Progressive Bolivian Income Tax Stopped by Angry Mobs

by John Leo Keenan

Santa Cruz, Bolivia, February 20, 2003

Something very momentous happened in Bolivia, on February 12, 2003. Gonzalo Sanchez de Lozada, president of Bolivia, had wanted to establish a progressive national income tax for his countrymen and presented such a plan to congress in his budget, at the beginning of February. He was sworn in as president last August 6. He seeks to more than double the national debt with IMF loans, plus the loans of other multilateral agencies, in his chase of huge public infrastructure projects. So his purpose all along has been to conform to the demands of organizations like the IMF. The Bolivian national debt is between 4 and 5 billion dollars right now. For the sake of the economic health of the nation, and for the next four years, president Sanchez de Lozada declared he wants to get a total of approximately 5 billion dollars in loans, mostly from the IMF and the Interamerican Development Bank.

Bolivia has plenty of federal and local taxes but it is one of the few places without a national income tax. It does have a tax that resembles, at first glance, a national income tax; it is called "IVA," more on this later.

Rejection of the tax plan was almost universal here, both among institutions and the general public. One of the institutions against the plan was the national police force. During the morning of February 12, policemen and civilians were protesting in front of the Burnt Palace, or "Palacio Quemado," Bolivia’s White House equivalent. Shots were fired by military soldiers loyal to the president, and the police responded in kind. More than 25 people died right there, mostly protesters, more than 100 were wounded, many remain gravely wounded. But the forces against the income tax defeated the government’s plan for the rest of us Bolivians.

For by 4pm, the president, afraid of a bigger revolution, afraid perhaps that he could soon be lynched by the masses (something that actually happened to a Bolivian president in the 1940s), appeared on television briefly and announced that he was withdrawing his plan from congress. He looked shaken. The last phrase in his speech was "God save Bolivia," but it would have been more adequate and better for him to say, "God bless Bolivia." A radio commentator, right after the capitulation speech was over, mercilessly pounced on the president for his choice of words, by saying: "He said ‘God save Bolivia’ because he can’t save it himself."

In fairness, my sense is that the president has good intentions with regard to the economy. He wants policies that work. It is tragic for him and his countrymen that his fatal problem is ignorance, total ignorance of economics. He, together with his whole cabinet, would benefit from reading economic articles like Lew Rockwell’s essay titled: "The Only Honest Thing," about economic law. Unfortunately, Bolivians don’t really have access yet to writers like, say, Joseph Sobran. As a friend of mine told me, when I translated for him an article by Sobran, "we don’t have writers like that here, and it will be a long time before we have them." Bullets like the ones he fires are unknown in this part of the world. I have translated Rockwell’s persuasive essay to Spanish and hope that I can get it to president Sanchez de Lozada.

In his "budget" plan, the big, sticky issue was always the tax issue. People making 1000 Bolivianos, that is 132 dollars per month (at today’s exchange rate), were scheduled to pay a tax of 2 dollars per month (1.5%). Those making double that, 2000 Bolivianos (264 dollars), were scheduled to pay 18.50 dollars per month in taxes (or 7%). Those making 3000 Bolivianos or 397 dollars, were scheduled to pay 35 dollars monthly (8.8%). Those making 5000 Bolivianos or 661 dollars per month, were scheduled to pay an income tax of 69 dollars per month (10.3%). Finally, all those making more than 661 dollars were scheduled to pay 12.5% per month, the top income tax rate.

There is a 13% flat tax instituted already that comes close to being a national income tax. It’s called "impuesto al valor agregado" (IVA) or "tax on aggregated value." The thing about this tax, however, is that you can discount it by showing the receipts of the purchases you’ve made during the previous 4 months. Of course, "everybody" buys receipts from a large black market in receipts, to the full extent of their salary, so nobody really pays the IVA. Private business people will pay a part of it to dissimulate.

What Sanchez de Lozada purported to do was to actually lower the IVA to 12.5 but get rid of the receipts system. The taxes were to be collected directly by the employer and given to the government. Up to now, businesses don’t have such a responsibility. Every private person or business has to pay his or its IVA directly to the government.

To give you a better idea about this situation, those making more than 661 dollars per month are 6% of Bolivia’s population; in the plan, they would have paid for 47% of all national income taxes (about 90 million dollars); those making between 330 dollars and 661 dollars would have paid 34 % of the tax total, and those making up to 330 dollars per month, that is 79 % of the population, would have accounted for the remaining 19 percent tax collection. Small numbers by American standards but $US 18.50 in monthly taxes is a lot to someone working full time and making only 264 dollars per month.

Bolivians are quite an anarchic people by nature, but confused about political economy. For instance, most really consider their president "neoliberal," meaning classical liberal; free market policies are identified with "neoliberalism." IMF policies are also identified as "neoliberalism." President Sanchez de Lozada is usually described by even the international media as a "liberal president," something which he heatedly and correctly denies. Much of the public here is identifying the progressive income tax with "neoliberal" policies imposed by the IMF, while in their mind the president is considered to be in cahoots with the IMF and other imperialists.

The president is a strong-minded individual and a talented multimillionaire in his own right (owner of the biggest gold mines in Bolivia and he started small). He has a majority coalition in the congress. He would have been able to pass his income tax through the congress and make it law. But after this horrific confrontation, I think the progressive income tax movement will be history in Bolivia for a long time to come; politicians know now that it would be self-destructive to try to impose that tax on those who can barely make ends meet; such citizens are scot-free now and for good. Bolivians are far more sensitive to violent deaths than they used to be.

For it’s not the first time the Bolivian people have taken matters into their own hands. The Bolivian president who was lynched in the 1940s died in the same square where the protesters died this week, right in front of the Burnt Palace. Yes, he was dragged out of the Palace. In the 1860s, president Manuel Belzu was addressing a large crowd in the square, from the balcony of Palacio Quemado. The crowd was chanting: "Long Live Belzu." History books record that Belzu’s eventual successor, Mariano Melgarejo, accompanied by a few men, went into the Palace riding his horse. Shots were heard inside. Then Melgarejo stood in that balcony, and yelled: "Belzu is dead, who lives now?" Yes, the crowd responded: "Long live Melgarejo."

And it is said that this nation has had more military coups than any other nation in the world, although it has had peaceful democratic transitions since 1981.

Bolivians at large may be confused about political economy but they sure know when someone is trying to pick their pocket. And, in our day and age, they deserve a lot of credit for that knowledge, and, above all, for resisting so bravely. Gonzalo Sanchez de Lozada cut his losses short as he had to, because in anarchic Bolivia, one can rely upon it, somebody loony like Hugo Chavez or suicidal like Saddam Hussein, would already have been overthrown by fellas who bite the bullet. Many people here will forever remember the big headline, in the front page of a major local newspaper, which said it all: "The ‘Big Tax’ was erased with blood."

So now the government has decided to do something more feasible to get IMF loans. It announced yesterday that it has decided to cut the number of ministries from 18 to 12 and the number of viceministries from 53 to 38. Among the ministries set to disappear are that of foreign trade, the financial services ministry, and the municipal development ministry. "General Directorates" will be reduced from 111 to 81. It is estimated that a new law, to be called "Organization Law of the Executive Power," will seek to reduce the total number of hierarchical positions from 181 to 137.

You can bet safely that president Sanchez de Lozada will in the end get a lot of money from the IMF and its sister organizations. Somebody bigger needs to stand against such organizations, and against confiscatory measures like the progressive income tax, with the kind of bravery Bolivians have shown the world. At the end, the American people will have to make their own stand.

John Leo Keenan [send him mail] is an economist and translator in Santa Cruz, Bolivia.

Copyright © 2003 LewRockwell.com