ROBIN HOOD WAS A SOCIALIST

UNCLAS SECTION 01 OF 03 CARACAS 000216

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E.O. 12958: N/A
TAGS: ECON EFIN PGOV VE
SUBJECT: ROBIN HOOD WAS A SOCIALIST

REF: A. 06CARACAS 3434


B. 06CARACAS 3617

C. 06 CARACAS 3653

D. CARACAS 183

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SUMMARY
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1. (SBU) During the past two weeks Chavez and other BRV
officials have proposed a dizzying array of tax increases,
all of which Chavez will have the ability to impose through
decrees sanctioned by the new "enabling" law. These
proposals maintain the trend of growing the tax burden on
individuals and private companies and even greater government
imposition on the private sector. In proposing to increase
taxes on assets, luxury items, and gasoline, as well as
limiting hard currency authorizations to restrict imports and
favor domestically produced goods, the BRV is adding to
strong inflationary pressures and distorting the economy
further in its march towards 21st century socialism.

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IF 10 PERCENT IS GOOD ENOUGH FOR THE CHURCH...
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2. (SBU) During his weekly "Alo Presidente" call-in show on
January 21, Chavez took some time to lambaste bank profits
and wealthy individuals in Venezuela. Referring to luxury
property, Chavez suggested that the BRV would institute an
assets tax, demanding a percentage of peoples' assets. He
threatened, "you have a BMW, well okay...a tax. You have a
home and another on the sea...come here buddy. You have an
airplane...collections of marvelous art, come here buddy..."
According to Chavez, the proceeds from this tax would go to
community councils. The Venezuelan tax authority, SENIAT,
explained that such an asset tax would only affect people
with net worths in excess of 560 million Bolivars (or USD
260,000) and that the rate would range from .5 to 1 percent
of assets. (COMMENT: As Chavez correctly noted, France does
have an asset tax of .7 percent, though very few countries in
the world have been successful in collecting such a tax.
Despite significant improvements in collection by SENIAT, tax
evasion remains a competitive sport here and it is very
unlikely that the government would be successful in getting
anything near an accurate accounting of individuals' net
worth, especially given that most Venezuelans with enough
money to buy a BMW have learned how to hide their assets
domestically and abroad. END COMMENT.)


3. (SBU) In addition to the increase in duties for luxury
goods (reftel C),the BRV is also contemplating additional
luxury taxes, which may come in the form of a separate
value-added tax (IVA),or in an increase in the IVA rate for
certain goods. (Note: Currently, almost all goods in
Venezuela are subject to 14 percent IVA. Notable exceptions
include certain foodstuffs and educational and medical
supplies. End Note.) According to the daily El Universal, a
tax on "selective consumption" may include alcohol,
cigarettes, cell phone, internet, and television service.


4. (SBU) SENIAT recently announced that they would tax idle
agricultural lands and threatened possible expropriation if
this did not encourage land holders to use their lands for
agricultural production. At the same time SENIAT recently
announced up to a two year tax holiday on agricultural
production. National and local governments have already
expropriated "idle" rural and urban holdings, so a tax
holiday would represent an odd method by which the BRV is
attempting to stimulate domestic production without resorting
to more traditional methods like improving the investment or
judicial climate.

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USURY AND OTHER TERMS
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5. (SBU) Chavez has also begun to attack what he considers
"tiny," or "chiquitito" taxes paid by banks. The corporate
income tax is 34 percent. However in the second semester of
2006, the banking sector only paid on average 8.7 percent of

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its income in taxes. This is because most banks in Venezuela
are heavily invested in government bonds and CDs, which are
tax-free. Banks have profited by paying 6 percent to
depositors and earning 10 percent on those investments (the
rate paid on government CDs and bonds). However, according
to one sector contact, most profit growth in recent years has
been through the increase in consumer credit and investing.
Increasing taxes on bank income, or "excessive" profits, fits
with BRV rhetoric regarding the private sector, in general.
It seems increasingly likely that Chavez will move to cap
profits in the private sector, at which point one banking
contact joked that they would make as much as the BRV allowed
and use the leftover money to raise their salaries.

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WATER INTO GAS
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6. (SBU) Venezuela has the cheapest gasoline in the world (17
cents a gallon) and gas prices have not changed since Chavez
took office in 1999. Various estimates put PDVSA's losses
from gasoline subsidization at anywhere from USD 1 to 4
billion annually, and the heavily subsidized gas creates many
negative externalities, including contributing to Caracas's
gridlock (reftel B). Venezuela is consuming around 280,000
barrels daily of gasoline. The opportunity cost of selling
it at 17 cents a gallon instead of the world pump price of
about USD 2 a gallon is in the tens of billions of dollars
(see reftel D for more details). Despite the economic
reality, Venezuelans are incredibly attached to essentially
free gas and it remains to be seen if Chavez will follow
through. He has already claimed that any increase would
avoid certain sectors of the economy like transportation. In
1989 government attempts to raise gas prices led to massive
rioting, hundreds of deaths and supposedly inspired Hugo
Chavez to begin plotting his coup.

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MONEY CHANGING IN THE TEMPLE
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7. (SBU) The parallel exchange rate for dollars is hovering
around the 4200Bs./dollar mark, making the Bolivar
approximately 95 percent overvalued as compared to the
official rate of 2150Bs./dollar. Increasing limitations on
what goods are eligible for CADIVI dollars (the official
rate) have pushed more importers to use the parallel market
to bring their items into Venezuela, which has contributed to
inflation (see reftel A),and exacerbating the capital flight
generated by Chavez' recent proclamations. The increase in
the parallel rate has not been lost on BRV officials. The
President of the Institute for the Defense and Education of
the Consumer (INDECU) recently noted that the government
needed to prevent importers from pricing their goods based on
the parallel rate and ensure that importers did not profit
from parallel rate transactions. The head of SENIAT, Jose
Vielma Mora, has also participated in this debate, testifying
before the National Assembly that he was concerned about bank
profits from currency trading and speculation. On January
26, Vielma Mora announced the formation of a commission
comprised of SENIAT, CADIVI, INDECU and the Public Ministry
to combat the commercialization of profits from the parallel
market trade. Plans include fines and jail times for those
that "perturb" the country's "financial peace."

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COMMENT
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8. (SBU) Currency restrictions are contributing to inflation
and shortages (the most recent victims are car manufacturers
who cannot import all of the parts needed to assemble a car)
that hurt the average Venezuelan. The proposed restriction
of foreign exchange and growth in the parallel market could
be intentional and a means of creating a dual exchange rate
mechanism. "Preferential goods," including raw materials,
capital goods, and foodstuffs not produced in Venezuela, can
be imported at the better 2150Bs./dollar and the rest at
4200Bs/dollar, which in essence now serves as a 100 percent
sin tax on the Venezuelan consumer.


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9. (SBU) True to BRV form, Chavez' rantings televised on "Alo
Presidente" on Sunday, January 21 are becoming government
policy. By increasing the tax burden on Venezuelans, Chavez
believes that he can capture an even greater role for the
state and encourage certain types of consumption. While a
tax on individuals with USD 260,000 in assets will only
affect a small portion of the population, other taxes on
widely used goods like gasoline and cigarettes will hurt the
middle and lower classes disproportionately. At the moment,
all of these proposals remain that, merely proposals, but
given Chavez' propensity for doing as he says and the
upcoming Enabling Law, which will allow him to draft and
enact legislation without even cursory oversight (or time to
rethink potential mistakes),it seems likely that the fence
around the private sector will continue to tighten, to the
detriment of most Venezuelans.

BROWNFIELD