Cubans are just now becoming aware of the establishment of a new system for taxing personal income and new private and cooperative activities, because until now the vast state economy was practically the only source of finances for national funds used to cover public spending.
Average Cubans had hardly any tax obligations, limited solely to small sums for possession of vehicles or boats, processing of documents, non-wage income, certain incipient commercial and service activities, airport fees, tolls and others.
However, distortions in the national economy’s organization and bad habits acquired over decades, along with a lack of economic culture, are preventing a full understanding of categories such as prices, wages, inflation, taxes and others that are closely related to people’s purchasing power and to families’ living standards.
The fact that the national economy is now undergoing a profound structural change meant that the tax system also had to change. The new tax law went into effect on January 1, 2013, and contains concepts that were previously unthinkable for this Caribbean society, such as individual contributions to social security and taxes on real estate and wages.
The latter two are part of the law, but their implementation has been deferred “until the country’s conditions permit it,” taking into account the need to first organize and facilitate registration with the Property Registry and to pass a general reform that allows wage earners to balance inflation and their income.
As a general rule, tax systems are an essential source of income for social spending and for financing public activities, but in Cuba’s case, the law explicitly includes the following “Inasmuch as”:
“For the perfecting of the economic management model in the coming years, the Tax System must advance gradually and in scope, improving its efficiency and effectiveness as a mechanism for the redistribution of income.”
This element of “the redistribution of income” is, perhaps, what most concerns Cuban authorities as they face the current economic changes, because one recurring theme in the official discourse is the “need to avoid concentrations of property and money,” in an effort to preserve society from capitalist thinking.
Therefore, this package of regulations is an attempt to redistribute the income of sectors with more economic capacity, as a form of protection for those with fewer possibilities, thus reducing existing inequalities among citizens.
Under these premises, fiscal policy—and as part of that, the tax system—is responsible for helping to steadily increase the economic efficiency of state budget funds. The purpose is to back public spending at planned levels and to maintain an appropriate financial equilibrium, taking into account the specific characteristics of the model that is being implemented.
The new economic situation
The Cuban economy today is subject to absolute self-criticism of all of its mechanisms, management forms and, above all, its use of human and material resources. That critical attitude and the road map that has been charted involve the opening up of space for private and cooperative activities and for participation by foreign investors.
New actors are beginning to make their way in local commerce and services, as forms of land use are increased and even an incipient artisan industry is beginning to appear, closing productive cycles and, in some cases, inserting themselves into a relationship between the private and state sector.
The new law—passed by the Cuban Parliament in its July 2012 session—and its complementary resolutions encompass everything related to the payment of taxes, fees and contributions, both by individuals and legal entities, ensuring that the income so derived will be sufficient to cover social spending and keep the budget deficit within a range that is sustainable for the economy.
The law was created under the principle of generality guiding its application, and is combined with special regimes and fiscal benefits, which are justified by economic and social policy.
Flexibility is how experts are describing these precepts, noting, for example, that a special regimen is being created to stimulate production in the agriculture and forestry sectors, with tax loads that are lighter than those of other sectors.
As one way of easing the development of private work, those who become self-employed workers will have a three-month grace period, during which they do not have to pay a variety of taxes: sales, special products and services, services, hired labor, and personal income.
In an evident change of policy on the use of hired labor, and with the purpose of stimulating job creation in the private sector, the law provides for a gradual reduction of taxes on hired labor, which will be reduced partially for each taxpayer from 25% to 5% in a period of five consecutive years.
Also, individuals who hire up to five workers are exempt from the hired-labor tax.
Another striking aspect of the new law is that the non-agricultural cooperatives now being created will have a lighter tax burden than individual businesses, with the express purpose of stimulating the socialization of property and work.
The new approach of Cuba’s tax policy involves the creation of a culture of taxes, and its success depends in part on how efficient the tax system is, including its capacity for detecting tax evasion.