Guatemala’s recently passed fiscal reform, scheduled to take effect in 2013, raises taxes for upper-middle-class and wealthy earners.
Fiscal reform is an issue of particular importance in Guatemala, a nation with one of the world’s greatest gaps in income distribution. While Guatemala’s annual GDP is the highest in Central America, tax rates have consistently hovered around 10 percent, the lowest in the entire region. The international community has long encouraged fiscal reform as an obvious step toward reducing debt and inequality. In a visit to the country in 2010, U.S. Secretary of State Hillary Clinton expressed firm support for the measure.
As part of the 1996 Peace Accords ending Guatemala’s 36-year civil war, the government agreed to raise tax revenues as a percentage of GDP from 8 percent to 12 percent by the year 2000. The previous administration, under President Álvaro Colóm, made repeated efforts to pass a fiscal reform only to be blocked by resistance from congress and the private sector.
However, last month the fiscal reform package passed in expedited fashion as a matter of national urgency: with more than 105 of 158 representatives supporting it, Guatemala’s Congress was able to hold an immediate vote, bypassing a lengthy debate process. It passed in Congress with 102 votes, a near two-thirds majority.
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.
The tax reform further benefited from party fragmentation and shifting political alliances. National Unity of Hope (UNE), the party of Colóm, began to crumble when Colóm’s ex-wife, Sandra Torres, attempted to run for the presidency. Her failed candidacy caused the party to split; party leader Roberto Alejos left UNE and took many members with him. His new willingness to ally himself with Pérez Molina’s harder-lined Patriot Party on the issue of tax reform proved influential in swinging the vote.
Critics of the reform voice uncertainty that revenue from increased taxes will be put to good use. Nevertheless, many Guatemalans hope that this long-awaited measure will be a step toward improved social services and a better quality of life.
Kate Newman is a guest blogger to AQ Online. She is a freelance writer dividing her time between Mexico, Guatemala and New York. She is a former Watson Fellow and in 2010 was named Oslo Peace Scholar in a joint program of Australian National University and Peace Research Institute Oslo.