Monday, March 20, 2006
What really pushes their buttons.
Anyone who has followed the Venezuelan political situation over the past several years is familiar not only with the extensive social reforms being implemented by President Chavez but by the extremism of those opposing him. It has often been something of a mystery to many why President Chavez’s opponents are so vitriolic in their opposition of him.
I have often wondered what could be the source of all this vitriol. Could it be the oft referred to “repression” or “dictatorial tendencies” of Chavez driving the hatred? Not likely, given that the alleged repression or dictatorial tendencies are either complete fabrications or greatly exaggerated. Venezuelans enjoy personal and political freedoms on a par with any country in the world. Maybe it’s that Chavez is destroying the economy? Again not likely as the economy has performed well under Chavez save when the opposition itself has intentionally trashed it. Could it be Chavez’s sometimes belligerent style? Maybe. But even this is unlikely to account for most of the opposition fury. Words are, after all, only words.
So what then accounts for the almost pathological hatred the opposition has toward Chavez and his government? In traveling around Venezuela and talking to people, particularly opposition supporters, one primary factor quickly becomes apparent – taxes. There is probably no other accomplishment of the Venezuelan government more overlooked than its tremendous improvement in collecting taxes. Yet, it should not be forgotten that taxes hit the affluent right where it hurts, in the pocket book. And it is this blow to their finances that has contributed heavily to the business classes’ hatred of Chavez.
In the United States there is a saying “nothing is certain in life except death and taxes”. I have never heard a comparable saying in Latin America. This is mainly due to the rampant tax evasion that afflicts the region and starves governments there of the funds they need. Venezuela, prior to Chavez’s ascension to power, was no exception to this. Taxes were widely evaded both by the wealthy and by businesses of all types and enforcement efforts were lax and ineffective. Further, the political class, which was under the sway of well connected business people, exempted all sorts of groups from taxes – ranchers, fisheries, and mutual funds to name a few.
This has changed radically during the Chavez administration. Tax loopholes have been closed and tax collection and enforcement have been revamped and improved. Before getting into the details of how tax collection has changed lets go over some numbers to see just how much tax collection has increased. I will compare two years, 1997 and 2005. 2005 is the most recent year for which full numbers are available. 1997 is one of the last full years prior to Chavez coming to power. Further, much of the economic data in Venezuela is given in constant 1997 Bolivares facilitating comparisons between 1997 and other years. Lastly the Venezuelan economy was of similar size in those two years which, as we will see, means increased revenues results from improved tax collection much more than economic growth.
Now lets turn to the actual numbers. In 2005 38.4 trillion Bolivares were collected in non-oil taxes (SENIAT Boletin Mensual Numero 58). Dividing that by the official exchange rate of 2,150 Bolivares to the dollar this comes to $17.86 billion dollars. Now, lets turn to 1997. Non-oil tax collections in that year were 4.38 trillion Bolivares which when multiplied by the 500% cumulative inflation between 1997 and 2005 gives 21.9 trillion 2005 Bolivares. Putting this into dollars gives $10.2 billion dollars. So in 2005 the government collected $17.8 billion dollars in taxes whereas in 1997, before Chavez, the government only collected $10.2 billion in taxes. This means Chavez has boosted tax collection by more than $7.5 billion dollars. Quite a princely sum by Venezuelan standards and something that goes a long ways to explaining why the Venezuelan business class and wealthy hate Chavez. He has taken $7.5 billion extra right out of their pockets!! That was all money that they previously had free and clear to buy BMWs with, go shopping in Europe, or squirrel away in Miami banks. Previously profits were yours to enjoy in full with little worry about the tax man. Much to their chagrin, taxes are now being effectively collected by the Venezuelan government to fund its operations and massive social programs.
Now, you may ask, has growth in the economy played much of a role in this dramatic increase? The answer is no. The GDP of the Venezuelan economy in 2005 was $107 billion (if you think you’ve seen much higher GDP numbers for Venezuela you probably seen “purchasing parity” GDP which is GDP with significant adjustments to make it comparable to other countries) meaning that 16.7% of economic output was collected as taxes. In 1997 GDP was $97.5 billion meaning that the $10.2 billion collected in taxes represented 10.45% of economic output. So the increased revenues resulted not so much from a change in the size of the economy as from a boost of more than 6% percentage points of GDP being collected in taxes. Looked at another way the tax collection rate increased 62.5%!! Such a dramatic increase in tax collections in such a short period of time is an accomplishment of epic proportions. I can’t think of any other country ever accomplishing anything remotely similar.
Before moving on to how this has been accomplished let me give some additional numbers on Venezuelan taxes. First, there are two main taxes in Venezuela, an income tax which is progressive and goes from 6% to 34% and a value added tax (VAT) that has generally been 15% but was recently reduced to 14%. There is also a banking transaction tax which has been a .5% transaction fee on all banking activities and there are miscellaneous sin taxes on things like cigarettes, liquor, and bingo parlors (yes they collect taxes on bingo parlors which may explain why Carlos Ortega was at the forefront of the opposition to Chavez). Lastly, customs duties are levied on most imports. Here is what was derived from those sources in 2005:
Income taxes $4.77 billion (versus $2.24 billion in 1997)
Value Added Tax $9.23 billion (versus $5.56 billion in 1997)
Customs Duties $1.95 billion (versus $1.7 billion in 1997)
Banking Transaction tax $1.27 billion (did not exist in 1997)
Liquor taxes $220 million
Cigarette taxes $327 million
So how did the Venezuelan government increase tax collections to such an amazing degree? In a word, enforcement. Evading taxes is no longer risk free in Venezuela and getting caught doing so is no longer painless. The Venezuelan tax agency is known by the initials S.E.N.I.A.T., the National Integrated Service of Customs and Tax Administration. Seniat has initiated an enforcement program, called Zero Evasion, has been both comprehensive and innovative.
The first, and main, obstacle that must be overcome in most underdeveloped countries is poor record keeping. Heavy reliance on cash transactions and haphazard paperwork have always allowed tax cheats to avoid detection. It’s hard for a tax authority to make sure taxes are collected when it doesn’t even know what anyone’s income is. Seniat has solved this problem by putting the burden of maintaining accurate and comprehensive records squarely on the businesses themselves. They must generate receipts for all transactions and then tie those receipts into a detailed financial statement.
The legal requirement that receipts be issued is enforced in several ways. First, consumers are expected to request receipts for all their purchases. To encourage them to do this Seniat has actually set up a lottery where people can send in their receipts to be used in drawings for significant cash prizes and even cars. The more receipts you send in the better your odds, so their is a strong incentive for people to make sure they get their receipts and send them in.
If being a good citizen or having a chance to win a prize wasn’t enough of an incentive this past February made it a requirement that consumers ask for a receipt. Those who don’t, and Seniat actually carried out enforcement actions for this, are subject to fines from $12 to $60 dollars.
Businesses are then expected to keep copies of all these receipts and use them to create a detailed and accurate financial statement. These financial statements are used by Seniat to assess taxes. Most all stores actually post these financial statements on their doors or by their cash registers. I’m not sure if they are required to do so but they sure didn’t like it when I tried to take pictures of them which is why I only got this one not so good picture. I’m sure having their finances revealed to the public doesn’t make their day.
This was the only quick picture I could snap before being told to leave the store.
And suppose a business’s paperwork isn’t completely in order? Then they are potentially in big trouble. Seniat regularly sends auditors out to all business establishments to review their books and impose stiff penalties for any omissions or shortcomings. During 2005 Seniat auditors visited more than 29,000 businesses and fined 22,000 for not fully complying with its requirements. The fines alone brought in about $25 million. But the fines are not what the business fear most. Seniats strongest enforcement tool is temporary closing of businesses, generally lasting for two or three days. This literally involves pulling the gate down on the business or padlocking its doors and putting seals over them as happened to this business in Barquisimeto:
Note that this sticker gives not only the dates the business was closed, December 2 to December 4th, but the exact time it was closed and the exact time it will be allowed to re-open. That is what you call being detail oriented.
Every day, businesses all over Venezuela are subject to these inspections with dozens being shuttered. No one is exempt from this – big businesses, small ones, foreign and Venezuelan, even a government owned petrochemical company was fined. If a franchise or chain of stores is found to have a problem often times all their stores throughout the entire country will be closed. Heinz, Pfizer, Nestle, and Del Monte are some of the multinational sanctioned by Seniat in just one month. These methods of tax collection have proven so successful that even other Venezuelan government agencies have adopted Seniat’s methods.
This store in an upscale mall had been closed for not paying social security taxes
Of course the opposition and the business community have criticized these enforcement mechanisms as heavy handed and abusive. These complaints lack merit. Given the pervasiveness of tax evasion decisive action was needed to reverse the situation. There is no reason a business can’t keep an accurate set of books and Seniat is right to expect them to. When tax evasion , or poor record keeping that could be masking tax evasion, is found it must be heavily sanctioned. If the sanction is not costly then tax cheats will simply see it as the “cost of doing business” and continue using “sloppy” record keeping to hide tax evasion. So until a culture of paying taxes is firmly established these aggressive collection efforts are entirely appropriate.
Although the measure taken to collect the IVA tax from businesses is the most obvious collection action Seniat has used similarly aggressive methods to collect income taxes. Due to extensive exemptions it is generally only people with significant personal wealth, business owners, and well paid professionals who are subject to Venezuela’s income tax. Seniat has reduced evasion among their ranks by targeting members of various professional organizations for review. Seniat has culled the lists of the Venezuelan Medical Association and Bar Associations in an attempt to match people with significant income with those who have actually filed returns. Again, the stiff fines levied for non-compliance have sharply increased the number of tax returns filed.
All of this has served to illustrate why some are motivated to oppose Chavez. But what does it say about the nature of the Chavez administration? At the least it shows a couple of things. First, while the opposition likes to paint the Chavez government as being administratively inept is clearly not the case. Previous governments had for decades failed miserably to improve tax collection. Their excuse was that Venezuelan’s were incorrigible tax cheats. With the tax authorities now well organized and efficient the Chavez administration has now shown how wrong that notion was. In fact, given the billions of dollars they are now having to pay in taxes it is probably safe to say what really bothers the well-heeled opposition is not Chavista inefficiency, but rather the zeal and efficiency the Chavez administration has brought to tax collection.
Another common misconception spread by the opposition is that corruption has increased and the current government is doing nothing about it. Yet one of the largest and most persistent forms of corruption throughout Venezuela’s history has been tax evasion. Refusal to pay taxes is not a victimless crime. It is theft from the government which is starved of the funds it needs to provide services. Or it is theft from your fellow citizens who must now pay more taxes to make up for those who refuse to pay. Either way it is a form of corruption and Chavez administration’s success is combating it is probably the single biggest and most successful anti-corruption initiative in Venezuelan history.
So the next time you hear the howls emanating from eastern Caracas about how terrible Chavez is hopefully you’ll remember what is the real reason behind them – Chavez’s unprecedented and highly successful tax collection efforts.
|
I have often wondered what could be the source of all this vitriol. Could it be the oft referred to “repression” or “dictatorial tendencies” of Chavez driving the hatred? Not likely, given that the alleged repression or dictatorial tendencies are either complete fabrications or greatly exaggerated. Venezuelans enjoy personal and political freedoms on a par with any country in the world. Maybe it’s that Chavez is destroying the economy? Again not likely as the economy has performed well under Chavez save when the opposition itself has intentionally trashed it. Could it be Chavez’s sometimes belligerent style? Maybe. But even this is unlikely to account for most of the opposition fury. Words are, after all, only words.
So what then accounts for the almost pathological hatred the opposition has toward Chavez and his government? In traveling around Venezuela and talking to people, particularly opposition supporters, one primary factor quickly becomes apparent – taxes. There is probably no other accomplishment of the Venezuelan government more overlooked than its tremendous improvement in collecting taxes. Yet, it should not be forgotten that taxes hit the affluent right where it hurts, in the pocket book. And it is this blow to their finances that has contributed heavily to the business classes’ hatred of Chavez.
In the United States there is a saying “nothing is certain in life except death and taxes”. I have never heard a comparable saying in Latin America. This is mainly due to the rampant tax evasion that afflicts the region and starves governments there of the funds they need. Venezuela, prior to Chavez’s ascension to power, was no exception to this. Taxes were widely evaded both by the wealthy and by businesses of all types and enforcement efforts were lax and ineffective. Further, the political class, which was under the sway of well connected business people, exempted all sorts of groups from taxes – ranchers, fisheries, and mutual funds to name a few.
This has changed radically during the Chavez administration. Tax loopholes have been closed and tax collection and enforcement have been revamped and improved. Before getting into the details of how tax collection has changed lets go over some numbers to see just how much tax collection has increased. I will compare two years, 1997 and 2005. 2005 is the most recent year for which full numbers are available. 1997 is one of the last full years prior to Chavez coming to power. Further, much of the economic data in Venezuela is given in constant 1997 Bolivares facilitating comparisons between 1997 and other years. Lastly the Venezuelan economy was of similar size in those two years which, as we will see, means increased revenues results from improved tax collection much more than economic growth.
Now lets turn to the actual numbers. In 2005 38.4 trillion Bolivares were collected in non-oil taxes (SENIAT Boletin Mensual Numero 58). Dividing that by the official exchange rate of 2,150 Bolivares to the dollar this comes to $17.86 billion dollars. Now, lets turn to 1997. Non-oil tax collections in that year were 4.38 trillion Bolivares which when multiplied by the 500% cumulative inflation between 1997 and 2005 gives 21.9 trillion 2005 Bolivares. Putting this into dollars gives $10.2 billion dollars. So in 2005 the government collected $17.8 billion dollars in taxes whereas in 1997, before Chavez, the government only collected $10.2 billion in taxes. This means Chavez has boosted tax collection by more than $7.5 billion dollars. Quite a princely sum by Venezuelan standards and something that goes a long ways to explaining why the Venezuelan business class and wealthy hate Chavez. He has taken $7.5 billion extra right out of their pockets!! That was all money that they previously had free and clear to buy BMWs with, go shopping in Europe, or squirrel away in Miami banks. Previously profits were yours to enjoy in full with little worry about the tax man. Much to their chagrin, taxes are now being effectively collected by the Venezuelan government to fund its operations and massive social programs.
Now, you may ask, has growth in the economy played much of a role in this dramatic increase? The answer is no. The GDP of the Venezuelan economy in 2005 was $107 billion (if you think you’ve seen much higher GDP numbers for Venezuela you probably seen “purchasing parity” GDP which is GDP with significant adjustments to make it comparable to other countries) meaning that 16.7% of economic output was collected as taxes. In 1997 GDP was $97.5 billion meaning that the $10.2 billion collected in taxes represented 10.45% of economic output. So the increased revenues resulted not so much from a change in the size of the economy as from a boost of more than 6% percentage points of GDP being collected in taxes. Looked at another way the tax collection rate increased 62.5%!! Such a dramatic increase in tax collections in such a short period of time is an accomplishment of epic proportions. I can’t think of any other country ever accomplishing anything remotely similar.
Before moving on to how this has been accomplished let me give some additional numbers on Venezuelan taxes. First, there are two main taxes in Venezuela, an income tax which is progressive and goes from 6% to 34% and a value added tax (VAT) that has generally been 15% but was recently reduced to 14%. There is also a banking transaction tax which has been a .5% transaction fee on all banking activities and there are miscellaneous sin taxes on things like cigarettes, liquor, and bingo parlors (yes they collect taxes on bingo parlors which may explain why Carlos Ortega was at the forefront of the opposition to Chavez). Lastly, customs duties are levied on most imports. Here is what was derived from those sources in 2005:
Income taxes $4.77 billion (versus $2.24 billion in 1997)
Value Added Tax $9.23 billion (versus $5.56 billion in 1997)
Customs Duties $1.95 billion (versus $1.7 billion in 1997)
Banking Transaction tax $1.27 billion (did not exist in 1997)
Liquor taxes $220 million
Cigarette taxes $327 million
So how did the Venezuelan government increase tax collections to such an amazing degree? In a word, enforcement. Evading taxes is no longer risk free in Venezuela and getting caught doing so is no longer painless. The Venezuelan tax agency is known by the initials S.E.N.I.A.T., the National Integrated Service of Customs and Tax Administration. Seniat has initiated an enforcement program, called Zero Evasion, has been both comprehensive and innovative.
The first, and main, obstacle that must be overcome in most underdeveloped countries is poor record keeping. Heavy reliance on cash transactions and haphazard paperwork have always allowed tax cheats to avoid detection. It’s hard for a tax authority to make sure taxes are collected when it doesn’t even know what anyone’s income is. Seniat has solved this problem by putting the burden of maintaining accurate and comprehensive records squarely on the businesses themselves. They must generate receipts for all transactions and then tie those receipts into a detailed financial statement.
The legal requirement that receipts be issued is enforced in several ways. First, consumers are expected to request receipts for all their purchases. To encourage them to do this Seniat has actually set up a lottery where people can send in their receipts to be used in drawings for significant cash prizes and even cars. The more receipts you send in the better your odds, so their is a strong incentive for people to make sure they get their receipts and send them in.
If being a good citizen or having a chance to win a prize wasn’t enough of an incentive this past February made it a requirement that consumers ask for a receipt. Those who don’t, and Seniat actually carried out enforcement actions for this, are subject to fines from $12 to $60 dollars.
Businesses are then expected to keep copies of all these receipts and use them to create a detailed and accurate financial statement. These financial statements are used by Seniat to assess taxes. Most all stores actually post these financial statements on their doors or by their cash registers. I’m not sure if they are required to do so but they sure didn’t like it when I tried to take pictures of them which is why I only got this one not so good picture. I’m sure having their finances revealed to the public doesn’t make their day.
This was the only quick picture I could snap before being told to leave the store.
And suppose a business’s paperwork isn’t completely in order? Then they are potentially in big trouble. Seniat regularly sends auditors out to all business establishments to review their books and impose stiff penalties for any omissions or shortcomings. During 2005 Seniat auditors visited more than 29,000 businesses and fined 22,000 for not fully complying with its requirements. The fines alone brought in about $25 million. But the fines are not what the business fear most. Seniats strongest enforcement tool is temporary closing of businesses, generally lasting for two or three days. This literally involves pulling the gate down on the business or padlocking its doors and putting seals over them as happened to this business in Barquisimeto:
Note that this sticker gives not only the dates the business was closed, December 2 to December 4th, but the exact time it was closed and the exact time it will be allowed to re-open. That is what you call being detail oriented.
Every day, businesses all over Venezuela are subject to these inspections with dozens being shuttered. No one is exempt from this – big businesses, small ones, foreign and Venezuelan, even a government owned petrochemical company was fined. If a franchise or chain of stores is found to have a problem often times all their stores throughout the entire country will be closed. Heinz, Pfizer, Nestle, and Del Monte are some of the multinational sanctioned by Seniat in just one month. These methods of tax collection have proven so successful that even other Venezuelan government agencies have adopted Seniat’s methods.
This store in an upscale mall had been closed for not paying social security taxes
Of course the opposition and the business community have criticized these enforcement mechanisms as heavy handed and abusive. These complaints lack merit. Given the pervasiveness of tax evasion decisive action was needed to reverse the situation. There is no reason a business can’t keep an accurate set of books and Seniat is right to expect them to. When tax evasion , or poor record keeping that could be masking tax evasion, is found it must be heavily sanctioned. If the sanction is not costly then tax cheats will simply see it as the “cost of doing business” and continue using “sloppy” record keeping to hide tax evasion. So until a culture of paying taxes is firmly established these aggressive collection efforts are entirely appropriate.
Although the measure taken to collect the IVA tax from businesses is the most obvious collection action Seniat has used similarly aggressive methods to collect income taxes. Due to extensive exemptions it is generally only people with significant personal wealth, business owners, and well paid professionals who are subject to Venezuela’s income tax. Seniat has reduced evasion among their ranks by targeting members of various professional organizations for review. Seniat has culled the lists of the Venezuelan Medical Association and Bar Associations in an attempt to match people with significant income with those who have actually filed returns. Again, the stiff fines levied for non-compliance have sharply increased the number of tax returns filed.
All of this has served to illustrate why some are motivated to oppose Chavez. But what does it say about the nature of the Chavez administration? At the least it shows a couple of things. First, while the opposition likes to paint the Chavez government as being administratively inept is clearly not the case. Previous governments had for decades failed miserably to improve tax collection. Their excuse was that Venezuelan’s were incorrigible tax cheats. With the tax authorities now well organized and efficient the Chavez administration has now shown how wrong that notion was. In fact, given the billions of dollars they are now having to pay in taxes it is probably safe to say what really bothers the well-heeled opposition is not Chavista inefficiency, but rather the zeal and efficiency the Chavez administration has brought to tax collection.
Another common misconception spread by the opposition is that corruption has increased and the current government is doing nothing about it. Yet one of the largest and most persistent forms of corruption throughout Venezuela’s history has been tax evasion. Refusal to pay taxes is not a victimless crime. It is theft from the government which is starved of the funds it needs to provide services. Or it is theft from your fellow citizens who must now pay more taxes to make up for those who refuse to pay. Either way it is a form of corruption and Chavez administration’s success is combating it is probably the single biggest and most successful anti-corruption initiative in Venezuelan history.
So the next time you hear the howls emanating from eastern Caracas about how terrible Chavez is hopefully you’ll remember what is the real reason behind them – Chavez’s unprecedented and highly successful tax collection efforts.
|
