Fiscal reform in Guatemala

The Guatemalan Congress recently passed fiscal reform that will raise taxes for the wealthy earners. From Kate Newman at Americas Quarterly, 

The reform will allow Guatemalans earning less than 48,000 quetzales (US $6,200) yearly to pay nothing in taxes; currently all earning above 36,000 quetzales (US $4,645) are obliged to pay. Those earning over 300,000 quetzales (US $38,709) annually will pay 7 percent income tax, up from 5 percent. Middle-class earners making between 48,000 and 300,000Q will pay 5 percent.

Why the sudden shift in support? Recently-inaugurated President Otto Pérez Molina claimed the reform was essential for lowering the national debt and generating funds for programs to improve security and development.

Yet concerns of debt, security and development have long been present in Guatemala, and do little to explain the reform’s recent passing. There are likely other factors behind this sudden show of support. One such factor was approval from the Coordinating Committee for Agricultural, Commercial, Industrial, and Financial Associations (CACIF), whose resistance proved insurmountable in previous attempts to pass the reform. Perhaps its members trust that Pérez Molina respects their interests as others have not; the president depended heavily on private-sector support during his campaign, and appointed well-known business leaders to head several government ministries. Nor does this version of the tax reform work entirely against CACIF interests; while businesses will now pay a 5 percent tax on dividends—drafted as 10 percent in a previously rejected bill—the 31 percent tax they pay on utilities will be reduced to 25 percent by 2014.

I can't help but think that Perez and the congress' passage of the legislation is tied to Guatemala's efforts to get more support from the US to tackle poverty, crime, and other challenges. In one of the reviews of Alvaro Colom's presidency, someone at Plaza Publica wrote how Colom promised not to pursue significant fiscal reform during his first year or so in office so as to calm the business communities' fears. By the time he moved to pursue some reform, the main business organizations were ready to block any of his reforms. And then he was weakened by the Rosenberg murder/suicide. After that, fiscal reform was toast.

Claire Kumar at The Guardian has more on the positives and negatives of the reforms.