Caracas Chronicles

Quico says: Over the last two posts (here and here), I’ve explained why I think the Venezuelan state should distribute all of its oil income (yes, all of it) to the population and finance itself like any normal government would: through tax.

(This is an idea that reader Torres first put in my mind, but I’m going to stop calling it the Torres plan, because I don’t think he would agree with the ideas in this post.)

The big question is: how could you make an oil rent distribution system progressive, efficient and fiscally feasible?

Simple: by making the payouts in the form of a tax credit.

The pitch is pretty straightforward. Citizenship is about rights, but it’s also about responsibilities. All citizens have the right to an equal share of the nation’s oil revenue, but they also have a responsibility to pay their taxes: this plan works by marrying that basic right with that basic responsibility.

As I envision it, the form you would use to declare your taxes is the same form that would entitle you to receive the Petroleum Tax Credit. If you don’t file, you get nothing. And why should you? You’ve failed to hold up your end of the bargain.

So how does the system work, precisely?

Lets say Person A is unemployed and earns nothing at all. She still has to go down to her local Seniat office and sign a tax form that says “last year, I earned nothing at all.” For her trouble, she gets her Petroleum Tax Credit: lets say Bs.50. (Remember, from next year the bolivar will be “fuerte!”)

Person B is a buhonero earning Bs.100. To claim his tax credit, he has to pay tax on the money he’s earned. Lets say the tax rate is 25%. He keeps the Bs.50 Petroleum Tax Credit, plus Bs.75 out of the Bs.100 he’s earned. His after-tax income is Bs.125. As a result of the plan, he ends up Bs.25 better off: effectively, the plan works as a wage subsidy for people on low-incomes. (In practice, half of his Tax Credit would be withheld.)

How about Person C, a clerk who earns Bs.200? Just like anyone else, she gets the Bs.50 Petroleum Tax Credit, but she also has to pay Bs.50 in tax. So Person C is at the break even point – her after tax income is the same as her pre-tax income.

Person D is a lawyer, and he’s doing great: he earns Bs.1,000. Even though he’s relatively well off, he still gets his Bs.50 Petroleum Tax Credit: everyone does. But he has to pay a 25% tax on his earnings. That’s Bs.250. So his net contribution to the state is Bs.200 – in his case, the entire Tax Credit has been “clawed back,” and then some…

Not progressive enough for you? Lets add some higher income tax brackets.

Person E is a fat cat banker earning Bs.2000. But after the first Bs.1000 in income, the marginal tax rate jumps to 50%. Because he is a citizen of this country, Person E still gets his Petroleum Tax Credit. But he has to pay 25% tax on the first Bs.1,000 he’s earned, (Bs.250) and 50% on the second Bs.1000 (Bs.500.) So he gets Bs.50, but pays Bs.750 in tax. His contribution is Bs.700.

Graphically, the system would look like this:
So, what’s good about this plan?

1. It’s progressive: the richer you are the more you pay.
2. It codifies the state’s relationship with the individual. No more political manipulation of oil handouts. The money you get is a right, not a favor.
3. It formalizes the informal economy. It gives poor people a powerful incentive to “go formal” and start declaring tax.
4. It fights poverty. The basic Petroleum Tax Credit acts as a minimum income guarantee for everyone. Low wage earners get their wages boosted.
5. It makes waste and corruption more politically visible: since the government has no alternative source of income, people realize that the money the government spends is money they gave it.

And what are the challenges?

1. Tax administration: everyone has to be assessed. Seniat would need to step up its game immensely, and that will be expensive.
2. Attempts at tax evasion are certain: People would have an incentive to file their taxes (to get the tax credit) but also to under report their income in the declaration. Seniat will have to develop its investigative capabilities substantially.
3. Work disincentives: low wage earners would get to keep only 75% of what they earn, instead of 100% as is the case in the informal economy. They’ll still file, for the credit, but their marginal propensity to work may fall.

Now, this is just a brief conceptual sketch. It would take substantial, detailed work to arrive at a full proposal that sets the tax credit, the marginal tax rates and the tax bracket thresholds at fiscally sensible levels.

And much qualification and refinement could be added: do children get part of their tax-credit in the form of education vouchers? Do you force adults to save part of it in pensions accounts? Lots and lots of detail would have to be worked out. It’s a task I’m in no way qualified to undertake. But the system, at heart, would look something like this.