The new tax system

Today’s Granma explains the way Cuba’s new tax system will apply to trabajadores por cuenta propia, Cuba’s self-employed entrepreneurs, and now the microenterprises that will result when these entrepreneurs begin hiring workers.

The article is informative but leaves some questions unanswered. It refers to a new resolution that enacts all the details of the tax system; when this resolution is published we’ll presumably know all the details.

As an economic matter, it will be some time before we know the impact of this tax system – the details, the way it is put into practice, and the size of the wedge it drives between the entrepreneur and his or her earnings. Even when all the details are published, I think the jury will be out for some time. In Cuba as elsewhere, there is often a difference between what is written on paper and what happens in the real economy.

As a political matter, the tax system as described here seems to accomplish an important task. Cuentapropistas are required to contribute to a pension system and to pay taxes on income and public services. That is fair, and it blocks arguments from the orthodox left that they are capitalist freeloaders, profiting within the revolution but paying nothing back to support it.

To date, the cuentapropistas have paid income tax; they pay in pesos if they do business in pesos, or convertible pesos if they do business in convertible pesos. They are allowed a standard ten percent deduction for business expenses and the tax is progressive; rates increase as levels of income increase.

As the article describes it, the new system is different in that all income tax will be paid in pesos. And the deduction for expenses can go up to 40 percent, which is a big improvement.

Other details:

· In 91 occupations, in cases where no workers are hired, there will be a simple monthly tax payment. This does away with the current process where a monthly payment is made, and the taxpayer files a return at the end of the year and, depending on the year’s earnings, may have to make an additional payment.

· Outside those 91 occupations, cuentapropistas will pay other taxes in addition to income tax (e.g. taxes on use of utilities and public services, or on the hiring of workers). Those other tax payments will be deductible from income tax. The first 5,000 pesos of income are also exempt from tax.

· The article warns those now working without a license to sign up and start paying tax. Some of those working without a license are surely doing so to evade tax, but others are doing so because the government became stingy with new licenses. The implication in the article, let’s hope, is that when they now apply, they will get a license.

· The tax on hiring labor has a “regulatory” effect, the article says, “to avoid concentrations of wealth.” So hiring of workers is now permitted, but the government’s enthusiasm is limited.

· Social security contributions can be made at different levels, and benefits will depend on the amount contributed.