banks that fraudulently went under that year and in the early nineties had issued longer-term ones to compensate people for property confiscated in the eighties.]

A full three quarters of Nicaragua’s total debt is domestic and is owed to national banks that bought up the two bond issues either directly from the Central Bank or from their original owners. The banks that bought up those bonds made the killing of the century.

We need to look at what the candidates in Nicaragua’s November elections propose for this debt, because it’s a crucial issue. So far, Herty Lewites is the only one who’s said anything, promising to renegotiate it in line with the proposal so emphatically argued by three very professional, solid economists: Néstor Avendaño, Adolfo Acevedo and Sergio Santamaría.

Renegotiating it is an imperative of justice and equity, a project of national, patriotic interest, because under its current conditions the domestic debt is illegal, unjust and immoral. Of course it has to be paid, because we’re honorable as well as poor, but not according to the whims of those who negotiated it. It has to be renegotiated to a 20- or 30-year repayment schedule; anything under 20 years is inadmissible given Nicaragua’s economic situation.

On this same theme, Adolfo Acevedo’s technically and professionally excellent argument in the March 2005 issue of envío is one hundred percent valid. How can the government come up with hundreds of millions of córdobas to pay on an irrational domestic debt while saying we have no money to increase the unjust salaries of the teachers, doctors and nurses?

Nicaragua’s tax burden is borne very unequally

How are we coping with these huge deficits? The donor community is financing two thirds of the fiscal deficit, which helps us turn the red into pink, but this is making us dependent on foreign aid rather than on our own capacities. As for the rest, the government is trying to collect more taxes. We already have the largest tax burden of any Central American country and one of the largest in all of Latin America. Of every 100 córdobas produced in Nicaragua, 17.6 go to taxes. In Guatemala it’s 10.3, in El Salvador 12.6, in Costa Rica 13 and in Honduras 16. Looking at this tax contribution, our economy would appear to be the most buoyant in the region, but it’s not; our GDP is the lowest.

It’s all very contradictory, but the most important aspect for our reflection is that the Nicaraguan population is affected very unequally by all these different deficit balances. If we have the highest tax burden despite being the poorest country, we have to ask is how it is borne. Who pays those 17.6 of every 100 córdobas in taxes? The answer is that Nicaragua’s poor pay approximately 15.6 of them and the non-poor only 2. This, then, is the main reason we can’t provide fair responses to our social problems: Nicaragua’s social inequity is expressed in its fiscal inequity. In fact Nicaragua’s fiscal inequity equals social injustice.

Each month the general tax director offers the same propaganda in the media, announcing that the month’s tax collection targets have been more than met as if it were some kind of real achievement. Listening to him, one can’t help but wonder: if we’re so solvent, why are there no subsidies for public transport, why no salary raises? Could this over-collection be just a programmed underestimation of taxes in the budget rather than the fruit of greater efficiency? Might it even be a statistical figure designed to cover up key data about who’s being hit by those taxes?

Regressive vs. progressive taxes. It’s true that income tax collection is today almost double what it was seven or eight years ago. Previously, the IR (Nicaragua’s income tax) made up 15% of the “collection pie” while 70-80% came from consumer taxes through both the General Value Tax (IVA)—known as IGV before 2003—and the Selective Consumer Tax (ISC). In the current collection pie, 35% comes from the IR, 60% from the two consumer taxes and the remaining 5% from import duties.

The IR tax is fairer than the IVA, because at least theoretically those who earn more pay more, while any consumer tax is unfair because everyone pays the same. But this leaves room for more appearance games. For example, much is made of the fact that the products in the basic basket are IVA-exempt to make them more affordable by the poor, which is presented as “fairer.” But there’s nothing particularly fair about it. The magistrate on a mega-salary gets the same IVA tax break when he buys a tube of toothpaste as the poor unemployed guy does—assuming the latter can even afford it!

The government likes to talk about exceeding the target and about “collection quality” because the collection of IR—the “fairer” tax—is doubling while the collection of consumer taxes—the more “unfair” ones—is shrinking. Nobody objects and everybody feels a bit better. But someone ought to ask the government who’s paying that increased portion of the IR. Apart from the fact that income tax collection hasn’t quite grown as much as it claims, the government also never explains why it has increased at all or who exactly is paying more.

Workers vs. capitalists: In this unequal society, it’s the salaried workers, not the business owners, who are contributing more and more, sometimes even through methods at odds with the law that establishes this tax. In other words, and this should concern us greatly, the IR is ceasing to be an “ideally” progressive tax in Nicaragua and becoming a dangerously regressive one. And to top it all, the larger the business, the less IR it pays. This isn’t some political ranting on my part; I have professional and technical evidence to back it up.

This can be understood better with a specific example. According to the Fiscal Equity Law, salaried workers who earn over 4,444 córdobas a month (roughly $255) must pay their IR based on an obsolete rate that hasn’t been adjusted for inflation for over eight years, forcing them to pay more than they should. But a business that, for example, makes a million córdoba profit, pays 30% IR on it—if, of course, it pays at all—and when it splits up the remaining 700,000 as dividends to its seven partners, each one receives 100,000 córdobas free of personal income tax. It’s completely legal, as established in article 11, point 6 of the Fiscal Equity Law, which is shot through with inequities such as this. Those who have less pay more and those who have more pay less or don’t pay anything. Legal, yes, but not fair and not always ethical.

Men vs. women: The inequity is even greater if we compare men vs. women as well as rich vs. poor. We’re currently working on an investigation into fiscal policy and women and, despite the difficulties, we’re finding some fascinating areas for our analysis. We’ve discovered that women’s fiscal contribution is much higher than men’s in large labor sectors such as cooperatives and free trade zones, as well as in other social segments, including students. The first results are already telling us that the inequity between men and women’s contribution intensifies the already inequitable contribution between rich and poor, that women bear the brunt of Nicaragua’s fiscal inequity. It’s a living reflection of our perverse gender relations.

We have the legal resources;
do we also have the fiscal ones?

As we saw above, we have the legal resources to deal with the recurring social crises, but they aren’t applied. Do we also have the fiscal resources? Are there any “tax niches” we can tap to solve Nicaragua’s huge social inequalities?

The inequity, injustice and lack of ethics are most apparent in the world of exonerations, which have been on the rise in Nicaragua since 1990. Nicaragua has become a tax haven for some sectors of the economy, under the argument that they require tax exemption to develop.

Let’s break through the appearances and reflections we’re served daily in the news, because a lot is neither said nor seen. Many causes are left largely unexplained. Let’s start, for example, with the public debate in the media between former President Daniel Ortega and Supreme Council of Private Enterprise (COSEP) president Erwin Krüger in the wake of the agreement to tax the oil companies to subsidize Managua’s public transport companies.

Both the oil companies and COSEP protested, and once it became clear that there weren’t enough votes to push the tax through the National Assembly, Daniel Ortega criticized COSEP’s big entrepreneurs for receiving all kinds of subsidies yet opposing the mere idea of the bus companies getting one. He called these business leaders thieves, scoundrels and pillagers. Krüger reacted angrily, arguing that Ortega should get better advisers because Nicaragua’s private business sector receives no subsidies and any fiscal incentives it takes advantage of are strictly legal.

Both Ortega and Krüger were telling the truth, and both of them hid truths as well. One hushed-up truth is that the most subsidized sector in Nicaragua is a huge business group that uses its power to lobby for new and continuing tax exonerations with the arrival of all new parliamentary benches, and it always gets them. This can be easily demonstrated with data and figures, as well as laws endorsing the subsidies. Nonetheless, Krüger did tell the truth: these subsidies—which is all tax exonerations are—are legal, just like the exemption of corporate dividends from individual income tax. Almost the entire set of subsidies that the government gives big business can be found in the laws; only a few are “de facto.” But being legal doesn’t necessarily make something just. And not everything that appears just is ethical, even though justice and ethics are complementary; sometimes appearances can deceive.

It would be neither responsible nor correct to lump all “profit seekers” or “dealers in speculation”—as economic doctrine calls them—together with serious national or foreign investors who are unquestionably discriminated against by this special treatment, violating the principle of fiscal neutrality. It’s unfair competition for certain big businesses to be exempted from paying tax in multiple sectors of the economy while all other large, medium and small businesses in those same sectors have to pay it. In December 2005, the IDB published an interesting study in Central America titled “Collect to grow,” which ratifies the above data. This investigation confirms the terrible fiscal inequity in Nicaragua, which the government is fully aware of. In a moment we’ll examine a concrete and very serious case in the tourism sector.

There’s no such thing as a free lunch

Technically speaking, we have to view exonerations as a fiscal loss, a real and concrete, albeit invisible form of public spending. The International Monetary Fund, the World Bank, the Inter-American Development Bank and all technical experts from right to left agree: a tax exoneration granted to a tourist business, telecommunications company or any other sector of the economy is as much public spending as what the government invests in health, education and highways.

Some subsidies are explicit, such as those the government has granted the urban bus cooperatives for months so they won’t raise the fare. Others, such as tax exonerations, are implicit. In economics they say, “there’s no such thing as a free lunch.” Everything has its cost, and someone has to pay it. If I give somebody 10 as a subsidy, I won’t have it to pay someone else. Or if I exonerate one person from paying 10, I won’t have it to give to someone else who needs it or deserves it.

In Nicaragua, the roughly 4 billion córdobas in exonerations the government grants, mainly to big business, represent 4% of the GDP. This is more than the 3.4% that international cooperation gives us to reduce our fiscal deficit to more acceptable levels. This is absolute madness, which competes for the crown with another similar dementia: tax evasion, which represents a whopping 8% of the GDP.

In conclusion, the national GDP is shortchanged a full 12% by tax evasion—with contraband at the head—plus legal tax exonerations and a few other illegal dispensations. It’s a staggering amount, one we’ve been pointing out for years, to no effect. How does a poor economy, so different from that of France, the United States or Japan, suffer this feast—perhaps orgy would be a better word—of privileges?

Daniel Artana, a very competent technical expert and a star consultant to the Bolaños government, came to Nicaragua recently to study its inequity and fiscal spending. In his November 2005 report, “Evaluación reciente de la recauda-ción tributaria, gastos fiscales y proyecciones fiscales” (Recent evaluation of tax collection, fiscal spending and fiscal projections), he warned the government about these very figures. He also strongly recommended including the implicit subsidies known as tax exonerations as effective tax spending in the national budget to provide a realistic, comprehensive vision of public spending. They are never included in Nicaragua.

The tourism sector:
One of the most hidden scandals

We’re told half-truths and real truths are hidden from us. One of the least known scandals in Nicaragua today relates to exonerations to the tourism sector. Daniel Artana explains on page 39 of his study that for every 100 córdobas invested in tourism in Nicaragua, the state “generously” gives 63 in the form of exonerations. On the previous page, he asserts that the government is acting as a “foolish partner” in this sector of the national economy.

The benefits currently offered to Nicaragua’s tourism industry are extremely broad, if not exaggerated. The Tourism Law (Law 306) we’ve had for the past six years offers the most tax exonerations in all of Latin America and is one of the most generous in this respect in the entire world. Until very recently we competed in this “generosity” with Costa Rica and the Dominican Republic, but both countries have now cut back the benefits they conceded to tourism. In Nicaragua, tourism companies pay virtually no taxes for anything.

As if that weren’t enough, President Bolaños introduced an utterly obscene bill in 2004, the Tourist Investment Bonds (BIT) Law, designed specifically to benefit a huge tourism project the powerful US hotel chain Marriot is thinking about establishing in Nicaragua alongside the Montelimar beach resort. Marriot has already invested some $15 million, covered by the benefits the Tourism Law offered, which include a 10-year tax exemption on all expenses—from construction materials to the fine crystal glassware and even the liquor it will import—and on all profits for the same period. The firm’s promoters have declared that it’s thinking of investing over US$50 million.

Marriot’s project, called Gran Pacífica, consists of an immense tourist complex with a hotel, entertainment centers and thousands of individual houses. But it’s not satisfied despite all the advantages it has already received and will go on receiving from the Tourism Law and other recent laws, including indirect benefits such as exonerations to foreign retirees who come to live or spend vacation seasons in these installations. Marriot has said it won’t release the franchise for the project until the BIT Law is approved.

This legislation contains some very strange things. For example, the standard 15% IGV tax that clients of this hotel complex will pay for all goods and services they receive won’t go into the state treasury but will remain in Marriot’s hands. Any other establishment of any kind must transfer the IGV taxes it collects to the government tax division; only Marriot gets to keep all that money! What’s that all about?

Whatever it is, there’s no name for it. In every country on this planet, the person or business that sells a good charges the legal tax and is obliged to pass it on to the public treasury. Not here in Wonderland. This law privatizes even our taxes to a transnational corporation! And it won’t be just an implicit theft of the customers’ taxes through exoneration; it will be explicit!

When I sent this absurd bill to a team of illustrious tax professors from Harvard University, they were dumbfounded; they thought I had sent it as a joke. After studying it in detail, I can assure you with absolute conviction that no similar experience of legalized pillaging of public resources exists anywhere else in the world. It’s an unconstitutional law to boot, because if a private party appropriates a state resource, in this case taxes, it’s a violation of the Constitution and a financial crime.

President Bolaños presented Marriot’s bill to the National Assembly in September 2004 and it was unanimously approved in general terms in December 2005, right in the midst of a great conflict between the legislative and executive branches, giving us some insight into the huge interests at stake, which seem to involve all the power groups. Afterward, when all the contents of this legislation began to be aired, some officials started worrying about the fiscal losses resulting from the exonerations the new law would grant exclusively to Marriot. These privileges would be even greater than those received by the sweatshops in the free trade zones—in both cases in exchange for doing nothing more than generating jobs. Such effrontery also triggered a certain amount of embarrassment among some politicians, which has put a brake on the bill’s article-by-article passage.

One top official informed me of the Bolaños govern-ment’s “existential drama” around this bill as follows: “There have been huge obstacles, but our faith is greater. Even though the General Tax Division publicly declared that $40 million will be lost annually as a result of this Investment Bonds Law, the IMF has a cautious view of it and Comandante Ortega, with an eye on his fight with COSEP, says he’ll never support it, the dice have been cast with good backing on all sides. God wants us to win.”

Given how many interests were behind the mired Tourism Bonds Law, some thieving politicians decided to help God out a bit by offering the wavering legislators a tradeoff: in exchange for their approval of the “Marriot Law,” they could reform the existing Tourism Law to include small tourist businesses, which were excluded from the benefits and exonerations. But injustice knows no respite: 95% of the reform law (Law 575) promptly drafted by Liberal, Sandi-nista and other legislators was dedicated to additional exonerations for the larger tourist businesses. According to these reforms, absolutely everything surrounding a tourist project, all activities close to a tourist center or smelling of tourism or looking even remotely touristy would be exempt—jet-skis, yachts, airplane lubricant, spare parts… No taxes on any of it. It was as grotesque as it is infuriating; so much so that even President Bolaños, the man who promoted the giveaway Bond Law in Marriot’s favor, felt moved to veto the reforms!

Can things really change? We will be in serious trouble if these critical discoveries keep us benched, sunk in conformism and victims of “every man for himself.” They should serve to energize us, to make us madly pursue that dignity apparently snatched away by those with an insatiable thirst for power. We should rebel without quarter against our eternal role as bothersome beggars of foreign aid, poor little people defeated by the injustice of a handful. Let’s recall the sensible and spirited rector of the Central American University, the late Xabier Gorostiaga, who invited us to “move from protest to proposal.” No enlightened individual will bring change to us; it can only come from our own guts, from all of us, united and angry.

Julio Francisco Báez, a lawyer epecializing in tax law, is associated with the Instituto de Estudios Tributarios together with his brother, also a tax expert.

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