Written by Gustavo Irías, Executive Director of CESPAD Download PDF here
March 18, 2024
Once again, the discussion and possible approval of the controversial Tax Justice Law was placed on the country’s agenda, a regulation that has the active resistance of the country’s traditional (economic and political) elites.
In this regard, the vice president of the National Congress (CN), Hugo Noe Pino, has told the public that the CN is ready to submit the law for discussion before the plenary, because it has already been adjusted with the observations, recommendations and suggestions that were made through the 24 public hearings to which it was submitted in recent months. with the participation of various sectors of society.
As we have indicated in previous analyses, the Tax Justice Law is focused on reforming and streamlining tax exemptions. In that sense, it is not a tax reform (i.e., a substantial modification of the taxation structure of the various sectors of society). For this reason, the intense opposition of the big business sector and the traditional political parties is striking. But if we investigate, the bottom line is that these exemptions have become the privileged instrument to evade the tax obligations established in the income tax law, aggravating the regressive nature of the Honduran tax system. That is a system in which those who earn less sustain the tax system.
Table #1, shown below, shows the stark contrast between indirect tax revenues (composed especially of sales taxes) and direct tax revenues (from income, profits, and property). More than 60% is contributed by consumers in general and, barely, a little more than 30% is taxed by the owners of the means of production, that is, by national and foreign entrepreneurs.
For that matter, based on information from the Revenue Administration System, the “10 richest families in the country” only pay “0.3% of taxes. In proportional terms, 1 employee with a salary of L20,000 pays twice as much tax as these families” (SAR, Tax Justice Act. Diagnosis, synthesis, and myths around the Law).
Tax exemptions are total or partial exemptions from the payment of tax or customs obligations, mostly in favor of the large business sector, contained in approximately 18 legal instruments issued from 1976 to 2022. Some of these laws remain in force until 2036 (ZOLITUR), and until 2047 (ZOLI). Several of the companies covered by these instruments have not complied with the fundamental requirements of these systems: job creation, increased investment and exports, and foreign exchange generation. This has occurred due to the dismantling of public institutions, which are responsible for monitoring and correcting the performance of these exemption regimes, but also due to irrational legislation that has disproportionately benefited the privileged sectors of society.
Source: SEFIN, 2024 data are projected.
The Tax Justice Law could lay the foundations for substantive social reform and, even more, adjust the historical model of growth of exclusions and inequalities, although it will continue to maintain tax privileges in companies that demonstrate that they have complied with the obligations acquired in the tax incentive regime (acquired rights). We hold this point of view because with the eventual application of this law, one of the most unfair pillars of the national tax system would be dismantled and the development of the internal market would be stimulated.
Job creation and exemptions
The narrative of the large business sector is that the Tax Justice Law will reduce job creation and discourage domestic and foreign investment.
Tax exemptions have been a constituent part of a growth model, which has benefited only a small number of companies and has not guaranteed decent living standards for most of the population. This has happened since the mining and banana enclave of the last century. The result of this model has been widespread poverty, inequality, and job insecurity.
This is a structural issue, the Honduran economy is narrow-based, it only benefits a small minority, and most of the population remains excluded. If we take a relatively normal year (2019), it is possible to see that 60% of the economy is sustained by three activities: financial intermediation (21%), maquila (18%), and communications (11%). (Source: BCH, Honduras in figures). The maquila generates a little more than 100,000 employees (out of an economically active population of more than 3 million), financial intermediation and communications, although they are the engines of the economy, their contribution to employment is insignificant.
Table # 1 then provides a summary of the evolution of people with employment problems in the last ten years (underemployment and unemployment), i.e., with the full force of the exemption system.
Even though the percentage of salaried workers increased from 40.3% (in 2012) to 50% (in 2021), most of this salaried population suffers from underemployment. According to the definitions of the National Institute of Statistics (INE), visible underemployment is defined as employed people who “work less than 36 hours a week and wish to work more” and, for this reason, their income does not reach the minimum wage. Meanwhile, invisible underemployment includes those employed persons “who work more than 36 hours and had incomes below the minimum wage”. The percentage of underemployed people is alarming, in 2021 they represented 68.1% of the total employed population. For its part, open unemployment (i.e., people without work) have also grown significantly in the last 10 years.
| Table # 1. People with employment problems (in percentages) | ||||
| Years | Visible underemployment | Invisible underemployment | Total, underemployment | Open unemployment |
| 2012 | 43.6 | 10.5 | 54.1 | 3.6 |
| 2015 | 41.1 | 14.1 | 55.2 | 7.3 |
| 2018 | 48.6 | 14.2 | 62.8 | 5.7 |
| 2021 | 41.2 | 26.9 | 68.1 | 8.6 |
Source: Household surveys, INE.
In addition, based on figures provided by CEPALS inequalities portal, the richest 1% of the population in Honduras receives 20% of the total gross national income, while the poorest 50% only receives 10% of that income. In addition, 70% of the poorest women have no monetary income.
The current growth model is not capable of generating prosperity for most of the population and, on the contrary, has become the main factor in the expulsion of the labor force to the US and Europe. Not only does it fail to generate enough employment; Those who create are precarious, without social rights, and without the possibility of social mobility. Moreover, at present, traditional activities such as coffee cutting and cattle ranching are experiencing an appreciable deficit in the temporary workforce, expelled from the country due to precarious wages and lack of social rights.
The State’s sacrifice of tax exemptions has not achieved the results of attracting more investment to generate quality jobs and increase exports and foreign exchange. On the contrary, as the State becomes weaker, with reduced tax resources, it deepens its inability to deliver basic services (education, health, infrastructure) and reinforces the perverse circle of poverty, social disintegration, and inequality.
In this sense, debating and seeking options for adjustments to the historic growth model is a national priority.
How can we move towards substantive social reform?
Bearing in mind the bicentennial plan (championed by the governing party), the revision of the tax exemption regime with the approval of the Tax Justice Law could be the entry point for substantive social reform.
The proposed law provides us with two points to rethink the current growth model:
- Investment models, i.e. the combination of different investment modalities: public, public-municipal, public-community, private, and mixed, breaking the paradigm that only private investment can create jobs.
- Simplification to two tax incentive regimes. The first is the Incentive Regime for Investment for Development (RINDE), as a tool for promoting the domestic market. The second is the free zone regime to continue promoting investment for exports. Bearing in mind, from historical experience, that without the participation of the State (with the support of production services), the development of the domestic market would be very difficult, but without the expansion of this market, employment and income opportunities will continue to be extremely limited for most of the population.
Of course, this should also involve a review of public spending, improvement of its quality and of the current government’s budgetary priorities. A commitment to a vigorous system of health, education and the construction of basic infrastructure would be essential, without ignoring the limits imposed by climate change and the responsibility to protect and respect the environment. Likewise, the political will to modify legal frameworks and public policies that have enshrined social inequality.
Within the framework of the current capitalist system and increasing inequalities, these changes should be morally possible, opening the gap to move towards a more just society (in a complex process of structural transition of society).
However, this implies an essentially political struggle and approach. As Thomas Piketty, an academic and contemporary specialist on inequalities, points out, these changes “can only take place if they are accompanied by strong mobilizations and balances of power. This should come as no surprise: in the past, it has always been collective struggles and movements that have made it possible to replace old structures with new institutions. There is nothing to prevent us from thinking of a peaceful evolution based on social and political movements that manage to activate a large majority of voters and come to power with ambitious programs of transformation” (Piketty, A Brief History of Equality, 272).
In addition, he adds: “Historical experience suggests that large-scale changes often lead to moments of crisis, tensions, and confrontations. Among the factors that can accelerate the pace of these changes are, of course, environmental catastrophes. In theory, one would expect that the prospect of such catastrophes, increasingly better documented by science, would be sufficient to provoke timely mobilization.”
Now, in Honduras, five lines of action could be possible to advance in the fight against inequality or for equality.
The first is to review, redesign and audit the tax exemption regime so that the state increases its monetary income and does not continue to subsidize a business sector that has lived off the disproportionate protection of the state.
The second is to review and restructure public spending, reducing as much as possible unproductive expenditures (including military spending) and nepotism. Efforts to lay the foundations for a free, quality public health and education system are essential.
The third to construct the social. In Honduras, historically we have lacked a welfare state, which is why, even if it is with difficulties, it is necessary to move towards the structuring of a social state that promotes and protects economic, social, political, cultural, and environmental rights. Among them, it is worth highlighting the need to recover public companies such as ENEE, HONDUTEL, ports, airports, road infrastructure, among others.
The fourth is to advance the issuance of a new generation of public policies that ensure access to productive assets for historically excluded sectors, especially regarding property rights over land, natural resources, access to credit, and other factors of production. Likewise, the recognition, in its proper dimension, of the rights of women (Comprehensive Law against Violence against Women), youth, rural populations, and indigenous peoples.
And the fifth: is to defend the rights of nature and protect the rights of peasant, indigenous and Afro-descendant communities to the usufruct of nature’s goods, without facing the risks of militarization and paramilitarism. Take steps towards the transition from the extractive model, opening spaces to non-commodified sectors of the economy, guided by principles of solidarity and management of the commons.
These are modest reflections to continue rethinking the necessary democratic transformation of Honduran society.