VZCZCXRO4873
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0216/01 0321358
ZNR UUUUU ZZH
R 011358Z FEB 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7665
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUEHRC/DEPT OF AGRICULTURE USD FAS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 CARACAS 000216 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
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 
 
------- 
SUMMARY 
------- 
 
¶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. 
 
--------------------------------------------- - 
IF 10 PERCENT IS GOOD ENOUGH FOR THE CHURCH... 
--------------------------------------------- - 
 
¶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. 
 
--------------------- 
USURY AND OTHER TERMS 
--------------------- 
 
¶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 
 
CARACAS 00000216  002 OF 003 
 
 
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. 
 
-------------- 
WATER INTO GAS 
-------------- 
 
¶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. 
 
---------------------------- 
MONEY CHANGING IN THE TEMPLE 
---------------------------- 
 
¶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." 
 
------- 
COMMENT 
------- 
 
¶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. 
 
 
CARACAS 00000216  003 OF 003 
 
 
¶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