The Tax System

El Salvador Table of Contents

Taxes, including sales, export, property, income, capital gains, profit, and stamp taxes (a 5 percent levy on goods and services), accounted for a 95 percent annual average of the Salvadoran government's revenue between 1976 and 1985. Tax revenue as a share of GDP increased from 11.6 percent in 1972 to 14.7 percent in 1986. Domestic sales taxes, representing 37 percent of total current revenue in 1986, were the most important source of revenue for the government. Taxes on international trade transactions provided an additional 27 percent of current revenue (two-thirds came from export duties), and taxes on income, profits, and capital gains provided 19 percent. Property taxes constituted only 5 percent of government revenue.

All residents, regardless of citizenship, were required to pay personal income tax, which was assessed according to a progressive scale, with a graduated minimum tax plus a percentage. In 1986 wage earners who garnered less than the equivalent of US$2,400 per year paid no income tax, while those whose income exceeded the equivalent of US$50,000 paid at a 60 percent rate. The maximum corporate tax was also set at 60 percent. In addition, businesses were subject to a net worth tax based on their net capital investment; the maximum rate of this levy was 2.5 percent.

The relative importance of export duties as a revenue source has been problematic for the government. Besides being unpopular among coffee producers, these taxes fluctuated with world coffee prices. In 1986, for example, government revenues rose by 57 percent, compared with 1985. Although higher income taxes, stamp taxes, and increased foreign aid also increased revenue in 1986, the size of the increase resulted largely from a jump in world coffee prices from US$1.43 per pound in 1985 to US$1.71 per pound in 1986. Conversely, when world coffee prices fell to only US$1.11 per pound in 1987, the Salvadoran government reported a fiscal deficit of US$160 million.

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Source: U.S. Library of Congress