University of Chicago economist and businessman Rodrigo Montealegre wrote to DR1 to join those expressing their concern over the ?paqueton,? or new tax reform bill, prepared by the PLD-PRD economic advisors. Montealegre says that Leonel Fernandez could be ?walking into a trap? by accepting the proposed tax increases inspired by PRD economic advisors to solve the deficit by increasing taxes. He sees a political angle to the recommendations and alerts that augmenting the tax burden will deepen the recession within the next 24 months and damage the image of the new PLD government just in time for the 2006 and 2008 elections. This is the ?trap? referred to.
Montealegre advocates less taxes, which he says will make the economy more efficient, less corrupt and more attractive to investors ? and result in more jobs by 2006 and 2008. He estimates that with this tax increase plan the government might not collect more revenue as there will be increased evasion and the recession will be greater than the increases in taxation. Furthermore, he speculates that the popularity of Leonel could founder, ?which means that in 2008 the PRD could return or worse, we could have our own Chavez.? In either case, the country would lose its present historic opportunity to relaunch a long-term program of growth, as was done in China, ?based on a market program of competition and incentives that would eventually eliminate poverty,? says the economist.
According to Montealegre, if the problem is one of cash flow ? ie high spending (the result of non-productive government jobs and populism) ? the solution would be to lower spending to the point where it equals the historic fiscal pressure. Or, if the problem is one of lost revenues because of the free trade agreement, then the solution would be to replace them with others, while keeping the same fiscal pressure, he explains. If the problem is one of accumulated debt (for previous deficits) and of urgency, because of the International Monetary Fund pending agreement resumption, then the solution would be to sell assets, accompanied by a cut in spending to balance the budget. ?Yes, I know that these assets are considered sacred, but more sacred is the opportunity to eliminate poverty through growth,? he writes.
In his opinion, it is not appropriate to increase taxes to solve a short-term emergency problem, as tax increases are generally long-term measures.
?To increase fiscal pressure may seem attractive to those who understand that it is a way to redistribute revenues (a la Robin Hood), because they are unaware of the recessionary impact that eventually damages the same sector of the population that they want to help (the poor). The only solution to the problem of poverty is to generate wealth, and the only route is through increases in GDP, which require less, not more taxes.?
Finally, Montealegre recommends that the society make the required analysis to understand which factors destroyed the economic miracle of the nineties and wrought this failure upon us. ?To the extent that it was populist economic policies, such as the previous tax increases (paquetazos) and the excessive government employment (botellas), then all the more reason to avoid them now that ?what we need is growth, not botellas,? he writes. For Montealegre, if it was corruption, whether private or public, then we should work to fortify the institutions needed to prevent this from happening again, and let justice work its case fairly, efficiently and uninterrupted by political considerations. Perhaps we could even recover some of the losses,? he concludes.