Increasing the VAT has been a popular option for presidents but not with the National Assembly

Jan 17, 2024 | 0 comments

Increasing Ecuador’s Value Added Tax (VAT) is often the first option Ecuadorian presidents turn to when they face a budget crisis. It’s main advantage, if it’s approved by the National Assembly, is that additional revenue can begin flowing within a matter of weeks.

If a vote was held today, President Daniel Noboa’s 3% VAT tax increase proposal would fail in the National Assembly

“This was [President Daniel] Noboa’s thinking when he sent his 3% proposal to the Assembly last week,” says economics professor Kever Ramos. “He needs money quickly to pay for his narco war and is afraid of a drawn-out debate on other tax options.”

Following strong negative reaction to the plan in the Assembly, Ramos says Noboa may have to compromise or seek other tax sources. “The problem is that whatever is proposed must be agreed to in a hurry.”

Ramos says Noboa has a “strong hand to play” in the debate, given his sky-high popularity with the public. “If the Assembly drags its heals on this, they could feel the people’s wrath.”

Over the years, presidents have failed more often than not in increasing the VAT, Ramos points out.

Although Osvaldo Hurtado and León Febres Cordero succeeded in 1983 and 1986, Fabián Alarcón and Jamil Mahuad failed in 1996 and 1998.

Rafael Correa’s 2% increase, to 14%, was approved in 2016 to fund earthquake reconstruction but only for a period of one year. Later, when he floated the idea of making it permanent, he backed off when key Assembly members said they would not support it. In 2016, Correa pointed out that Ecuador’s rate was one of the lowest in Latin America, the same argument Noboa is making today.

Both Lenin Moreno and Guillermo Lasso considered a VAT increase but realized the idea had little public or Assembly support and did not pursue it.

According to Ramon, Noboa’s 3% increase will not pass if it is voted on today. “It seems like everyone in the Citizens Revolution and Social Christian blocs has a different idea, many of them in opposition to the others,” he says. “The finance minister is saying he is open to negotiations, but this must happen quickly given the circumstances. I expect Noboa will be flexible, but he understands he has the upper hand.”

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