Optimizing Fiscal Policy for High and Inclusive Growth in Haiti1
1. Fiscal policy can serve as an important tool for promoting high and inclusive growth. Not only does fiscal policy warrant macroeconomic stability by ensuring a constant flow of resources to the budget and sustainable debt levels, but revenue and spending components can be powerful inputs in a country’s efforts to achieve higher levels of income and improve socio-economic indicators.
2. For fiscal policy to play an effective role in removing constraints to business and growth, and enhance employability in Haiti, it will be important to:
- Raise revenue in ways that minimize its disincentive effects on economic activities (Tanzi and Zee 2000; Birdsall 2007).
- Improve the composition of spending towards growth-enhancing and job-promoting sectors.
A. Raising revenue
Improving tax collection
3. Steps should be taken to increase revenue-to-GDP by improving tax and customs administration and expanding the tax base. Revenue-to-GDP rose from 10.7 percent of GDP in 2008 to 13.1 percent in 2011. Despite this progress, revenue in Haiti is still low compared to international standards and more needs to be done to reach the authorities’ goal of 15 percent of GDP. The reasons for low revenue are manifold, stemming from loopholes in the administration and collection process, a taxation structure that does not adequately reflect the underlying socio-economic structure of the country, and a high level of tax expenditure.
4. Important steps have been taken in the area of revenue administration, but more can be done. The recent improvements in the revenue-to-GDP ratio are associated with a more efficient collection chain, and improved controls over the collection chain. Yet, tax and customs administrations still suffer from weak technical capacity, and an organizational structure where policy direction, monitoring and operational delivery are not separated and that does not fully reflect taxpayers’ diversity (Bua et al. 2012). On this last point, a more segmented tax administration would better address the different needs and compliance challenges of large, medium and small taxpayers. Reforms are ongoing regarding an organizational overhaul of the Ministry of Finance which would attribute larger powers to the revenue collection agencies.2 On tax segmentation, a unit for large taxpayers and one for medium taxpayers are already running. More efforts are required for improving controls, internal audits, and training at both customs and revenue administration authorities.
% of GDP
|St. Vincent & Grens.||2011||29|
|Trinidad and Tobago||2011||33|
Source: Haitian authorities
5. Tax composition reveals weaknesses in the collection of income taxation, as the bulk of taxes comes mostly from international transactions. Looking at the composition of tax revenues provides insights on possible niches of revenue losses, suggesting areas for higher revenue mobilization. The main component of Haiti’s revenue consists of taxes from international trade, and dependence on international trade is particularly high (4.6 percent of GDP), much higher than in regional comparators (2.5 percent, on average). The second largest component of taxes is the turnover tax on goods and services. Collection of taxes on income is weaker, generating only 2.5 percent of GDP, as opposed to a regional average of 4.1 percent. Over the last 15 years, income tax has slightly increased, while custom duties have increased much more.
Tax composition (% of GDP)
Composition of tax revenue (% of GDP)
Source: WEO, GFS, OECD
6. Revenue could be expanded by modifying the rate for the personal income tax. Although inefficiency in administrative capacity is a reason for low income taxation, and, scarce income segmentation is a major factor behind the incapacity of capturing broader sets of taxpayers, a look at the rates applied to the income tax can provide additional explanations for the low level of revenue. A corporate income is levied at a tax equal to 30 percent of the total income, a level not significantly different from the one of neighboring countries.3 Similarly, the highest rate of the personal income tax is set at 30 percent, a rate very close to the Caribbean and Central America average. Yet, when considering the rates applied to each bracket, a heavy burden weighs on middle levels of income, and current taxation fails to capture important resources coming from higher levels of income.4 The 10 percent minimum rate applies only at relatively high levels of income (125 percent of GDP per capita-PPP based), while the highest rate of 30 percent applies to levels of income which are more than 2000 percent higher than the country’s GDP per capita.
|Antigua & Barbuda||25.0%|
|Antigua & Barbuda||25.0%|
7. Envisaged reforms that will better align custom duties and a move towards the VAT may raise revenue. Imports are levied about 3 percent (simple average for all products) for custom duties, a level much lower than in other Caribbean countries and in other Central American countries. To comply with the requirements of the CARICOM membership, however, a reform of import tariffs will soon raise and align these duties with those of other countries in the region. The overall impact on revenues is still uncertain as a revenue loss could result from the reduction or elimination of tariffs within the CARICOM. The authorities are also considering replacing the turnover tax5 on goods and services with a fully fledged value added tax. The adoption of a VAT could potentially attract more companies in the taxation system because they will need to be formally registered to claim back the VAT paid on inputs.
Tariff rate applied
Source: World Bank World Development Indicators
Limiting tax expenditure
8. Another major source of revenue loss comes from tax expenditure. Estimates for the fiscal year 2010-11 indicate a level of tax exemptions in Haiti equivalent to about 4 percent of GDP. While the level as such is not particularly high compared to its comparators, the amount still constitutes an important loss in revenue, and efforts could be made to reduce part of this loss. The major source of this tax expenditure comes from exemptions granted on the imports of international organizations and diplomatic missions, which go even beyond the boundaries set by international treaties. Among the items exempted from custom duties, the largest share of tax expenditure regards vehicles, and to a minor extent food, construction and medical items.
9. Haiti grants exemptions according to the Investment Code and some laws. The Investment Code of 2002 created a privileged status for certain manufacturers, while a 2002 law sets out the conditions for creating free trade zones, along with the exemption or incentive regime applicable to investment in such zones. In addition, firms that import machinery, spare parts, semi-finished products, or materials needed to promote the development of specific sectors within the economy are exempt from duties on imports. NGOs benefit from a special status: they are exonerated from custom duties on all goods necessary for the realization of their objectives.
|Million of HTG||% of Imports||% of GDP|
|Total Customs Administration||7,466||6.15||2.5|
|NGO and charities||1,139||0.4|
|Diplomatic missions and intern. organizations||4,999||1.7|
|Projects funded with foreign aid||482||0.2|
|Total Revenue Administration||4,666||1.6|
10. The 2002 law provides incentives for enterprises located in free trade zones. These are geographical areas to which a special regime on customs duties and customs controls, taxation, immigration, capital investment, and foreign trade applies.6 Firms in a FTZ are granted (i) exemption from income tax for a maximum 15-year period, to be followed by a period of partial exemption that gradually decreases; (ii) customs and fiscal exemption (including registration taxes) for the import of capital goods and equipment needed to develop the area, with the exclusion of tourism vehicles; (iii) exemption from all communal taxes (with the exception of the fixed occupation tax) for a period not exceeding 15 years.
11. The 2002 Investment Code allows for a 5- to 10-year income tax exemption for specific investments. To benefit from the exemption, enterprises must meet one of the following criteria: (i) make intensive and efficient use of available local resources; (ii) increase national income; (iii) create new jobs and/or upgrade the level of professional qualifications; (iv) reinforce the balance of payments position and/or reduce the level of dependency of the national economy on imports; (v) introduce or extend new technology more appropriate to local conditions; (vi) create and/or intensify backward or forward linkages in the industrial sector; (v) engage in export-oriented production; (vi) substitute a new product for an imported product; (vii) prepare, modify, assemble, or process imported raw materials or components for finished goods that will be re-exported; or, (viii) utilize local inputs at a rate equal or superior to 35 percent of the production cost.
Composition of custom exemptions (2011)
Source: Haitian authorities
12. More analysis is needed for a streamlining of exemptions. Given the amount of exemptions and the sectors exempted, there is potential to streamline tax expenditure and raising revenues. Yet, the benefits of higher revenue should be weighed against the possible negative impact on businesses and on international donors and NGOs whose work in social and infrastructure projects could be key for the reconstruction. To this end, the newly established Unit for the Analysis of Fiscal Policy is undertaking an examination of all current exemptions and will suggest streamlining them in ways that ensure adequate revenue gains without dampening the profitability of businesses or discouraging donors. Policies for rationalizing exemptions are needed especially for those exemptions granted locally; however, for customs administration, the large amount of exemptions will be likely reduced by better control of fraud and smuggling.
Promoting a business friendly tax system
13. Taxation is not the most serious constraint to business in Haiti, but the overall burden is high and procedures are cumbersome. The Paying Taxes Indicator ranks high compared to other Doing Business Indicators for Haiti; but it is low if compared to that of countries in the region. More specifically, the rate of specific taxes is not higher than in other countries, but the overall burden falling on profits is high and the number of payments could be reduced.
|Profit tax (%)||Labor tax|
14. Rates on dividends and specific provisions discourage business. As indicated, the rates of the corporate income tax (CIT) are in line with comparators. On the contrary, dividends are levied at 30 percent, slightly higher than the 29 percent of the Dominican Republic, and much higher than the 10 percent in Nicaragua and Honduras (see appendix). A series of legal provisions for taxation discourages business. First, contrary to in many other countries the tax on dividends has to be added to the CIT, which may imply a tax burden equal to 44 percent. Second, differently from most other countries, companies operating abroad cannot deduct taxes levied on international income, which implies that a company may have a resulting 60 percent tax on its profits coming from abroad and from Haiti (see appendix). Third, companies with a turnover higher than Gourdes 15 million are required by law to contract an external auditor to verify their accounts, which adds to the company’s costs. Finally, the payment of almost 70 percent of the tax is in some cases required at the beginning of the fiscal year.
15. Although incentives are provided to small and medium enterprises, the payment of the turnover tax weighs quite heavily on their business. Small business employs almost 80 percent of Haiti’s labor force. For companies with turnover below USD 31,250 per year, a simplified taxation applies. They can subtract USD 12,500 from the tax base and then on this base they are levied a corporate income tax of only 1 percent and a 10 percent turnover tax. For companies with a turnover of USD 2,500 or below, the law imposes only a lump sum payment of USD 50 and a turnover tax of 2 percent. Despite these incentives, the payment of the turnover tax on the inputs of production largely discourages small enterprises and represents a crucial constrain to business (Petit and Geourjon 2010).
Box 1:How equitable is Haiti’s tax system?
Taxation is largely tilted to indirect taxes, mostly coming from international trade, and the personal income tax could be more progressive.
The Haitian taxation system is substantially tilted towards indirect taxation. A tax system hinged more on direct taxes tend to be more progressive since the burden of tax contribution falls differently on different levels of income instead of being equally distributed across the population. An increase in the direct to indirect tax ratio is usually associated with a decrease in the Gini coefficient (Chu et al 2000, Gemell and Morissey 2005). In Haiti the ratio of direct to indirect taxes is at 29 percent in 2011 against a regional average of 41 percent. Although significant changes took place over time, indirect taxes remain large.
The personal income tax could be more progressive. As indicated, with the highest rate at 30 percent, Haiti is largely in line with its comparators for the levels of the tax rates. However, the 10 percent minimum rate applies at relatively high levels of income, corresponding to around 125 percent of GDP per capita (PPP based). Only in Costa Rica and Honduras, minimum rates, of 10 and 15 percent respectively, apply to higher level of incomes, (127 and 138 percent of GDP per capita, respectively). More seriously, as indicated, the highest rate of 30 percent applies in Haiti to levels of income which are more than 2000 percent higher than the country’s GDP per capita.
B. Upgrading the Country’s Infrastructure and Human Capital
Public expenditure can sustain an inclusive growth path: spending in infrastructure helps in fact reduce bottlenecks and constraints on business, while spending in health and education will reinforce human capital and increase employability.
16. Haiti performs poorly for selected infrastructure indicators. Only 40 percent of the population has access to electricity and 69 percent to water, the lowest ratios in the region. The country has only 15 kilometers of road per 100 square kilometers of land, second to Honduras with 12 kilometers. With only 40 subscribers per 100 people to mobile phones, Haiti ranks low also for access to soft infrastructure.
Selected Infrastructure Indicators for Central America and the Caribbean (2009-10)1
Source: World Bank, World Development Indicators
1 Access to electricity is for 2009. Road density is for 2001 for Haiti, Dominican Republic, El Salvador, Guatemala, Honduras and for 2009 for Jamaica and Nicaragua.
17. Despite heightened efforts in capital spending, project implementation is still inadequate for the country’s needs. Boosted by urgent needs in the aftermath of the earthquake and stimulated by the presence of international donors, capital spending in Haiti has increased from 1.6 in 2007 to 6.5 percent of GDP in 2012. A slowing down in the rate of increase in current spending indicates the authorities’ effort to reduce unnecessary spending and redirect efforts towards infrastructure. Yet, indicators on infrastructure and the slow pace of the reconstruction call for more efforts in this direction.
Capital and current spending
Source: Haitian authorities
18. Higher reported capital spending does not mean improved execution capacity. The actual amount of capital spending always underperforms the envisaged amount in the budget. Data on execution capacity of treasury-financed capital spending shows an increasing trend over the last five years. Yet, this increasing trend only indicates higher transfers of resources from the treasury accounts to project accounts, with no real indication of project implementation. Evidence on capital spending by quarter shows very high spending occurring during the last quarter (almost 57 percent in FY2012), suggesting that the closing of the fiscal year puts pressure in the transfer of money to project accounts; it is unlikely that these resources are actually utilized for project execution until later.
19. Infrastructure spending should be boosted through better coordination among line-ministries and with donors and a more dynamic and efficient information and supervision system. Major reasons for Haiti’s low execution capacity and a weak public investment can be identified in the fragmentation of the public investment program, lack of sector-anchored growth policies, cumbersome project execution, and weak information and control systems. Against this background, the reform agenda should be oriented to define clear responsibility among government institutions, enhance a control system, boost the work of the unit of project executions and promote a dynamic information system.7
Treasury-financed capital spending: Execution rate
Source: Haitian authorities
Haiti’s ranking for social indicators is low. School enrollment remains very low and the health situation difficult; key other social indicators are far from the MDGs target. In 2011, Haiti ranked 158 out of 187 countries according to the UNDP Human Development Index. Life expectancy at birth is below 62 year in 2010, while it is above 70 for all other Caribbean countries. About 49 percent of people older than 15 are literate, as opposed to the Caribbean average of 89.5 percent.
|Literacy rates of 15-24 (percentage)||72||96||90|
|Mortality rate, infant (per 1000 live births)||57||22||38|
|Maternal mortality ratio (per 100,000 live births)||670||100||170|
|Prevalence of HIV, total (percentage of population 15-49)||2||1||1|
|Births attended by skilled health personnel (in percentage)||26||98||69|
20. Social spending is the lowest in the region, and health spending has declined from its late 1990s level. Spending in education and health is respectively at 2.1 and 1.4 percent of GDP, against 3.8 and 3.4 percent on average for the other countries of the region. Differently from regional trends, health spending in Haiti has actually declined since 1997, going from 2.5 percent of GDP in 1997 to 1.4 percent in 2009. However, a large part of healthcare is provided by international donors and NGOs, especially since the earthquake.
Source: IMF, Fiscal Affairs Department Database
Source: IMF, Fiscal Affairs Department Database
21. To ensure higher job opportunities, the composition of current spending could be more social. While important steps have been made to tilt the envelope of total spending more towards capital spending, the composition of current spending can also be changed more in favor of social spending. Differently from advanced economies where social spending tends to be identified with the creation of safety nets, in the Haitian context this requires more long-lasting and long-term measures. Social infrastructure needs to be build and strengthened, education and health provision has to encompass much larger shares of the population. Hence, while cutting unnecessary current spending, spending should be directed to health, sanitation and education services. Also, the large donors’ presence in the field of social spending can indeed offer opportunities for capacity building.
C. Concluding Remarks
With high challenges in terms of poverty, employment and inequality, fiscal policy in Haiti should be oriented towards more developmental objectives, sustaining inclusive growth. While major steps have been taken in this direction, the current taxation and expenditure frameworks do not completely fulfill the necessary requirements for these objectives.
On the revenue side,
- revenue mobilization is still low, largely based on custom duties, with high inefficiencies in the collection of income revenue;
- taxation does not favor the business environment and is not progressive;
- tax expenditures are large
On the expenditure side,
- investment spending is inadequate for the country’s infrastructure needs;
- social spending is not enough to raise the productivity of human capital.
Addressing these weaknesses would require (i) adopting a VAT as opposed to the current turnover tax; and promoting a more progressive income taxation; (ii) strengthening revenue administration; (iii) streamlining exemptions; (iv) and improving project implementation while enhancing social spending.
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Prepared by Elva Bova. This SIP updates and expands issues in part raised in the 2007 Selected Issues Paper ‘Revenue Mobilization in a Post-conflict Economy’, by El-Masry and Funke.
The initially planned loi organique has been turned into two laws which aim at changing the organization and functions of some of the main Directions Generales.
Please see the following section for a discussion about whether the corporate income tax and dispositions attached to this tax are business friendly.
See also the following section which addresses income distribution.
The only countries with turnover tax besides Haiti are North Korea with a rate of 2 percent and 15 percent and Netherlands Antilles with rates of 3 percent and 5 percent (Deloitte 2012).
A free trade zone was established in northern Haiti in 2002. Additionally, an agreement on the creation of another 40-hectare free trade zone in southern Haiti was signed in June 2003.
See next SIP chapter on Public Investment in Haiti.