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An opposition protest rally in Quito on June 25, 2015. (Photo: Carlos Rodríguez/Andes)
Wednesday, July 1, 2015
Perspectives

Ecuador: The Streets Speak Out


Ecuador tax protests undermine President Rafael Correa.


LATINVEX SPECIAL
Analytica

 

QUITO -- Late June 8, spontaneous street demonstrations erupted in Quito around a week after president Rafael Correa announced his latest plans for tax increases. Aimed at rallying his original leftwing following, the plan backfired dramatically. The protests were so large and numerous – from the Galápagos Islands, where residents demonstrated against a new special law for the remote archipelago, to the main cities of the Andes and Pacific Coast lowlands, to Macas in the southeast Amazon – that the Vatican considered canceling the July visit of Pope Francis given the confrontational situation, sources close to the church have informed us. After a belligerent Monday morning speech from the presidential balcony, in the evening, a subdued Correa announced that he was "temporarily" withdrawing the controversial legislation from the congress to allow for time to convince Ecuadorians of the wisdom of the higher inheritance and real estate taxes. It was one of the president's worst losses of face in his more than eight years in office.

The protests revealed the president's dwindling political power in parallel to the reversal in economic fortunes as the price of crude oil lost half its value from a year ago to December (recovering only moderately) and the dollar strengthened, making Ecuadorian exports comparatively more expensive. The power shift became visible in the streets. While not near the around 100,000 people who protested against the government on May 1, Correa's political movement, Alianza Pais, had to give up the defense of the highly symbolic grandstand on Shyris Avenue in northern Quito right across from AP headquarters. On June 8, AP demonstrators had to withdraw from the grandstand as they risked being overwhelmed by the far superior numbers of anti-Correa protestors. In the following days, AP resorted to desperate measures not to lose the Tribuna, including having police "save their seats" during the day, having it draped in a giant yellow-blue-red flag, and a public viewing of the Copa America soccer tournament (where Ecuador bowed out after a mediocre performance). At present, the grandstand has fallen to Correa's critics.

The protests have shown some signs of fatigue following the demonstrators' partial victories. They may be concentrating efforts however: labor and environmentalist groups and conservative banker-cum-politician Guillermo Lasso called for separate demonstrations at the state-run social security institute and the congress, respectively, on June 24, while conservative Guayaquil mayor Jaime Nebot called for a massive rally in Guayaquil the next day, with other protests called for Cuenca and Galápagos. "Ecuador is once again marching towards a great clash," wrote Cuban-born commentator Carlos Alberto Montaner.


Much of the blame for the protests can be attributed to the president. Protestors refused to see beyond his use of the word "temporarily" in conciliatory speech. And since then, once again, government calls for peaceful dialogue have been swamped on the pro-government side by harangues. Even while attacking his critics, president Correa linked Catholic faith in the Gospel with faith in his politics. Viviana Bonilla, minister for politics, one of several odd cabinet positions, said that protestors who formed a massive vehicle caravan to protest the president's arrival at the airport in Quito from a European summit were attempting to kill him. The violence the presidential camp accuses the remarkably peaceful and mostly self-organized demonstrators of using remains overwhelmingly fictional. Like Venezuelan president Nicolás Maduro, Correa is attempting to portray himself as a victim of a completely fictional plot. Sadly, some individuals on social networks have called for the military to force Correa out, handing administration officials a pretense to claim ominous forces stood behind the protests and the demonstrators' chant of "Fuera Correa, Fuera" (Out, Correa Out). What started as a tax protest has become far more generalized. "The situation has passed beyond those laws, the protest is against a cumulus of abuses," said Nebot ahead of the Guayaquil demonstration, the second major protest following another called by Lasso. The long list of popular grievances began to coalesce into important protests after Correa cancelled the Yasuní ITT initiative in August 2013, which sought to keep Ecuador's biggest oilfield underground in exchange for compensation, and scuttled the subsequent attempt by environmentalists to force a referendum on the matter. Subsequently, through the constitutional court and electoral body that Correa controls, he has blocked multiple attempts at forcing a referendum on his wish to change the constitution to be able to stand for election again in 2017, even though more than 80 percent of Ecuadorians, according to polls, want to vote on the matter. The pressure in the political pot has reached an interesting level.

THE TAX PLAN


Their length and pomp considered, president Rafael Correa's State of the Nation speeches tend to be short on news. This year, he followed up on statements that the economy is performing well, based on above-budget tax receipts for the first quarter, and that the worst of the economic weak spell is over with announcements on tax increases.

"I will face whatever political cost is necessary but in the coming days, I will send the National Assembly a new tax system for inheritances greater than 100 basic (monthly) minimum salaries," or $35,400. Additionally, he aims to capture added property values on real estate that benefit from government investment.

Correa's plans indeed sparked controversy and, considering the limited amounts the tax service (SRI) currently collects on inheritance, $10.69m in 2014 versus $9.02m in 2013, seems an odd choice were it not for its ideological background. Correa said that the measure is aimed at reducing inequality. "When will a poor person receive an inheritance greater than $50,000?" he asked.

 

Turns out, the probability may not be that low. Correa did say that "only three out of every thousand citizens receive an inheritance every year," an unusual comment given that someone has to die for another to inherit something. Analysts however noted that minor rural properties are typically the inheritance passed on by Ecuador's poorest to their children. The threshold upon which the tax must be paid will fall by almost 50 percent from $68,880 to $35,400. To target inheritances is nothing new for Correa, who in 2008 installed an inheritance tax system from 5 percent for the smallest to 35 percent for the largest inheritances, currently around $850,000 and up.

 

Critics fear that slashing the threshold will force even low-income Ecuadorians to pay inheritance taxes on modest property, potentially forcing the beneficiaries to have to sell their inheritance just to pay the tax. Considering the initial levels are just 5 percent (although they may rise), these comments do appear likely to be exaggerated, also considered the threshold will be applied to the size of the assets and capital individuals would inherit; two heirs to a $70,000 apartment would still not pay taxes on that inheritance. But while the government says that it aims to create a nation of entrepreneurs, the tax levels finally announced by Correa on May 30 have led to fears regarding the future of family enterprises: the top tax bracket, from $849,600 onwards, will pay 47.5 percent. Once the new high-tax inheritance system is installed, the long-term effect could be to spur consumption and discourage savings, which runs against the culture of entrepreneurship the administration insists it is creating.

 

Worryingly, Correa has also railed against what he has called a culture of family-owned big business, considering that some 80 percent of companies in Ecuador are controlled by families, big or small. Submitted as fast-track legislation and then modified after the first howls of protest over a 77 percent peak rate, plus a last-second inclusion of a proposal to distribute the shares of companies to employees, show major improvisation in what supposedly is a key proposal to address income inequality.

 

Overall, the shock over the tax plan, from which Correa is in fact showing no willingness to truly retreat, has introduced even more uncertainty into an economy that has historically suffered from a lack of policy stability. As a result, investment projects have stalled, and speculation soared that government officials were seeking to devalue assets to buy them up cheaply.


Negative effects could be more immediate regarding the plan to tax real estate gains. Not for the first time, Correa argued that gains from state investments should go to state, rather than property owners benefitting from a new road, bridge, or other capital created with taxes. "Any increase in the value of an asset that is not the direct fruit of the actions of the economic agent is an illegitimate profit and sometimes immoral," Correa argued, citing as examples property values he said had increased near Yachay, a state university near Ibarra in northern Ecuador, at the site of the new UNASUR headquarters on the equator north of Quito proper, as well as the capital's new international airport – the latter however a privately-run concession. The tax on these gains would run between 50 percent and 70 percent, said Correa's legal secretary, Alexis Mera. From a conceptual standpoint, Correa's arguments are easily challenged.

To argue illegitimacy on all benefits from government investments is exaggerated; it could often be difficult to prove that a property owner specifically bought real estate to gain from eventual state investment. Government economic activity has become the dominant driver of investment in Ecuador under Correa, making it difficult for individuals or companies to extricate themselves from this risk of illegitimacy, even if they wanted to, and already pay taxes. In the case of gains on public investment, there is already a 10 percent surcharge on profits made on urban lots, introduced as recently as 2010. While the president pledged that these tax increases would go to local governments, rather than the SRI, the overall impression the announcements made pointed to an administration continuing to scrape the bottom of the barrel to make ends meet. Abandoning the government great welfare for all, the aspirational, consumption-oriented promise of politics that made many leftwing populists successful in Latin America in recent years has come apart.

For many Ecuadorians, it was the last straw.

This commentary originally appeared in Ecuador Weekly Report published by Analytica. Republished with permission.

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