Taxes and Fiscal Sustainability in Caribbean Countries

Abstract

The Caribbean countries have earned the moniker of “high debt, low growth” due to expanding fiscal deficits, high debt levels, and slowing productivity growth. The COVID-19 pandemic has accentuated these two characteristics. This chapter examines several channels and feedback loops—large adverse external shocks and severe structural economic constraints—contributing to Caribbean countries’ low economic growth-high debt status. The region’s main fiscal problems are reviewed, focusing on the tax system and how tax reforms can improve the countries’ fiscal positions. The performance of the region’s tax system is undermined by a large shadow economy, perverse effects of tax expenditures, and weak tax administration, among other issues. The chapter argues that Caribbean countries should pursue four critical objectives as it relates to tax reforms: (i) broaden the tax bases; (ii) reduce statutory rates and tariffs consistent with a responsible fiscal situation; (iii) simplify the tax system—including reducing tax expenditures—to facilitate compliance, enforcement, and transparency; and (iv) strengthen tax administration, including accelerating digital transformation of tax and customs administrations. However, tax reforms by themselves will not be sufficient to restore growth and achieve fiscal sustainability. Those reforms will need to be complemented by strengthening the countries’ fiscal framework and broader public institutions. It is important to note that obtaining public buy-in and political commitment will be critical to achieving these reforms.