Government officials announced this month that more Cuban state industries will start paying income tax. In an effort to ease the transition into a reformed welfare system, the change will mean that, in total, 94% of Cuban state enterprises will pay tax starting from October 1st.
Taxation is still a relatively unfamiliar concept in Cuba. In the half century before 2009 there was very little in the way of taxation policy.
One of Fidel Castro’s most fundamental changes was to abolish taxes as public services were made free and a universal welfare system was put in place. Since then, the state has employed the vast majority of working people and wages have been paid into public welfare before the workers see the money.
Fidel rallied against implementing taxes in Cuba. (cc)
Along with free access to schooling and healthcare, a flat universal wage and rations for daily necessities were introduced, they exist to this day and have worked well for Cubans at the best of times and have been gruelling at the worst.
During the worst of times, the ‘special period’ from 1989 and through much of the 1990s, in which there was the most severe material scarcity, a rare taxation policy was employed to aid government spending. However, this acts as the singular major example of taxation since the revolution.
So averse was Fidel Castro to taxation, over dinner he once declared, “We should follow the example of the [Thatcher’s] British Conservative government. Don’t make the rate of taxation too high. If you set the rates too high, it will encourage tax evasion and discourage hard work and initiative.” Fidel kept the rates lower than Thatcher could have dreamed, and kept the welfare state larger than her worst nightmares.
In Raul’s Cuba, the ‘Sistema Tributaria’ is now developing year on year, enveloping more and more areas of the economy. This expansion accelerated most notably in 2010, coinciding with the “apertura”, when the government announced that around 200 services would be opened up to private businesses. At the same time, taxation measures were introduced for these new small businesses at rates sliding to 50% a year.
Since then, thousands of farmers and around half a million ‘cuentapropistas’, self-employed Cubans, have become liable to pay income tax.
The recent change is an extension of the Tax System Law that was put in place in 2013 to allow for the gradual, reformist implementation of taxation. Workers in the higher state wage bracket in areas such as health, education and accounting already pay into social security. This latest policy now includes lower earners employed in the public sector.
In Raul’s Cuba, the ‘Sistema Tributaria’ is now developing year on year, enveloping more and more areas of the economy. Raul’s reformist Cuba (cc)
Raul’s taxation system now demands payments from almost everyone in Cuba’s workforce, no matter the income bracket and this reform process has come with its contradictions.
In Trinidad, a tuk-tuk driver carrying tourists between the town’s idyllic allies can earn $1,000 a day, away from the eye of the state. Meanwhile an entry-level state nurse makes around $25 a month. Both are officially charged at different tax rates but in one occupation it is easier to dodge the taxman.
In a taxation system still in its early stages and an economy that functions mainly without receipts nor card transactions, many small businesses and ‘cuentapropistas’ are able to evade their taxes. Meanwhile, in state-run industries, tax-evasion is near impossible, leaving an disparity between contributions towards the welfare system.
Dr. C Juan Triana Cordoví, government advisor to the economic reform process, has marked out the major reasons that Cubans are sceptical about paying taxes. As well as a lack of taxpaying tradition, Cordoví believes Cubans are disillusioned about their general lack of commercial spending power, so it is considered “too expensive to tell the taxman the truth”. He also writes that there is little evidence for locals that paying taxes helps the quality of public services, like park maintenance.
Personal income tax forms distributed in 2010. (c) Cubahora 2014
In answer to these concerns, Guillermo Sarmiento, director of Administration of Work and Pay, recently announced that increased wages for state workers will come with the updates to the taxation system. The state run discussion TV programme Mesa Rotonda has also been singing the praises of the changes and declaring their great significance to social security spending.
However, in this moment, taxation policy seems to be hurting the people more than it is helping the state. Personal tax payments, which are seen as too crippling to pay, in total only amount to 1% of government public spending, suggesting that this is a policy implemented to promote the ideas of taxation more than to contribute to public expenditure.
That is for now at least. These are the early stages of Cuba’s exploration of taxation and the system and the values of paying into the welfare state should develop. This could be a reform process that arrives at a sustainable system of taxation for the government and a fair system for the people. But the road to reform is rocky.
