Freddy- I have been following the recent news on President Mejia's new economic package and am confused by some of its components, particularly as they affect the DR business sector. Since I am lacking some of the background info, I thought maybe you could address these issues for me. I am particularly curious to learn about the impact of the measures on local businesses and on labor and what their reaction has been. It would seem that increasing taxes will be a disincentive for consumption, thereby hurting both purchasing power and sales results. This is similar to when President Mejia withheld Christmas bonues for civil servants, again hurting both retailers - who had a slower Christmas than they expected - and consumers who had saw their purchasing power impacted. Also, was there any discussion prior to these moves of simply trying to tackle low tax revenues by enforcing anti-evasion laws and expanding the tax base instead of boosting tax rates? I'm sure President Mejia must have some good advisers, but I can't imagine that business executives would agree. As an old friend, I trust your judgement and would appreciate some insight. Thanks for your help.
Re: Paquetazo confusion
It's so good to hear from an old friend.
I am more glad to see that your analyisis and mine coincide.
I am sending you an analysis I did about the whole thing to you by email.
The way I see it, the timing and sequence of the reform package is going to hurt more people during more time, innecesarily; even though eventually things will work out---they always do, because if they don't we make them work out.
As you know, economic theory teaches us that you don't raise taxes and tax pressures, during economic contractions. A keynesian will tell you to apply some deficit spending policies to stimulate the economy and monetarists will tell you to easy the money. But no one suggests taxing your way out of a slowdown.
You increase taxes as a last resort and you do it when the pie is growing and we are doing it during a slowdown.
The Dom. Rep. is presently confronting three negative forces:
1. An 'Oil Shock" that implies higher gas prices and less money in the pockets of the people to spend more money.
2. A decrease in domestic and foreign investments in reaction to the uncertainty created by the new government by its misperception about the situation of the economy.
3. A decrease in trade with the U.S. due to the slowdown in the U.S.---remember US represents about 80 of our total trade.
Ceteris paribus, all these things mean less money in the consumers pocket and thus less buying power, thus less aggregate demand, lower sales, etc., etc. and then the government comes along and (tries) to raise the "tax pressure" from around 15% of the GDP to about 20%.
And then they are surprised about the consumer's and the businesspeople's complaints of a mayor slowdown, maybe even a recession!!!!!!!!
I hope my article helps you to understand our situation better.
Interesting, Another Question....
Thank you for that analysis...
I have an additional question. I noticed that some powers that
be in the DR are moving to drop the 5% currency tax.
As I understand, though I may be wrong, that currency tax is
charged whenever one converts currency from peso to USD and
from USD to peso.. Therefore it is expensive to move money
from pesos to dollars.
Is this a move by the upperclass/banks in the DR to allow them to convert their pesos to USD before the inflation from the new
taxes you mention above begin to decimate the peso.
Sorry if I am thinking silly, I am no economist..
is there anyway you could post your article on these
new taxes here as a stream of messages? I'd be interested
in reading this, and I suspect many others here are wondering
the possible results of these drastic taxes..
Re: Your Article?
The article is available at the link below. Only a Spanish version is available at this time.
Re: Your Article?
Do you dnow if the new taxes are to be applied to export products. [Cigars & Rum] Or just for internal sales.
Re: Interesting, Another Question....
Not really, its mainly because it is now an unnecessary and very costly tax, that could/should be romoved now that the tariff and tax reform will provide more resources for the Government.