The Tax Regime for Micro-Enterprise in Cuba

This paper discusses the tax regime for micro-enterprise in Cuba. The key features of the tax regime are:

• It was designed to function in a context where a taxpaying culture did not exist, non-compliance was feared, some micro entrepreneurs had high incomes;
• It includes up-front, monthly, lump-sum payments and an escalating tax schedule;
• It is inequitable and ineffective in revenue generation;
• It discriminates against micro-enterprises which have costs of purchased inputs in excess of 10% of gross revenue;
• It is regressive in that tax is higher for lower-income micro-enterprises;
• It is easier on the foreign and joint venture sector of the economy and tougher on micro enterprise;
• It restricts the entry of new firms and forces some out of business thereby reducing production, employment and the generation of income and raising prices.

The paper recommends:

• Establishment of net income, rather than gross income, as the tax base;
• Abolition of the monthly up-front lump-sum payments;
• Building up of the credibility of the tax system;
• Lowering of barriers to entry into the micro enterprise sector.

The paper concludes that a well designed micro enterprise tax regime could help in:

• Permitting the sector to play a more valuable role in terms of employment and income generation and the production of needed goods and services at lower prices;
• Generating more revenues than the current system, which pushes micro enterprises into tax-evasion.