What have the tax reforms in the Dominican Republic been good for?

A tax reform must transfer resources from the general population and economic agents to the treasury. The aim is to increase collections in absolute and relative values, collaterally correct distortions, simplify taxes, reduce evasion and avoidance, evaluate the relevance of incentives, improve tax equity and sometimes broaden the tax base.

By seeking an improvement in public finances, tax reform becomes fiscal, when it reaches the level of public spending -including its ceiling and its destination to improve the quality of life of the people- and if it goes to a higher level, it would touch the legal limit of public indebtedness, then, we would speak of integral fiscal reform and if the changes are sought in an environment of consensus and agreements among all sectors, the reform acquires the category of fiscal pact.

Dominican public finances have been experiencing over the years a progressive deterioration, which is manifested in constant fiscal deficits, increase in public debt, decrease in the quality of spending, signs of exhaustion of fiscal sustainability, aggravated by the Covid-19 pandemic, interrupting the march of continuous economic growth, making monetary expansionary with collateral effects on the exchange rate, inflation and, in the social sphere, increase in poverty and degradation of formal and informal employment.

Part of the national discussion about fiscal changes lies in the fact that postponing reforms for a longer period of time -in a scenario of fiscal deterioration- implies a higher cost for the public debt, the sustainability of economic growth with stability, to face external shocks and natural disasters. In the monetary and financial sphere, the costs are associated with currency depreciation, a decrease in international reserves, higher inflation and a possible increase in the circulating currency, as well as for the cost of private investment, by displacing public debt to private debt, and also for attracting foreign direct investment.

When the time comes to make fiscal changes, these should, in addition to correcting the structural problems of Dominican public finances, continue to support economic recovery and continue to assist the vulnerable, now more urgently than before due to the pandemic situation, as a way to ensure a social safety net and greater emphasis on the national health service.

In the Dominican Republic, several fiscal reforms and amendments have been made in the last 30 years. Have the fiscal changes been useful in terms of improving the tax burden, the quality of spending, the reduction of public indebtedness and other fiscal challenges, as contemplated in the recitals and objectives of the various legal initiatives?

After the tax code was approved in 1992, the tax burden in 1993 was 11.1% of GDP, from then until 2000, the contribution of taxes reached its maximum at 12.3%, for a variation of only 1.2 percentage points (pp) in 8 years. Later, the tax burden has moved from 13.4% of GDP in 2001, to 15.7% in 2006, declining in the following years to stand at 13.1% in 2012 and remaining around 13% until 2019, when it reached 13.4%. During 2020, an atypical year for health reasons, the tax burden stood at 12.4% of GDP.

When comparing the tax burden recorded in 1993, when tax revenues had the immediate effect of the 1992 tax reform, with the tax burden in 2019, a year of economic normality prior to Covid-19, the Dominican tax burden has changed by 2.3 pp, after 28 years.

The little improvement that the Dominican tax burden has experienced does not seem to correspond with the almost constant growth of the nominal gross domestic product, which has gone from RD$165,513 million in 1993 to RD$4,456,657 million, for a growth equivalent to 27 times greater than that of 1993.

While tax revenues and the economy have behaved in this way, the country has carried out 4 tax reforms, that of 1992 and its law 11-92 of the Tax Code, that of 2000 with its legal framework 147-00 (aimed at eliminating the fiscal deficit), that of 2004 with law 288-04 (carried out within the framework of the agreement with the IMF and the banking crisis of 2003), that of 2005 with law 557-05 (due to the DR-CAFTA) and 34 laws that have served as amendments, incentives, amnesties, reduction of rates, among other objectives.

Advertisements

Leave a Reply

Your email address will not be published. Required fields are marked *

2 × 2 =