TO GROW OR NOT TO GROW

October 11, 2006

The first country in Latin America that institutes a flat-tax regime is going to make history for that region, just as history is being made by such pro-growth flat-tax regimes as Slovakia, Georgia and Estonia across Eastern Europe.  The man who made it happen in Estonia is giving Costa Rica that chance, says the Wall Street Journal.

Costa Rica is not the poorest country in Latin America but it's hardly meeting its potential:

  • Steep personal income-tax rates are the cause of a government-estimated tax evasion rate of 70 percent.
  • A 30 percent corporate tax rate discourages investment.

Also:

  • Costa Rica was considered a model welfare state 20 years ago.
  • Today, 80 percent of government revenues are dedicated to wages, pensions, debt service and higher education.
  • Most of the region now takes for granted technology such as portable email devices; in Costa Rica such modern conveniences remain a dream.

Former Estonian Prime Minister Mart Laar faced bigger challenges in post-Soviet-Estonia:

  • In 1992 his country was running 1,000 percent annualized inflation and the economy had contracted 30 percent over two years.
  • Today, with its zero percent corporate tax rate on reinvested profits, single tax rate for individuals and a fully deregulated economy, Estonia is running ahead of the European pack, attracting human and financial capital.
  • Real gross domestic product (GDP) growth in 2006-2007 is forecast at more than 8 percent per year.

During three days of meetings with the government of Costa Rican President Oscar Arias, members of congress, economists, businessmen and opinion makers, Laar argued that Costa Rica could undergo a similar transformation if only the government would "just do it."  He emphasized the importance of privatization, accession to the Central American Free Trade Agreement and, of course, the flat tax.

Costa Rica has a chance to transform the region.  It should take it, says the Journal.

Source: Editorial, "To Grow or Not to Grow," Wall Street Journal, October 11, 2006.

For text (subscription required):

http://online.wsj.com/article/SB116052679565088760.html

 

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