From the Ordinary to the Extraordinary

This time the "Solidarity, Extraordinary and Temporal Tax" project was negotiated and presented, along with a new Economic Emergency Treasury Bonds emission, which were later approved by Congress.

Fiscal situation seems to need it. The Public Finance Ministry brought to evidence the need of short term resources and the fiscal solvency illusion presented by previous government authorities.

This extraordinary tax will be in vogue two years, with different payment characteristics each year. It is mandatory for all businesses, individuals or independent lucrative organizations and employees earning more than Q. 48,000 quetzals (about US$8,000) yearly.

An interesting point is that tax revenues have two specific destinies: a) 50% to pay internal, floating and bonus public debt, accumulated until December 31st 1995; and b) the other 50% to support monetary policy approved by the Monetary Council. The dest iny given to the tax seems attractive to contribute, in some way, in lowering interest rates. Nevertheless, real effects expected from this tax are dubious. First, because there is no need of emergent resources to resolve the government's debt problem. Wh at is needed is a guaranteed constant flow of funds so that the next administration wont have to face the same problem. Second, because these resources are too little to make a difference in the interest rates. It is estimated that Q500 million quetzals w ould be needed during a 10 year period to recapitalize Banco de Guatemala (the central bank).

Supposing that the government is able to collect Q1,000 millions, or even the Q1,200 worth of bonds, income would be about Q600 millions.

Consequently, it would be needed an extraordinary tax eight more years to solve the problem. So to speak, a constant fiscal discipline is required, more than what this tax alone achieves. So this tax seems to be only the beginning of a long program to rec apitalize the central bank, whose effect on interest rates will be long term.

A lot of exemptions and special treatments also persist in the tax design, which don't have economic foundations, and that, along with administrative problems, corrode Guatemala's tax base.