Historically, consumption taxes, particularly the value added tax or as it is called in Honduras, Sales Tax (ISV), have been classified as regressive taxes. Tax regressiveness means that a tax is not collected based on a person's purchasing power, but is applied uniformly to all taxpayers, regardless of their income.

This regressiveness implies that there is no redistribution of wealth, low-income people in theory should contribute the same as companies or people with high purchasing power when a tax is regressive. Governments have historically tried to combat this regressivity with exemptions, reducing the tax base or the universe of goods and services on which the tax can be collected. The exemptions are usually directed to basic necessities, food, health services, and education.

However, modern researchers have reconsidered the categorization of ISV as a regressive tax. Usually, the way to measure tax regressiveness is by determining whether or not the tax is calculated based on the income that people receive. However, spending or people's consumption is also a reflection of your purchasing power. If the economic capacity of people is measured in terms of their consumption, the ISV is not a regressive tax. In absolute terms, large companies and people with high purchasing power contribute more to ISV than people with low purchasing power, simply because they consume more.

Regardless of whether or not the ISV is regressive, one could intuitively argue that when a product or service is exempt from ISV ​​it will be cheaper. However, consumption taxes are not intuitive, what one thinks will happen, does not always happen. When the ISV rate increases, or an ISV exemption is removed, the price of things will increase, so we would intuitively think that when the ISV rate decreases or an exemption is created, the price of things will decrease. However, the effect of the ISV exemption is asymmetric, when the ISV is exempted or the ISV rate decreases, the price of things does not necessarily go down. Most people assume that indirect tax changes are fully and exactly passed on to consumers, argumentum ad populum. Recent studies show that there is no complete transfer of the exemption benefit to consumers, in some cases a little of the exemption is reflected in the consumer's price, in others the benefit is absorbed by the supplier.

Even in cases where the consumer does have a benefit, even if it is less than expected, is this really an effective tool for redistributing wealth? In the end, the government has lost a good amount of its income, in absolute terms the people who have benefited the most have been those with the highest purchasing power and the people with the least purchasing power have benefited a little.

It is worth asking then: What are the objectives of the exemptions? And are there alternative spending or subsidy programs that could achieve the intended social and distributional goals more efficiently and fairly?

A broad ISV tax base would imply more state budget, which could be invested in subsidies or alternative programs of direct payment of benefits for those most in need. In my opinion, this does not imply that we should eliminate all tax exemptions at once (although this is recommended by Professor Rita de la Feria in the article that I invite you to read below) since this would cause, as I have explained above, an increase in the prices of goods and services. But, having concrete evidence that the benefits of exemption or reduction of the ISV rate are not transferred in wealth distribution and have a minimal positive effect on people with low purchasing power; I consider that the congressmen and the people in charge of designing the tax policy should analyze in depth the economic effects of the exemptions or reduction of rates prior to approving them, extracting intuition from the field of decisions, and in any case, design effective social policies that gradually supplant these exemptions.

Thanks for reading me! If you want to know more about the subject, I invite you to read:


Claudia Midence

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