Many proposals but no consensus alternative to the Noboa’s 3% VAT increase in Assembly

Jan 18, 2024 | 0 comments

Despite general rejection of President Daniel Noboa’s proposed 3% increase in the value added tax, no alternatives have emerged with majority support in the National Assembly.

Ecuador Finance Minister Juan Carlos Vega

“All of us agree the government needs more revenue, not just to fight narcro terrorists but to pay debts and fund our social programs,” says Camilo Salinas of the Assembly’s Construye bloc. “But so far, there is no consensus on another tax or taxes in the Assembly. There are many proposals, some of them dangerous in my opinion, but nothing that we are rallying around.”

Salinas adds: “My concern, like that of many of my fellow Assembly members, is that new taxes don’t impact our poorest citizens.”

Among the proposals to boost revenue are to ignore the results of the popular referendum to end oil production in the Yasuní National Park, to default on the national debt, to increase the money exit tax (ISD) to 6% from the current 3.5%, increase taxes on bank profits and to eliminate some of the fuel subsidy.

In his Wednesday presentation before the Assembly’s Economic Development Commission, Finance Minister Juan Carlos Vega said the government is open to alternatives but defended the VAT hike because of its immediate benefit. “I am aware of the other proposals, and we support some of them,” he said. “The problem is that, in some cases, they would take months to generate income which we need very quickly to fulfill our obligations to the people.”

Vega defended the VAT proposal against charges it is a regressive tax that affects poor people the most. “If it was a tax on all purchases, this would be true, but we have exemptions for basic necessities such as food, medicine, medical care, rent and education that are designed to protect the most vulnerable. The 3% increase will have the biggest impact on those who can afford to pay more.”

Salinas and Construye members propose a reduction of fuel subsidies by targeting low-income people. “We can save $1.5 billion by making sure gasoline subsidies apply only to those who need them and not to the entire driving public,” he said. “We should also look at targeting the LP gas subsidy, which is the largest.”

In addition, Construye favors a reduction of the number of government ministries and selling public companies that could be better managed by the private sector.

Among Citizen Revolution proposals are: stopping payment of the public debt; increasing taxes on individuals with assets of $1 million or more; increasing the ISD tax to 6%; and applying a windfall profits tax on private banks.

Although Citizens Revolution Assemblyman Carlos Luna says the stoppage of debt payments would probably be temporary, he said default might be necessary depending on the condition of the country in the coming months.

Both Citizens Revolution and the Social Christian blocs suggest the government ignore the referendum vote to end oil production in Yasuní National Park. “I admit this is an extreme measure, ignoring the intent of the voters, but these are extreme times, and we need the $1.2 billion in revenue generated in the Yasuní. “I think citizens would understand why we have to do this if we explain the reasons.”

Other Assembly members, including Salinas, reject scuttling the Yasuní vote. “There is no way this would be allowed by the Constitutional Court,” he says. “In the first place, it violates all the rules of democracy and, on the other, we have other options that would generate more revenue.”

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