Wednesday, October 10, 2007

New taxes in Venezuela sure to boost inflation

There is this:
And there is that: business will pay a 1.5% tax on any transaction they do through November and December (and maybe later but that is not decided yet!!!!!)

The first conclusion of this new scandalous tax we must make is that the already low rank in business competitiveness will take yet another hit. Although at this point Venezuela been so low in the international rankings, I doubt it will make much difference. Private business in Venezuela is not hiring, is not expanding, and in the best of cases is happy at working at full capacity waiting for the government to take it over through the spurious expropriations contemplated in the new constitution. The only sectors that are in "expansion" are low capital consuming import and distribution. Read: the government associates (or not) who import everything we eat and redistribute it around. With a warehouse and a few trucks they are in business. Even if Chavez takes their business away (e.g. for Mercal), chances are their investment has been long recovered.

But let's go into the detail of this tax which is a naked admission by the government of the failure of its anti inflation policies. Yes, a FAILURE OF THE ANTI INFLATIONARY POLICIES.

The tax will be paid on any transaction that private business makes (state business might be exempted, this is not quite clear at this point). Only payroll payments will be exempt, supposedly to protect employees from being charged for that tax. It does not matter, they will pay for it in inflation as I am going to show next.

So, let's look at a food production chain, say, chicken. Companies that import goods to raise chicken pay 1.5% at importation time when they pay their CADIVI bill (if they have CADIVI access). Most of the time they sell their goods to animal feed plants, veterinarian facilities, local producers of specific goods made from imported raw material, etc.... These people pay another 1.5%. The products make it to the chicken producers. Another 1.5% added. When the cycle of raising chickens is done, the chicken farmer sells the chicken to a processing system, another 1.5% is thus added. Then the chicken is distributed to grocery stores and we get another 1.5%.

Total? 5 x 1.5 = 7.5% increased cost.

By the time the new tax works its way through the production chain we are set to observe at the very least a 3 to 5% inflation boost in many items (not all increases, wages do not increase, etc...). Thus, the private worker who was "spared" the tax will end up paying it anyway. Money does not grow on trees, no matter what Chavez and Monedero think, and the new tax cost will be passed on to the final customers.

But that is not the reason why I wanted to write on this subject even though the above explanation was necessary. The reason I wanted to stress this is that we are seeing again another governmental failure of its financial and economical policies. The reader should wonder why at this point, with the oil prices so high and with the claimed production of PDVSA so good the government needs to create such a brutal tax. Brutal not only for business but more brutal for consumers.

The origin is the use of lowering the sales tax to fight inflation. Through 2007 at two opportunities the government has lowered its sales tax in the hope of lowering inflation levels. This has of course has failed. In spite of
sales tax going down from 14 to 9 %, inflation keeps apace and will likely be as high as last year, betraying a tendency to rise over time!

But in lowering sales tax the government has also lowered its revenues, something which economist warned the government at the time. But when did the Chavez administration listen to economists in Venezuela? This "supply side from hell" maneuver backfired badly for several reasons but for one mainly: the government kept increasing its spending as 2007 became yet another election year. The Chavez administration is starting to be called the "apotheosis of populism" in that no other Venezuelan administration has been giving away so much money to so many people without anything in return except for a promise of voting for Chavez. And chavismo is finding the hard truth of populists systems: they only survive through new promises and new spending: whenever they need to balance the books they lose support immediately.

So, faced with reality (no new private investment in production, decreasing oil revenues due as much through a decreased production in oil as well as a doubling of the PDVSA payroll, and a galloping corruption to crown it all) the government needs to find fresh cash FAST, before the December election. This is to give all sorts of year end bonus to the public sector to convince them to vote for Chavez in December (in Venezuela year end bonus must be given by law BEFORE December). Thus Chavez has decided to force the private sector to finance part of his constitutional referendum campaign with what should be considered an exaction. Chavismo knows very well that the public will only start feeling the pinch AFTER the vote takes place, that is, once the inventories are sold at the old price and after the new goods at the new prices hit the shelves. December inflation for all that I know could be as high as 5%, but the new constitution will have been approved. At least that is what Chavez hope anyway.

At any rate, when we see how easy the government does and undoes taxes and how the new constitution will make private property a very relative term, soon it will look good for Venezuelan business men, or those who are left, to start moving to more appealing markets such as Haiti.

PS: There is a detail that I am putting apart because I do not know if it is sheer governmental incompetence or just plain meanness from their part.

The Chavez administration has the gall to claim that this new tax will help fight inflation as it will remove money from the streets. Forgetting conveniently that it will put them into the government pocket to redistribute as fast as it comes in.

But what is worse in my eyes, is that the government forgot that a Sales Tax is not as punitive on people and inflation as the new tax they are imposing. Why you may ask? Because sales taxes are indirectly deductible. That is, as a company all the sales tax I would be charging can be compensated by the ones that I paid. That is, the sales taxes is carried over to the final customer but that tax has a limited effect on how I operate my business and my cost structure. With the new emergency tax business we will receive a direct hit that cannot be compensated except a price increase on the products we sell. There is no attenuation possible as nothing can be deducted. This is true from Polar to the little grocery store at the corner. In the end, as it is always the case, customers get screwed.

-The end-

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