FMLN Passes Progressive Tax Reform

News

After twenty years of protesting tax reforms that shifted the tax burden from the wealthy and business elite onto the poor and working class, the demands of popular movement organizations were finally heard. A package of progressive tax reforms – introduced by the Farabundo Martí National Liberation Front (FMLN) party – was approved by the Legislative Assembly and signed into law by President Funes on December 16, 2011. Tax reform was one of the central campaign promises of President Funes; upon taking office in June 2009, he began efforts to negotiate what a “fiscal pact” with El Salvador’s economic elite. Following nearly two and a half years of fruitless negotiations, the leftist Farabundo Martí Front for National Liberation party (FMLN) presented a proposal in late November to the Legislative Assembly for a series of tax reforms intended to create a more equitable tributary system. Finally recognizing the futility of negotiating with big business, the Funes administration quickly presented its own tax reform proposal, very similar to that of the FMLN. A broad array of social movement organizations had already begun mobilizing to pressure El Salvador’s right-wing political parties to approve a new progressive income tax structure. On December 8th, unionists, community organizers, family farmers, and street vendors demonstrated in San Salvador to call on the economic elite to quit whining and pay their fair share of taxes, chanting “Honest businessperson? Pay your taxes!” In recent history, El Salvador has had one of the lowest tax collection rates in all of Latin America. Conservative estimates show that El Salvador’s big businesses evade paying more than $600 million a year in taxes through the many loopholes built into the system. Over 80% of all taxes paid come from the working and middle classes, with the poorest 10% of households paying 30% of their income in taxes while the wealthiest 10% of households paying only 11% of their income in taxes. Therefore, the Salvadoran government depends on large loans from multilateral financial institutions, including the World Bank and International Monetary Fund, to fund basic operational expenses. The Funes administration has had to turn to these same institutions for loans to pay for the new health, education and employment programs to serve historically-marginalized sectors of the country, which puts the new government in a vulnerable and unsustainable situation. The reforms passed in December intend to correct the gross imbalance of the former tax structure and to collect an additional $150 million per year to fund the administration’s increased investment in social programs. The reforms totally eliminate income taxes for people making less than $503 a month, benefitting more than 262,000 people. Those with a monthly salary between $503 and $6,200, approximately 250,000 people, will see their income tax reduced from 30% to 25%. In contrast, business income taxes will be increased from 25% to 30%, except for companies with revenue of less than $150,000, who will continue to pay 25%. The reforms also create a new 5% tax on all dividends paid by businesses to stock holders, the first time shareholders in El Salvador will be responsible for paying such taxes. The National Association of Private Business (ANEP), the association that represents the country’s wealthiest businesses, staunchly opposed the reforms which were approved in the Legislative Assembly by all parties except the Nationalist Republican Alliance (ARENA). Indeed, a major theme of ARENA´s campaign for the March 2012 legislative elections is a promise to reverse the reforms despite the fact that television news and newspaper polls have demonstrated broad support for the reforms. While the reforms are modest, they are a first step towards moving El Salvador away from its current economic model, in which the poor majority subsidizes the business elite, towards an “economic model based in solidarity, where those who earn more pay more,” according to Wilfredo Berríos, a telecommunication union organizer and leader of the Salvadoran Union Front.

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