Nov 13, 2010

Taxes, nonsenses and good intentions

Just the other day we read about the reforms to the tax code proposed by the government. One of the articles received special attention thought, it is claim it will reduce the corporate income tax rate from 25% to 22%. The reduction would be made gradually one percentage point each year till 2013.

The proponents of these reforms argue it will attract more investment in Ecuador. Yet, that analysis (if it could be named such) is quite kinder-garden.  There are more factors that investors take into account in the investment decision process, as political stability, legal certainty, labor costs, security, relative tax burdens and commercial infrastructure among others.

Recent events like the 30-S and the crime wave harmed the country’s political stability and points out the police’s incapacity to stop crime. The impending so called “dignity wage” would raise the labor costs and could cause a hiring freeze.  These factors are quite disappointing by themselves alone.

Yet, I want to pay attention to the relative tax burden, as other countries are also reducing the income tax rate. It would seem Government’s “hook-up investors” bait isn’t but a fiscal policy trend in the region. United States is also reducing their income corporate tax from 35% to a 26%. The amusing fact is that they also argue it will attract more investment.


It all comes to a basic math calculation. Ecuador’s tax rate decreases in 12% while United States tax rates decreases in 25%. So investors are more likely not to invest in Ecuador. United States is relatively more attractive than Ecuador. Doing the rate comparison we assumed the other factors are equal in both countries, which is indeed far for reality.

However I don’t want to be pessimistic about our country’s willingness to create, modify and change laws in pro industry development. The government’s road network is a positive thing, yet its true potential could be achieved with complementary road safety surveillance. The tax legislation could be complemented with fair enforcing tax regulations.

The tax rate reduction will imply a 200 million lost in government revenue, but as IRS head officer, Carlos Marx Carrasco, has stated, the tax evasion in Ecuador is about 13%. Reducing this income gap can be attained by enforcing tax compliance among tax evaders. There’s still much work to be done, the three point income tax reduction is welcomed, but it is only a step in creating an investment-attractive country. 



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