As the economy craters, the Cuban government hits private-sector workers with tax hike

In recent years, workers in Cuba have dropped out of the low-wage public sector and state-owned companies to get coveted jobs in the small private enterprises that have mushroomed throughout the island despite strict government controls.

Now, these workers will see the pay they take home reduced by as much as 20%, according to new income tax regulations published in the government’s Official Gazette on Tuesday.

But unlike in most countries where those higher tax rates are designed for the highest earners, in Cuba, where the state monthly salary is equivalent to $15, workers earning as little as $109 a month will be in that tax bracket.

According to the new decree, private sector employees will have to pay a 20% income tax on earnings above 30,000 Cuban pesos, about $109 per month. That’s a 15% tax rate increase from the previous scale set up in 2021, which imposed a 5% income tax for earnings over 9,510 Cuban pesos. Business owners must automatically deduct the tax payments monthly, the decree says.

There are currently 9,652 small and medium private enterprises, according to government figures. Another 596,000 people are self-employed.

Amid rampant inflation and a worsening economic recession, the Cuban government announced in late December and earlier this year a number of cuts in subsidies, price hikes on gas, transportation and electricity, and higher taxes on the emerging private sector in an effort to “stabilize” the economy, officials said.

However, the income tax increase for workers in private enterprises was not mentioned and has not been reported in state media.

Government officials have said they need to collect more taxes to fund social spending, but they have also aired concerns about the continuing of the private sector.

These businesses, first authorized in August 2021 and known by their Spanish acronym mipymes, will now have to pay a 10 percent tax on sales and services. A tax break during the businesses’ first year of operations is also being eliminated.

The tax burden on Cuban private businesses now comprises a 35% tax on profits, a 10% tax on sales or services provided, a 5% payroll tax, a one percent revenue tax to support local governments and contributions to social security equal to 14% of workers’ salaries. Owners of the mipymes also have to pay up to 20% taxes on dividends.

The federal corporate income tax rate in the United States is 21 percent, though effective tax rates tend to be lower, especially for large corporations, due to credits and other tax breaks.

Businesses authorized to operate in Cuba face several restrictions: they cannot hire more than 100 employees, they cannot be involved in economic activities handled by the state, such as telecommunications, and must import products and supplies through state companies working as intermediaries. According to the new regulations published this week, they can also be hit with price controls at any time “when circumstances advise it to achieve more favorable prices for the population.”

Cuban government officials said what they are calling a “stabilization plan” is intended to reduce the government’s annual budget deficit. Several Cuban economists living abroad and on the island have criticized the measures as counterproductive, arguing that they will likely increase prices in the short term, exacerbate inequality and do little to address the structural problems of the centralized socialist economy, including the large number of state enterprises that report losses.

“The current fiscal adjustment seems to focus on regulating prices and higher taxes and regulations for the private sector, without restructuring the hundreds of zombie state companies that do not contribute wealth to society,” Pavel Vidal, a Cuban economist who teaches at the Pontifical Javeriana University in Colombia, wrote on the Cuba news website El Toque.

“The contradiction lies in the fact that the Cuban state wants to get rid of its responsibilities towards citizens but does not consider freeing them from the restrictions they face in exercising the freedom of enterprise,” Vidal added.

Political worries

Amid growing concern among the population about the new measures, the country’s handpicked president, Miguel Díaz-Canel, said during a Council of State meeting this week that “none” will be applied until the necessary “conditions for their implementation were created in the country” and that the process will be “gradual, with special attention to people in vulnerable situations.”

It is unclear which parts of the austerity plan will be applied gradually. The price raises for gasoline and utilities are scheduled to begin in February, and the tax increases on the private sector will be applied retroactively to Jan. 1.

In another signal of the leadership’s concerns about the political impact of their economic plan, Díaz-Canel said in the meeting that the government’s priority is “strengthening national unity,” as laid out by Gen. Raúl Castro in a speech on Jan. 1, “strengthening ideological work” and “politically securing the measures.”

On Monday, the government also published a new “ethics code” for government officials and members of the Communist Party and similar organizations that mandate them to “be faithful to socialism,” fight against the “genocidal” U.S. embargo and “be loyal to the Cuban Communist Party, the Revolution… and to the Revolution´s Commander in Chief,” Fidel Castro -- who died in 2016.