ABSTRACT
In the early 1990s, Costa Rica’s tax system was characterized by its complexity, consisting of a very high number of taxes, a broad use of tax incentives that eroded the tax bases and a poor technical design of the taxes. Tax administration was weak and lacked appropriate legal instruments to enforce the tax code. Moreover, no interest accrued on tax debts. The Costa Rican government was, in fact, a bank granting interest free loans to taxpayers who did not pay their taxes on time. Since then, systematically but very slowly, the tax administration has been strengthened and the tax code improved and simplified; the use of tax incentives has diminished, the sales tax’s basis has been broadened while that of excise taxes has been narrowed – conforming to best international practices – while the basis for the income tax has also been expanded, modestly. The tax burden of the central government has been increased from 11.3 percent of GDP in 1991 to 13.4 percent of GDP in 2004 and is expected to reach 14 percent of GDP in 2007. Nevertheless, tax revenue still falls short of the country’s need for public investments and it is well below the expected level in light of the country’s income or the human development level.
