Caribbean tax policy must 'get rid of so many loopholes'

The research of Inter-American Development Bank (IDB) economists Moisés Schwartz (pictured, right) and Diether Beuermann focuses on fiscal laws and institutions.

In their latest book, they outline a roadmap to make Caribbean countries' fiscal frameworks more resilient. Many countries in the region do not just deal with unclear tax rules which create uncertainty, but also with natural disasters like tropical storms or volcano eruptions that strain budgets.

BNamericas spoke to Schwartz and Beuermann about the book and the recommendations they provide.

BNamericas: What’s your book’s objective?

Schwartz: It’s a medium-term agenda. What we are doing here is giving [policymakers] this policy agenda. They can look at it, read it carefully, they know the political atmosphere; they know what’s feasible, what is not feasible right now but might be feasible in a year. We leave it to each country to decide.

Beuermann: In the book we show in which position Caribbean countries would be to face these shocks had they followed fiscal rules we recommended 10 years ago.

There’s a need for this to be understood, not only by experts or politicians but by the whole population. And [understanding is needed] how this would benefit society and foster changes that also need a lot of political commitment, political will.

BNamericas: Have you been surprised by changes that occurred between your latest book and the previous one?

Schwartz: What we cover takes time to change and of course we have seen improvements in the region. For example, Barbados has a new way of doing things, many new regulations; certainly a new government with a lot of energy and policy in the right direction.

If you take a look at Jamaica, which I believe is the country that has advanced the most in terms of economic policy making, it has taken them so many years doing the right thing. It takes time. It’s not as though you change a law and then people start reacting differently. 

Beuermann: Specifically, when we were finishing this [latest] book both [Barbados and Jamaica] approved new legislation, for example, for central bank independence. Both of them have recently approved legislation that is still to be enacted, in this quarter I think. 

BNamericas: Predictability is a key element of your book, can you explain the concept?

Schwartz: You have to see how economic agents react to and get used to the predictability of new amendments. [We refer to] predictability of a new law and of new economic policy, predictability of a new law or this new regulation, like central bank independence or some fiscal rules or changes in sovereign wealth funds.

This is the emphasis because individuals that want to invest, firms that want to produce, they need some predictability.

BNamericas: Are any Caribbean countries resilient?

Schwartz: You would never get to a position where you say, ‘This country is 100% resilient.’ That for sure is not going to happen. Neither in the Caribbean nor in any other part of the world. But if you have a framework that allows you to respond in a more flexible manner and try to not deviate too much from the path of development and growth [that helps].

BNamericas: How does taxation fit?

Schwartz: The idea is what we call medium-term fiscal frameworks. You need a policy that is fair and efficient for who pays taxes and how much you pay. Everyone needs to pay his or her share. It’s not only what you collect and how you collect it, but on what you spend and the quality of spending. 

It’s a combination between the quality of expenses, the revenue you collect, the debt the government incurs, the terms of the debt, all the hedging instruments you may have against natural disasters, tropical storms, against the collapse of oil. You have all these technologies available so the idea is to make the right public institutions work together in a synergy that makes them work well.

BNamericas: Which changes do Caribbean countries need?

Schwartz: These are very difficult decisions, it is easier to work in the short term on the tax collection because you have the laws, you have the regulations. We are trying to have a much more medium-term horizon. So it’s not only to deal with the pandemic or a specific shock. 

Now tax policy in terms of changing taxes, getting rid of so many loopholes that we have in the Caribbean. So many exemptions, the tax system in general is extremely cumbersome.

BNamericas: In the latest book you mention using technology to target tax evaders. How would that work?

Beuermann: A person who has for example 10 real estate properties and only reports renting out one could be audited to see if they are renting and not reporting that. It’s more efficient than just doing a random sample of taxpayers. It’s kind of exploiting data and technology to make the auditing process and tax collection more effective.

BNamericas: You also warn about pension schemes.

Schwartz: We have these projections all the way to 2050. If you do nothing and keep on doing what you are doing, the strain on fiscal expenses is going to be significant.

Then the government would be in a position that the contributions of active workers wouldn’t be enough to pay the pensions, and they would have to use other public revenue to pay these pensions instead of using those resources for health, for education, for infrastructure and so on. 

BNamericas: Are there options to having independent fiscal management other than sovereign wealth funds?

Beuermann: You could have a fiscal ruling or a public management system or a debt managing office that is well-organized but without any independence, and many countries actually adopt that reality. 

The independent fiscal council, which is a complementary institution, is the watchdog that these rules are complied with. This is a relatively new institution. So there is some evidence that fiscal councils stimulate compliance with rules, but it’s still not as robust evidence as we would like to because it’s relatively new.

BNamericas: Is the future more independent institutions or something else?

Beuermann: The point we make in the book is that these institutions should be working in tandem. It’s not that you should have a good management office, good fiscal ruling, it’s not separate. If you want them to work within a financial framework, they should all become connected.