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President and Finance Minister discuss plans to tax upper class to pay for pandemic costs

Published on September 14, 2021

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Minister of the economy said details of a tax reform, part of a broader reform, will be released at the end of the month.

As part of the tax reform and other economic reforms that the Government will send to the Assembly at the end of the month, the contribution to be made by a sector classified as “wealthy” of the Ecuadorian population would be based on the per capita income of the population.

At the moment, everything indicates that the base of the citizens that will be paying an extra one-time tax, are those who have a per capita income of more than $1,000 per month.

In a press conference last Wednesday, while discussing the technical agreement with the International Monetary Fund (IMF), the Minister of Economy and Finance, Simón Cueva, explained that Ecuador is an “unequal country,” and the pandemic affected the less favored deciles the most.

He said that in the latest survey of Employment, Unemployment and Underemployment (Enemdu) it was found that in 2020, 60% of the population earned less than $300 per capita per month; 88% earned less than $500, and about 96% earn less than $1,000.

This means that 4% earn more than $1,000. Additionally, it can be seen, comparing the years 2019 and 2020, that the lowest deciles of the population were the ones that suffered the most from the drop in their income, while 4% of that population would not have been affected as much.

The minister said that a strategy is still being refined that will strengthen tax revenues “focusing only on the sectors least affected by the pandemic.”

The minister avoided giving details of the tax reform that would be presented at the end of the month, as part of a broader law called Creating Opportunities, and that could include specific labor reform and other investment issues. Efficiency will be sought in tax collection so that everyone pays what they are required to pay. There will also be a review of the exemptions, and tax revenue will be strengthened, ensuring that the most vulnerable are not affected.

Cueva said that, regarding the review of exemptions (tax exemptions), they want the country to align itself with the international situation, “That we pay according to our income and assets.”

When Cueva was asked whether it is in the plans to create a wealth tax, the minister replied that everything is under analysis.

The minister described it as a particular effort as a result of the pandemic, “especially for the segments that have relatively had higher incomes and have managed to cope with the pandemic in the best way.”

President Lasso has also spoken of this extraordinary contribution that higher-income sectors could make to contribute to the issues of the pandemic and vaccination. Several analysts believe that this extraordinary contribution could be similar to what the population should have made after the Manabí earthquake.

The President reiterated that $500 million have been spent on vaccination and logistics and $900 million was spent on everything else that had to do with the pandemic, so it is natural to ensure more solidarity from the wealthiest. He stressed once again that it is not planned to increase the VAT, as this would affect consumption.

More details on the tax issue and an economic mega-law that would be sent to the Assembly will be released at the end of September.

Meanwhile, last week the IMF said that looking to the future, the Ecuadorian authorities have committed to continue improving the administration of public finances, increasing transparency in the management of public resources – including COVID spending and COVID operations— and advancing the anti-corruption program, which would strengthen confidence in public institutions and boost private sector activity.

The authorities also plan to reform their public-private partnership framework, capital and labor markets, and improve the business environment to catalyze domestic private investment and attract foreign direct investment.

Lasso doesn’t rule out making ministerial changes this year

Following up what Minister Cueva reported on Wednesday, President Guillermo Lasso announced on Thursday that he does not rule out changes in his cabinet of ministers before the end of 2021 and that the 4% of the population with higher incomes will pay a tax to alleviate the effects of the pandemic and comply with the requirements of the IMF.

This was stated in an interview in which he defended the performance of government ministers while adding that they should be subject to constant review.

“One has to make a permanent evaluation to make the changes that are required and that in turn Ecuadorian society requires,” he added before noting that the changes can occur at any time, “to improve the performance of the cabinet.”

When asked about possible changes to his cabinet in 2021, he said: “I do not rule it out.”

Regarding taxes, he explained that only 4% of the population will have to pay an additional tax to achieve the tax collection required by the International Monetary Fund (IMF).

“Tax management must be rationalized, so that the cost of the pandemic falls on those of us who have the most in Ecuador,” he pointed out about a bill that he will present “very soon” to Parliament and of which he did not offer further details.

The President also clarified that citizens will not be affected in any way with new taxes or an increase in existing ones.

Asked about the conditions of the IMF agreement, given that a previous one ended up taking thousands of Ecuadorians to the streets in October 2019, in the worst civil unrest in decades, the new president insisted that the current one has better conditions.

The former “required by 2022 a tax reform equivalent to 2.5% of GDP, approximately $2.5 billion,” however, the current one includes a commitment of “only 0.7% of GDP” in that same year.

“That is, there has been great flexibility in the negotiation and an acceptance by the IMF. Ecuador’s conditions are different today,” said the President, recalling his goal of doubling oil production to one million barrels per day by 2025, which would require “some $16 billion in private investment.”

Regarding the intentions of doubling oil production in four years to reach one million barrels of crude per day, a decision that arouses suspicion among environmental and indigenous sectors, he said that they should be used “in a sustainable way and without affecting the environment.”

He insisted that he will raise his reforms before the National Assembly (Legislative) where he does not have sufficient support and appealed to the “patriotic spirit of the assembly members,” but if the Assembly does not make an effort to support his agenda, he repeated his intentions to call a popular consultation to make it ” the people ” who decide.

In the same interview, the President also mentioned his “Creating Opportunities” bill that includes reforms in the fields of telecommunications, labor, hydrocarbons, energy and others.

The change will be “imminent” in the country if the proposal is allowed to be carried out, said the President.

According to Alberto Acosta Burneo, editor of Analysis Semanal, the government’s announcements aim to affect the bulk of the middle class. He said he did not understand how the government figures that 4% of the population earn more than $1,000.

“There is a problem in the calculation that does not add up; it is known that those who earn more than $1,000 represent 30% of people who have income,” he said.

He says the solution is not to get more money from citizens, rather it is in cutting expenses and not in new tax reforms. He says that with the government’s plan, they would once again be charging those who always pay taxes.

He believes that a better way out would be to raise VAT by 1 percentage point, and with this measure the impact on prices would hardly be felt and it would generate precisely what is being collected ($600 million). He pointed out that VAT is not a regressive tax, since there are products of the basic basket that are exempt from this tax. He regretted that now in Ecuador there are taboo subjects, such as the elimination of the gas subsidy and now the VAT increase.

He also warned that creating a wealth tax would be a mistake, both because it is very difficult to establish and value assets (a company, a work of art) and because what people usually do is hide their assets. The most serious problem is that it discourages saving and that affects economic growth, he says. Additionally, he commented that many times the assets are not liquid. For example, the owner of the farm that is worth $500,000 has that asset, but it does not mean that he has great liquidity, he explained.

Jaime Carrera, the Executive Secretary of the Fiscal Policy Observatory (OPF), said that it is evident that there are current exemptions that generate benefits for those who should not have them. He added that current exemptions cost the treasury about $4 billion. He believes that the benefits in terms of food should not disappear, but the issue of education and health and other benefits for companies could be moderated.

Regarding the possible wealth tax, Carrera said that it is important to establish the starting base level and that it be gradual and proportional, with a reasonable rate. In addition, great care must be taken so that when the estate is taxed, it can be verified that its owners have liquidity. This is achieved through cross-checking information at the SRI base.

Urgent economic project

The economic mega-law that is being prepared for the end of September by the President and his staff would arrive with the designation of “urgent economic project.”

Faced with the difficulty that the lack of support in the Assembly represents for the Government, the editor of Analysis Semanal, Acosta Burneo says that in politics everything is possible, and it cannot be taken for granted that there will be a rejection, rather, the Government will have to negotiate with all sectors to find support. Acosta says part of the negotiations would even be the announcement of a possible popular consultation.

OPF’s Carrera says that the Government needs to make a serious effort to disseminate the information about the project so that society sees it as necessary to get out of the crisis and promote development. This he says will force the Assembly, before the collective knowledge of the regulations, to lay down attitudes and find consensus.

According to article 140 of the Constitution, the President can send projects to the Assembly as urgent economic matters, and they must deal with them within 30 days.

The article also says that if the Assembly does not approve, modify, or deny the project classified as an urgent in economic matter, “the president of the Republic will promulgate it as a decree-law and order its publication in the Official Registry.”

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