Venezuela abolishes sales tax
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Emerging Markets

Venezuela abolishes sales tax

Government will phase out levy over next two years, says finance minister Rodrigo Cabeza

Venezuela ’s government has decided to eliminate its value added tax (VAT) within the next two years, Finance Minister Rodrigo Cabeza told Emerging Markets yesterday.

 “We are going to eliminate this regressive tax, which only hurts the poor,” said Cabeza. “This is not only a policy to curb inflation, but is a political decision to benefit the poor.”

 President Hugo Chavez had announced last month that the government would be reducing the VAT from 14% in two stages, to 11% starting March 1 and then 9% in July. Cabeza said that the subsequent analysis led the economic team to propose the complete elimination of the tax by 2009.

Overall tax collection in February 2007 was $1.8 billion, of which the VAT represented slightly more than 60% of that figure. Income tax accounted for 24% and customs 12.5%, with the rest made up by taxes on cigarettes, alcohol, etc.

 The minister said the absence of income from the VAT would be made up from a reform of the tax system “based on the age-old adage that who has more pays more.”

  Venezuela ’s general numbers have been improving in the past few years. The government predicts that GDP will grow by 8% in the first quarter of this year and by at least 6% year on year in 2007. If the prediction sticks, the economy will have grown for four consecutive year, the first time this has happened in 26 years. Overall GDP will be $200 billion, double what it was three years ago.

 The principal problem has been inflation, which was 17%. The government has crafted an inflationary plan with the goal of bringing it down into single digits this year. Chavez’s initial announcement concerning the VAT was part of this anti-inflationary plan. Another element in the plan is a change in the currency, the Bolivar, at the start of next year by dropping three zeroes from it.

Critics charge that the plan, far from ending inflation, will play havoc on government finances and may even contribute to inflation by pumping more money into the economy.

Cabeza said that he would accept some inflation if that meant people had more money in their pockets. “I would prefer to have greater demand than generalized poverty where the poor have no purchasing power whatsoever,” he said.

The Chavez government is not the first to promise elimination of the VAT. That was the central campaign promise of his predecessor, Rafael Caldera, when he took office in February 1994. Chavez was first elected in 1998 and re-elected against last year.

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