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Commentary

Guatemala: More Taxes or More Investment?


     
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Two international officials from those United Nations agencies that talk so much about their concern over poverty recently visited Guatemala. Both recommended that the government increase taxes in order to improve the country's economic growth, which has been quite squalid in the past few years. One of them specifically recommended increasing the total tax burden up to 16 percent of the nation’s GDP and setting aside a larger proportion of expenditures for "education, health and social development." Those words sound good and suggest great social sensitivity to the disturbing spectacle of poverty. Unfortunately, the forumula doesn’t work.

According to this line to thinking, poverty evolves primarily from the very inequitable manner in which income is distributed in society. Those who espouse this view maintain that if the state can fund social investment, broaden and improve education, and provide adequate health care by increasing taxes, poor people will be paid larger wages and will generally achieve better living conditions. But if we heed the lessons of history and economics, we see that the real world does not work that way.

In order to perform the social task these UN experts are recommending to the government of Guatemala, the first step is to charge higher taxes so that a wider slice of the wealth produced in the country be turned over to the government. If that is done, they think, the government can then develop a course of action that benefits the poor. But tax revenue created in this manner is inevitably subtracted from the private capital that might have been used to adopt new technologies, make new investments and, in the long run, generate more wealth. Fresh capital would flow into the country if investors perceived that it offered good business opportunities. The fundamental question is more taxes or more investment? Shall we produce less wealth and give the state a greater role in our development, or shall we let the state spend less on the social sector and boost the dynamics of the economy?

The question needs to be placed in a historical perspective and answered based on the results of concrete economic data. The countries that have achieved development, only increased their taxes after achieving sustained growth and a rate of development high enough that the tax burden did not affect the productive investments of the private sector. But to return to my initial example, Guatemalan companies today are taxed at a rate of 35 percent and the state takes 12.4 percent of the nation’s GDP, according to the Index of Economic Freedom, which also describes this burden as "high." Furthermore, according to revisions being made by the Central Bank, the country's GDP is being calculated slightly below the accepted figure, so the real tax burden would actually be 14 percent or 15 percent of the GDP.

I won't deny that a poor country, with a weak infrastructure and a population struggling for subsistence, should undertake some public investments in basic services and education. What does not seem logical is for Guatemala to reduce further the small private investment that exists, by frightening investors away in order to fund social programs that, in practice, are not effective in the war against poverty. The fact is that much of the public social expenditure (that so excites international officials) in fact ends up in the hands of a bureacracy that never stops growing, often vanishes in thin air thanks to corruption, and is detoured into "operational expenses" that never reach the neediest citizens

The climate of insecurity enveloping almost all the countries in our region directly affects the living conditions of the poorest citizens. They're the ones who live in the marginal areas where the police never go, where gangs of criminals rule uncontrolled, where law enforcement is impossible, and where property—even the smallest—is always threatened. Without security and a system of efficient justice, the majority of people are at the mercy of the strongest and cannot devote their efforts to advancing and improving their condition. It is a key function of the state to guarantee, first and foremost, these public services that are essential to civilized life.

The dilemma posed here is, in reality, much clearer and less difficult to solve. Either Guatemala encumbers its already very poor and long-suffering population with more taxes, thus increasing the public bureaucracy, or it stimulates private investment, the free flow of capital, and an environment of security and order so that everyone has an opportunity to prosper.


Carlos Sabino is an adjunct fellow with The Independent Institute, and a visiting professor and researcher at the Universidad Francisco Marroquín Foundation in Guatemala.






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