Try Living In Costa Rica!

By Global Tax Weekly

Apparently, taxpayer dissatisfaction with the United States tax code has reached a 12-year high (or should that be low?). But if you’re a frustrated US taxpayer growing increasingly impatient at congressional impotence on tax reform, then try living in Costa Rica! Ever noticed how, when a car alarm is blaring away in the street, instead of investigating or calling the police, people tend to ignore it? In fact, they might not even notice it, having mentally filtered out this particular noise-pest long ago. The same could be said of Costa Rican finance ministers when they issue their regular calls for the completion of long-awaited tax reform, which has been on the drawing board in one form or another for more than a decade now. Last week, incumbent finance minister Helio Fallas urged lawmakers to finally approve measures designed to shore up the Government’s increasingly shaky finances. The trouble is, Costa Rica’s Legislative Assembly makes the US Congress look positively dynamic. Costa Rica’s legislative set up is one of checks and balances, similar to America’s own constitution. The emphasis in Costa Rica though appears to have been placed on checks, rather than balances, and controversial bills like tax reforms are all too easily killed by endless committee reviews and constitutional court challenges. The Central American Free Trade Agreement, which Costa Rica eventually ratified in 2009, several years after the other signatories, almost suffered a similar fate. But don’t just take my word for it. Costa Rica was upbraided and downgraded by two international ratings agencies recently for the slow (non-existent, rather) pace of fiscal reform. However, it is also the content of the present tax package that earns Costa Rica a rebuke. This country has been one of the most successful in Latin America economically, having managed to supplement its largely agrarian economy with high value-added export industries, such as the manufacture of microchips. Costa Rica has one of the highest levels of FDI per head in the region, and is also a popular retirement destination for Americans. This is partly due to its benign (for foreigners) territorial tax system, which will be swept aside in favor of a worldwide system if the tax measures are ever introduced. One could argue that it is because Costa Rica doesn’t collect enough tax from foreign companies and individuals that the Government has a 5 percent budget deficit. But Costa Rica also has a reputation for Kafkaesque bureaucracy and regulation, which could account for a substantial proportion of the deficit. It doesn’t have an army, so it must be spending money on something.

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