Sophists were ancient Greek philosophers who, among other things, taught the art of the use of words. Their methods were not always entirely ethical, and it is said that they practiced the art of presenting the false as true. A sophism, therefore, is an argument that appears to be true, but which at bottom is as false as a three lempiras bill. To elaborate a sophism, if the premises are true, it is enough to introduce some element, a twist or a variable that seems true and the magic is done.
There are some topics among us that nobody discusses and are accepted as absolute truths. Fiscal regressivity is one of these topics. Thick studies have been filled, and many discussion forums on tax issues are contaminated with this concept. Fiscal regressivity, as a theory, indicates that people with fewer resources pay more indirect taxes than those with greater resources, posing a desolate inequitable system, in which taxation falls on the most needy. It is an apparently complex concept, but it can be explained with simple numerical examples (Wisecarver, 1980). In this sense, we will try to explain it using our sales tax:
- The sales tax is an indirect tax levied on consumption by individuals.
- The rate of the tax is 15% and 18%, depending on the product or service being taxed.
- This tax will be paid by all persons equally, when they consume the same product or service.
- In this sense, if a given product or service costs one hundred lempiras and pays 15%, the tax will be L 15.00 per product.
- If a janitor earns L 10,000.00 in salary and buys the product: The theory of regressivity calculates the incidence of the tax by dividing the L 15.00 of tax by the L 10,000.00 of income. The result is 0.15%.
- If an executive or official buys the same product, but earns a salary of L 120,000.00. The result of dividing the tax by the income is 0.0125%.
- In comparative terms, the theory would indicate that the janitor pays 12 times more tax than the civil servant, in proportion to their respective incomes.
In the theory of fiscal regressivity most of the elements are true. However, personal income is introduced into the analysis, an element taken completely out of context, which contaminates the reasoning and produces incorrect results. Generally, the comparison is made between the tax, expressed as a fixed percentage, and income, a variable and dynamic element. To establish a relationship between the tax and the income of individuals is to distort reality. The relationship between income and tax is artificial and incorrect. Clearly, what increases or decreases is people’s income over time. The tax remains unchanged, its value remains the same, regardless of the income of the person paying it.
In relation to the sales tax, everyone pays exactly the same tax rate (15%-18%), but when the tax is compared against income, it appears that people with lower incomes will pay more. Of course, a comparison needs to be made with extreme cases, such as the one used in the example. When the comparison is made between closer incomes, the alleged regressivity simply disappears or becomes irrelevant. In a famous example, Daniel L. Wisecarver (Wisecarver, 1980), compares incomes between a farmer and a fisherman: In year 1, the farmer has a bumper crop that brings him great income; the fisherman, on the other hand, suffers a fish shortage and his income deteriorates to the point of affecting his subsistence; in this scenario, the consumption tax would be regressive for the fisherman; in year 2, it is the farmer who suffers a drought, because of which, he loses his crop and his income, but the fisherman, has a great year and fishing brings him very good income, now the consumption tax would be regressive for the farmer. Evidently, the income-tax relationship and its regressivity rating does not work when dealing with income closer together, or when measuring income earned over a longer period of time.
Fiscal regressivity is supported by economic texts and is part of the traditional technique of fiscal policy analysis (Gómez-Sabaini, 2006). Its objectives seem to determine the effects of the tax on income. However, the conclusion: “He who has less income pays more”, is far-fetched. The truth is that the poor do not pay more, the real problem is their meager income. If we think about it, the simplistic analysis of the supposed “regressivity” can be applied to practically everything. Divide the prices of all things by the income of the poorest people; and the result will be that all prices of all goods and services will be more expensive for those with lower incomes.
Tax regressivity is supported by economic texts and is part of the traditional technique of fiscal policy analysis (Gómez-Sabaini, 2006). Its objectives seem to determine the effects of the tax on income. However, the conclusion: “He who has less income pays more”, is far-fetched. The truth is that the poor do not pay more, the real problem is their meager income. If we think about it, the simplistic analysis of the supposed “regressivity” can be applied to practically everything. Divide the prices of all things by the income of the poorest people; and the result will be that all prices of all goods and services will be more expensive for those with lower incomes.
Fiscal regressivity is a myth that diverts attention from the real problems: low incomes and high tax rates. In general, scarcity is a problem that makes any activity difficult: If you lack intelligence, it is difficult to study; if you lack talent, it is extremely difficult to develop an artistic or sporting activity; if you lack arable land, you cannot harvest; if you lack means of transportation, it is very difficult to get where you are going. The problem, clearly, is not having the resources to solve the different situations that arise in life.
In any case, the calculation of tax incidence and regressivity as a conclusion are entirely theoretical; they require pure elements to provide valid results. As a publication of the Inter-American Development Bank has pointed out: “Hypothetically, a totally flat VAT, taxing all household consumption goods and services equally, would be regressive because the poor consume a higher proportion of their income than the rich. This is the logic that leads to the common belief that VAT is by definition a regressive tax. But in practice, depending on which goods are exempt or taxed at reduced rates, and also depending on what measure of income is used, VAT may or may not be regressive.” (Ana Corbacho, 2013).
The IDB publication also points out, moreover, that the calculation of fiscal regressivity uses the income of individuals, obtained from a survey conducted at a given point in time. The survey does not take into account the situation of the unemployed, seasonal workers or those who lose their businesses or livelihoods due to health issues. It would be more appropriate for income to be considered over a longer period of time to have a better appreciation of a family’s regular income. We are also told in the book published by the IDB that when the tax is contrasted against other variables, for example, the level of household consumption, “the VAT in most countries (although not all) is slightly progressive” (Ana Corbacho, 2013). Evidently, in a tax such as sales tax, the one who consumes the most is the one who pays the most.
The false conclusion of tax regressivity is used by some tax policy makers to propose and carry out tax reforms that tax those with greater resources more heavily. The argument seems to blame “regressivity” on people with greater economic capacity, when it is the States, through their taxing power, that conceive, create and collect taxes. People do not create taxes nor do they tax anyone, nor are they to blame for other people’s low incomes. In our case, it is the Honduran State that has created a sales tax with rates of 15% and 18%. People with higher incomes have nothing to do with the tax or its rates, just like the entire population that consumes goods and services, they are only obliged to pay it.
It should be made clear that the reform currently proposed in Honduras does not increase taxes, nor does it create taxes for people with higher incomes. Neither is any type of tax eliminated or reduced. However, the shadow of tax regressivity has remained in the debate, since it is intended to introduce constitutionally a principle of “tax progressivity”, facilitating the future creation of taxes on personal wealth, in order to compensate for the alleged “regressivity” of the system.
According to the Household Survey of the National Institute of Statistics (INE), 80% of the country’s population is poor, which does not mean that the remaining 20% is rich: The household survey tells us that the income of the remaining families is on average L 9,849.00 (Statistics, 2022). This average is lower than the current minimum wage. Definitely, it cannot be stated that a family with an income below the minimum wage is rich. In this sense, it can be concluded that, considering the INE averages, the population in Honduras is not divided between the poor and the rich, but between the poor and the less poor. Although INE’s information is based on averages, it reflects the reality of the country. It cannot be denied that there is extreme poverty; neither can it be denied that there is a small group of people with considerable wealth. However, the metric reflects that we are one of the poorest countries in Latin America, comparable only to Haiti and Nicaragua, and this is because, on average, the whole country is poor.
In terms of Income Tax, an extremely important fact is that in Honduras today, people pay income tax from a monthly salary of L 19,919.96 (about 5 times higher than the national per capita income). Of course, there is no way to say that a family earning such a salary is rich. However, it can be affirmed that in Honduras only the people with the highest income pay income tax. The above assertion is supported, without any problem, when we consider that the relevant tax base of the country (people who pay taxes), is 218,442 people (SAR 125-2022 Agreement), in a country of 9,597,739 inhabitants, that represents a figure close to 2% of the population. It is like throwing a party for 100 people, paying for the venue, food and drinks, but dividing the cost between the two people with the highest salaries.
With the sales tax, the analysis is a bit more complex, especially because of the exemptions it contains. Considering that the ISV exempts the basic basket, and that poor and less poor people consume a greater proportion of such products, according to information from the Commission for the Defense and Promotion of Competition, consumption is up to 70% of the basic basket (Commission for the Defense and Promotion of Competition, 2022), the real tax burden rests on the people who consume the most taxed products. This is not to say that the tax does not affect people with lower incomes, but rather that the conclusion of tax regressivity is false or, at least, taken out of context. Poor and less poor pay the same tax, the problem is that their income does not allow them to live with dignity and decency.
Fiscal regressivity is a myth. It is an excuse to hide the real problems. It is a theory that leads us to conclude, erroneously, that people with higher incomes live at the expense of people with lower incomes. The theory of tax regressivity can drive systems that tax higher income people and exempt lower income people. Such a system affects tax collection, damaging its redistributive capacity, in addition to generating an immense inequity in which public expenditures rest on a small sector of the population. The primary impact of the sales tax is found in its high rates of 15% and 18%. The economy of poor and less poor families suffers to the extent that they cannot consume the taxed products, which are artificially made more expensive by the costly tax. Charging a tax at such high rates in such a poor country is a real injustice.
A tax system must be competitive and neutral (Bunn, 2022). A competitive system keeps taxes low. A neutral system does not interfere with economic and investment activities. As reflected in the Global Tax Competitiveness Index, published by http://www.taxfoundation.org/ the best tax systems are simple and have low taxes, their rules are so simple that they do not affect investment decisions or economic activity. In Honduras the solution is not to charge more taxes to people with more resources, on the contrary, the solution is to lower tax rates, in all areas, of course, increasing the taxpayer base. Low taxes increase people’s voluntary compliance and, consequently, improve tax collection and redistributive capacity, ensuring that we all pay much fairer taxes.