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ANALYSIS

Who Will Pay for the War in Central America?

EL SALVADOR / 8 JUN 2011 BY JEN SOKATCH EN

Testimony at a recent hearing on U.S.-Central American security cooperation showcased one of Central America’s key problems: These countries do not collect enough taxes to win the fight against organized crime.

In a recent Senate Caucus on International Narcotics Control, Kevin Casas-Zamora -- who was Vice President of Costa Rica from 2006 to 2007 under Oscar Arias, and is now a senior fellow at the Brookings Institute -- told the committee that wealthy Central American elites are going to have to start footing the bill for security forces in their home countries, or face an increasingly difficult security situation. (Watch Senate hearing here.)

“Don’t let the Central American elites, who have never paid taxes, off the hook this time,” he told the committee. (To read Kevin Casas-Zamora’s testimony click here.)

Central America ranks at the bottom in terms of tax revenue as a percentage of GDP. According to the World Bank’s most recent data from 2009, Central America’s tax revenue falls below the average for not only Latin America, but even Sub-Saharan Africa (see chart below).

centralamerica_tax_gdp_chart

(Source: World Bank)

Guatemala has the lowest tax collection in the region, at only 10.4 percent of GDP, and has been the scene of particularly brutal crimes in recent months. The penetration of drug traffickers, and the weakness of the government, caused a United Nations body in the country to warn that it could become a "narco-state." Even the governments of countries such as Indonesia, Sierra Leone, and Kosovo were able to collect more tax than Guatemala (full table below).

The region, meanwhile, is suffering. Large criminal organizations, such as the Mexican-based Zetas and Sinaloa Cartel, have established bases throughout the isthmus, while Central America now suffers some of the highest homicide rates in the world.

The security forces are woefully underpaid and under-trained. Many law enforcement officials work closely with local and foreign criminal organizations, taking part in smuggling drugs, kidnapping, extortion, and other illicit activities.

The trend is region-wide. Most countries facing the challenges of organized crime do not collect taxes comparable to their counterparts in the developing world. Indeed, the wealthy tend to avoid taxes and buy their own social services, including private schools, hospitals and security. In Mexico, for example, there are approximately 8,000 private security firms, according to the State Department’s 2010 Human Rights Report.

The one exception may be Colombia. In 2002, newly elected president Alvaro Uribe took on Colombia’s elite, raising over $800 million dollars with the implementation of a “wealth tax.” The tax was so successful that a similar measure was implemented from 2007-2011, which according to the State Department was expected to raise an additional $3.7 billion dollars.

Colombia's security situation has changed drastically since the measures were implemented. The military has killed and captured numerous top level guerrilla and paramilitary leaders.

Some Central American governments are beginning to take heed. The government of El Salvador, for example, recently proposed a new tax intended to raise $380 million to combat crime.

Country/Region Tax Revenue as Percentage of GDP
   
Central America  
Costa Rica 13.9
El Salvador 12.5
Guatemala 10.4
Honduras 14.4
Nicaragua 17.8
   
South America  
Brazil 15.6
Chile 15.3
Colombia 11.9
Paraguay 13.0
Peru 13.4
Uruguay 18.8
   
Sub-Saharan Africa  
Kenya 19.6
Mali 14.1
Sierra Leone 10.8
South Africa 25.4
Togo 17
   
Developed Countries  
   
Australia 22.1
Belgium 24
Denmark 64.5
France 19.6
Iceland 21.4
Italy 23
Norway 25.4
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