Friday, February 1, 2008

Everybody hates taxes

I spent some time in Cuba at the end of 1996 interviewing trabajadores por cuenta propia, Cuba’s self-employed workers. There are about 150,000 of these workers today, about three percent of the labor force.

At that time, these entrepreneurs were preparing to file income tax returns. Income taxes disappeared in the early days of the revolution, so when they were reinstituted in 1995, they were a novel concept. There was apprehension and confusion about procedures.

And, of course, no one liked the idea of paying tax. I had the impression, if you can believe it, that lots of these entrepreneurs might not have declared their full income so as to reduce any tax payment they would have to make, on top of monthly advance payments they had already made, when they filed their return early in the new year.

Cuba’s income tax is progressive and simple. The cuentapropistas have been paying it ever since – the flower vendors who yell “florero!” as they push their carts down the street (sometimes, as in the photo, with grandson in tow); the bicitaxi guys who sweat all day; the thousands of families that rent rooms in their homes; the painters who sell their work in the market by the cathedral; the carpenters, plumbers, and glass repairmen who fix up homes; the operators of Cuba’s ubiquitous tire repair shops; the pizza vendors; the retirees who make a little extra money tutoring students, selling sandwiches, or repairing watches.

The income tax also applies to authors and artists who earn money abroad. To my knowledge, it applies to no one else.

Now, a new group has to pay taxes; they do not like it, and one can’t blame them. This is the part of the Cuban workforce that works for foreign companies (not joint ventures), and who receive a hard currency bonus of a few hundred dollars a month in addition to their peso salary. This new policy was announced last December and discussed briefly here.

According to documents distributed to the workers, they are now required to register with the tax office by April 1 and to file returns, and companies are required to record the hard currency payments that they make to workers, and to inform the tax office. The tax applies only to hard currency bonuses, not to the workers’ peso salaries. Income tax will have to be paid three times per year. Monthly earnings up to $200 are taxed at a ten percent rate; earnings above that, up to $500, face a 12 percent marginal rate, all the way up to a marginal rate of 50 percent for earnings higher than $5,000 per month.

Two weeks ago, El Nuevo Herald reported that there were meetings where workers subjected to this tax complained bitterly to officials. Now comes a Reuters report (English here, Spanish here) on these same meetings. A video of the meetings seen by reporters shows workers complaining, demanding that the payments first be declared explicitly legal before any tax is levied, and laughing at the idea that they would have to pay a fee of more than $30 to register with Cuba’s tax office. (On that last point, Cubans who deal with their own immigration authorities would say, welcome to the club.)

It would be very interesting to know more about this discontent among some of the highest-paid workers in Cuba. But a few things stand out.

  • Raul Castro encouraged Cubans to speak out, and this group of “card-carrying Communists,” as the Reuters correspondent calls them, took him up on it.

  • From the accounts of the meetings, I barely see lip service paid to the social justice ideals that justify the tax on entrepreneurs who earn far less (usually less than 1,000 Cuban pesos per month) than these company workers, or the fees taken out of remittances from abroad. Zippo.

  • It is interesting is to think how else the government might have dealt with this. Foreign companies’ hard currency payments to workers are longstanding, widespread, and blatantly outside the law. The government could have acted shocked like Claude Rains and attacked the companies for making the payments, or cracked down and stopped them altogether.

  • Instead, it was decided that it is OK for the foreign companies to provide this benefit and incentive, and it’s OK for these Cubans make more money than others, but it is only fair that they pay tax. In the scheme of things, it’s hard to argue that the taxation of these workers is unfair.

  • I doubt that the hyper-egalitarian Fidel Castro would have reached this decision. It signals acceptance of incentives and higher earnings for workers in sectors of the economy that produce results. If this attitude is carried to other economic policy decisions, it will mean more incentives, more opportunities for higher pay, a greater chance to improve output and productivity. That would all be positive for Cuba’s economic health.


Alex said...

I think it's simpler. It was decided it was OK because the "bonuses" masked the way those companies are forced to depend on the Cuban government to hire (and underpay) their employees. A company that is used to work within the capitalist model of rewarding performance with earnings would have a hard time otherwise with the umotivated Cuban workforce.

And now they are taxing it because they need all the money they can get. Somebody decided to tap that source of currency.

Phil, I find hard to swallow any mention of "fairness" in the Cuban taxation system. Workers in Cuba are underpaid by an order of magnitude. Their salaries do not correspond to the value they produce and even if we give credence to the subsidies, they are not enough to survive. It's very hard to impossible to survive in Cuba on your government salary, and it has been that way for decades. So you have a group that manages to escape this situation by either getting a job in tourism or becoming a cuentapropista, and they tax them to death. Those taxes are not egalitarian but punitive.

Phil Peters said...

Points well taken.

When I say that in the scheme of things, it’s hard to argue that this is an unfair tax measure, I'm not addressing the bigger issues you raise about compensation and the workforce at large. Sure, one can argue that the entire system is unfair, it values labor unfairly or inaccurately, etc, and therefore nobody should pay tax under that system.

I'm just suggesting that it's hard to say it's unfair to tax these workers as a matter of equity. Others who earn less are taxed more.

Under this measure, a manager who earns 200 chavitos per month from a foreign company will pay 20 in tax and earn 180. Most Cubans earn far less than that.

I interviewed entrepreneurs for a study 2 years ago and found that on average, 34 percent of revenues are paid in taxes. And the average after-tax profit (for those doing business in Cuban pesos) was 1,326 pesos per month, about 55 chavitos.