Prominent economist Bernardo Vega, also known as a writer and diplomat as well as a savvy businessman, writes today about taxes and the free trade agreement between the United States, the Dominican Republic and the Central American nations. Vega states that the Dominican Congress should not pass the needed approval of DR-CAFTA until it has been passed by the US Congress, and he gives four good reasons for doing so. First, because the legislation might not pass the US Congress, and the “costs” (with tongue in cheek he says: “Costs in more than one sense of the word.”) would be very high. Second, this is distracting Congress’s attention from laws that are pending approval and that form part of the IMF accord which already has enough problems. Third, the US Congress can only approve or reject the agreement, but through “side letters,” needed to get the votes to pass, they can demand modifications and the DR would be in a better position to ask for something in exchange if the Dominican Congress has not approved the bill. Fourth, it will be easier for the local congress to pass the legislation once it has passed in Washington.
Vega says that the President of Costa Rica has announced that the FTA will not be sent to his Congress until early in 2006, and the crisis in Nicaragua makes things look bleak for an early passage there. However, once Washington passes the treaty, Vega says that the Dominican legislators should move quickly so as not to scare away potential investors. Since many people have said that much of the current pressure to pass the treaty now is based on the need for US legislators to see what is happening in the treaty countries, Vega says that it is highly likely that the United States legislators will act according to the will of their constituents and not because of what others are doing. The simultaneous tax reform should be characterized by its neutral effects, in the first place: this is to say that new taxes should only be introduced to make up for what the government will lose through the FTA agreements, and by its progressiveness, costing the rich more than the poor, in the second place.
Charging an 8% VAT tax on certain items of the typical food basket that are now exempt can be done without increasing the cost of those foodstuffs. Salted fish, such as cod and mackerel, sardines, oil and oats are good examples as is chicken, eggs, bread and pasta, since the exchange commission tax on imports will be abolished at the same time.
Vega says that taxing interest on savings accounts or CDs is a typical practice in countries like the Dominican Republic, and given the large difference in interest rates between the DR and the US it is unlikely that such a tax will cause a flight of capital, especially if an amnesty is granted to those who cannot adequately explain the source of their wealth. Any tax on income within the industrial free zones should only come if the other nations in Central America do the same, since it would push companies to flee the DR towards Central America. Finally, the economist says that increasing tariffs on non-American or non-Central American products would increase the “detouring” of trade as a result of the FTA, and this would probably put the DR in contravention of World Trade Organization guidelines and stimulate the Europeans to apply the clause that exists under the Cotonou Agreement that would oblige the DR to give them the same tariff treatment as those applied under the FTA that the country has with the Americans.