Putting economic reforms on a formal track, the government published a body of regulations — ranging from how state institutions must account for their payroll to how new entrepreneurs will be taxed and regulated — that shape the ongoing effort to make the Cuban economy more efficient and sustainable.
The reform picture that has emerged looks austere: Cubans can wave good-bye to cradle-to-grave security, laid-off workers will have only a few weeks of continued income, and unemployment with little government support will be part of many Cubans’ lives for some time to come. What’s more, the half of the laid-off workers that is supposed to go into business for themselves will do so in a highly taxed and small-cage regulatory environment.
What is still missing to complete the reforms are regulations for member-owned cooperatives acting within the private sector.
Cubans and foreigners quickly snatched up the “extraordinary special” issues No. 11 and 12 of the Gaceta Oficial at newsstands and post offices in Havana, and the Website of the legal gazette slowed to snail’s pace the first 24 hours after the new issues were posted. Reliable, official information is vital for Cubans since the government is planning to lay off 500,000 state workers within the next six months, while offering 250,000 licenses for self-employment.
The package of nearly 100 pages of regulations includes dispositions by the Council of State, Council of Ministers, and the Executive Committee of the Council of Ministers. The small-business regulations include resolutions by the ministries of Labor and Social Security, Finance, Transport and Agriculture, and the Central Bank and the National Housing Institute.
Given the high rate of taxation and the limited ability of the state to enforce the new rules, some observers question their capacity to lure of the limited new freedoms for black-market entrepreneurs to emerge from the shadows.
However, rather than by regulation, the short-term success of the new entrepreneurs will be determined by the demand — or lack thereof — for the goods and services these businesses offer, two Cuban economists argue.
“The income of the families that become small-business owners will, by itself, generate demand,” write Omar Everleny and Pavel Vidal, economists with the Centro de Estudios de la Economía Cubana (CEEC) at the University of Havana, in an article recently published in Espacio Laical, a Church-owned magazine. “As investment projects the country has prepared get underway, new structural changes will be applied and economic growth will return, demand will rise. But this will be gradual. All seems to indicate that the economy must, in the short term, cope with high unemployment rates, which is a challenge from various points of view.”
Even so, even independent institutions such as the Church tacitly support the reforms.
“If we don’t definitively break out of the vicious circle between low salaries and low productivity, the economy will never be able to get on a sustained growth track,” Everleny and Vidal write in the Church publication. “We must understand these economic realities to support adjustment and structural change with proposals, instead of launching unfounded criticism.”
Most aspects of the new regulations had already been described by the official media prior to publication. This is the first time, though, that the scale of income taxes is laid out. Under the new tax scheme, effective Jan. 1, self-employed workers making less than 5,000 CUP (non-convertible pesos, the equivalent of US$240) a year are exempt. The rates rise fast, though, and the highest income bracket, taxed at 50 percent, is reached at just 50,000 CUP (US$2,400) a year.
In addition to a 10-percent tax on revenues of small businesses, the new regulations also introduce a sales and public service tax of 10 percent on all sales made by private businesses, including food. The only exception are roadside food stands by farmers, which pay a 5-percent sales tax.
Private-sector hiring, allowed for the first time since the 1960s, is highly taxed.
Confirming the official aim to curb the growth of privately-owned companies, the payroll tax is 50 percent, very high in the Latin American context. But if a business hires more than 15 employees, the payroll tax rises to 300 percent of the median salary. Not only the self-employed, but those hired by private businesses must pay contributions to the Social Security system. Private farmers can hire only if they themselves and their families are personally involved in the work of the farm. Temporary and permanent farmhands must be hired through the service and credit cooperative farmers are affiliated with.
At the same time, in a hint of the sense of urgency the government gives the reforms, the local labor offices in charge of granting self-employment licenses must act within five days after receiving an application. The new business owners must then register with the tax office and provide monthly reports.
Something that had not been explained in detail beforehand are new regulations for property owners who lease apartments, homes and commercial space. As a rule of thumb, Cubans are not supposed to own more properties than the home they live in. Under Resolution No. 305, published by the Instituto Nacional de Vivienda, property owners can rent in convertible pesos (CUC) to both foreigners and Cubans, or in non-convertible pesos (CUP) to Cubans. Under the new rules, landlords must pay Social Security contributions for themselves, and a 10-percent public service tax on all rent income. Neither judicial entities, nor foreigners or foreign entities are allowed to rent space.
Meanwhile, a new regulation regarding transport licenses allows truck, van, taxi and bus operators to provide services to government entities. License holders are explicitly allowed to hire employees.
As to regulations regarding the layoff process, the “expert committees” within the state entities that make the job decisions consist of five or seven members, including one management and one union representative and three or five workers. All are elected by a plenum of workers in an open vote.
In an effort to move workers from administrative jobs back to using their core skills, a regulation about the “treatment of disposable workers” by the Ministry of Labor and Social Security spells out that agricultural technicians and teachers must first be offered jobs “according to their profile.” The state entities that lay off workers are also obliged to find alternative state jobs within the same province or city. Workers must accept the new jobs within five days, once offered.
The rules make clear that those losing their jobs won’t be able to temporarily park as students in a university or training program, and that they can only receive a salary for up to five months once they have been terminated, depending on seniority. Only exceptionally can state companies request financial help to pay for the salaries of terminated workers.
The new regulations do not spell out what happens to the unemployed after they stop receiving a salary.
According to a new regulation about the management of jobs, state entities must provide employment reports as part of their annual budget report, among others identifying “fundamental jobs” that are related to the core function of the organization and showing differences to the previous year.