Ignorance or bad faith?

October 27, 2007

Next Thursday the new Financial Transaction Tax (ITF) will go into effect. This 1.5% tax will imposed on any debit, credit, transfer from an account in the country by any corporation or institution, individuals are exempt from it.

We have had taxes like this before during emergencies, but never has it been at such a high level. Moreover, there have been exemptions to it, like inter-company transfers and compensation between banks. This time around these are not exempt.

The reason this tax was imposed is that the Government reduced earlier in the year the level of the Value added tax (VAT) I order to reduce inflation. However, its reimposition is even worse as it will have a much bigger impact, as the VAT you pay can be deducted from  the tax you obtain when you sell an object or a service. Thus, the VAT is a single tax, while the ITF is paid all along the chain of commercialization.

The decree imposing this tax is so absurd, that there has been a generalized feeling that it had to be changed, the Government could
not be that ignorant. Despite this, there has been little indication that it will be changed and Government officials say “their” studies are that it is not so bad as the private sector claims.

Let’s look at some examples:

—-You produce a product; let’s say milk, just to mention something that has been in the headlines. Starting next Thursday, you will pay 1.5% whenever you pay suppliers for feed for your cows, salaries to your workers, electricity and the like. Then you will sell your milk to the industrial company that bottles it, this company will likely sell it to a distributor that in turn will sell it to a supermarket. Each step will generate a 1.5% tax on the total amount. At each step there is a profit of course (or we hope), so the total tax paid will not be 4 x 1.5%=6%, but it will be around 5%. Thus the price of milk would have to go up to 5% or the profits of everyone will be reduced significantly.

—-You go to a store and use your credit card, when the store gets paid there is a 1.5% tax. If the point of sale does not belong to the same bank as your card, then there is a 1.5% tax when the bank that owns the point of sale gets paid and a final one when the bank pays the credit card operator. This adds almost 4.5% to the price. Since the margin in Venezuela is controlled at 3%, then each transaction will result in a loss. Not a good business to be in if there is a guaranteed loss each time.

—-Short-term borrowing will disappear. To begin with, the overnight market will shutdown, nobody can afford to pay 1.5% to borrow for a day when you are short. The result: Banks will be more careful in the way they handle their treasury so they are never short funds. This will reduce economic intermediation. Short term loans will be two expensive, if you borrow every month and have to pay 1.5%, that rate alone annualized is more than most prevailing lending rates in Venezuela. Long term lending will be more expensive as you will have to pay 1.5% more each time. All of this adds to inflation.

—-The Caracas Stock Market will collapse further if for each transaction you have to pay 1.5%. Today’s paper says this will be exempt like other times, but so far there is no action on this.

—-There are other cases, such as travel agencies which get a fixed rate which is regulated, they will have to pay 1.5% more each time.

Thus, the only benefit is that the Government will collect more, but it would make little sense, even if you need financing to create such an inflationary a growth reducing tax, just when you claim to be introducing a new currency to attempt to stop inflation.

Unless, this is all a bad faith attempt to hurt the private sector even more in your attempt to impose the yet to be defined XXIst.
Century Socialism faster. Of course, it will all be blamed on the private sector, never in the stupid or misguided Government policies or in the end, on another cynical attempt to destroy private enterprise in Venezuela.

You be the judge.

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