Anyone who followed last year’s violent right wing barricades in Venezuela knows that the pretexts for them were Venezuela’s extremely high inflation and its violent crime problem. But imagine Venezuela without those problems that have plagued it since before Hugo Chavez was first elected in 1998. Imagine Venezuela in Ecuador’s position - with single digit inflation, an economy not in recession, and a homicide rate that has not only fallen below the regional average but that is still falling quickly. Would the Venezuelan right be leading violent protests and threatening coups under those conditions? It is an extremely safe bet that it would – exactly as the Ecuadorian elite are doing today.
Ecuador’s strong economic indicators, and the fact that Correa was re-elected by a landslide in 2013, have not deterred its elite from aping the tactics of their counterparts in Venezuela. In fact, holding up Venezuela as the disaster to which Correa is leading Ecuador is part of its strategy. The international media’s distortions about Venezuela are a weapon the right uses throughout Latin America.
When Ecuadorian president Rafael Correa recently introduced two tax reforms that would only significantly impact the wealthiest 2% - and have no impact on the majority – the Ecuadorian elite went crazy.
Guayaquil’s right-wing mayor, Jaime Nebot, labelled the reforms “confiscation”. Others insisted it was an “attack on the family”. Remarkably, with the help of Ecuador’s private media, the protests, at least temporarily, made a dent in Correa’s (still very high) approval rating. It’s amazing that the right could have any impact at all with propaganda that doesn’t have the tiniest kernel of truth. The vilest propaganda sometimes has at least that much going for it. This illustrates how far from stifled the private media is in Ecuador and why groups like Human Rights Watch and Reporters Without Borders who have claimed otherwise, deserve ridicule.
Correa responded to the protests by temporarily withdrawing the tax reform proposals and challenging his opponents to participate in public debates about them. He pledged to withdraw the proposals if they could be shown to negatively impact the poor or the middle classes. In mid-September, the government will evaluate the public debate and decide if more dialog is warranted.
Initially, I was skeptical about Correa’s call for dialogue. Latin American countries like Ecuador are among the most unequal in the world. Reforms like the inheritance tax and capital gains tax Correa has proposed are hundreds of years overdue. Why not just get on with it? However, the approach Correa took has allowed him to elaborate on his proposals and clear up a lot of misunderstanding and lies that have been spread. It has also generated some useful feedback from segments of Ecuador’s business community regarding the capitals gains tax proposal. Drawing any segment of the elite into serious discussion divides and weaken coup plotters.
On his weekly television shows Correa has, a few times now, gone through calculations of what the inheritance tax would be for people with various levels of net worth – which anyone can verify on the website of Ecuador’s revenue agency (SRI). Two people inheriting an estate worth US$200,000 would pay zero inheritance tax. If the estate was worth US$500,000 then each of the two inheritors would pay $2,295 - so each pays a onetime tax of about 0.5% of the estate’s value. If the estate is worth US$5,000,000 then each pays US$430,000 (about 8.6% of the estate’s value). The tax rates drop the more inheritors there are. For example, on a US$5,000,000 estate, three inheritors would each pay US$233,000.
The capital gains tax is a bit harder to explain and therefore easier to spread lies about. A capital gains tax already exists but Correa’s proposal will make it fall much more heavily on the richest 2%. Again, relying on the calculator readily available on the SRI’s site, suppose you buy property worth US$400,000 and, a year later, sell it for an 8% profit. What happens?
Under the old capital gains law the seller would pay capital gains tax of US$3,040. Under Correa’s proposal the capital gains tax would be zero. Why on earth are the elite howling? Suppose after a year the property is sold for double the value - $800,000. The old capital gains tax would be US$38,000. Under Correa’s proposal it would be US$270,828, about six times more.
I believe this proposal is even more despised than the inheritance tax. It strikes at one of the key ways Ecuador’s elite have traditionally enriched themselves – through corruption and various types of insider deals that lead to extraordinarily high rates of profit from speculation. Speculation is when somebody profits, not from adding value to something, but from merely holding onto to it for a period of time until its price rises.
As I pointed out here, Correa’s government has already improved tax collection tremendously by actually enforcing existing tax laws, so the elite must have very little hope of evading the new taxes once they are the law.
Correa understands that he must take the threat of a coup seriously. He has long warned that a Venezuelan-style upper class revolt would be attempted against his government. At the same time, he knows that he must be careful not to exaggerate the threat and thereby contribute to defeatism among people who had become used to seeing a corrupt elite get its way.