Dominican Republic Table of Contents
The core of the government's fiscal problems lay on the revenue side. Starting in 1970, revenues, as a percentage of GDP, steadily declined. These revenues hit a low in 1982, as the result of generous tax exemptions for industry. Many economists criticized the role of fiscal exemptions in the island's industrialization because the government thereby forfeited badly needed revenues in favor of job creation. In 1983 the government introduced a 6-percent value-added tax and initiated a number of ad hoc taxes on international trade, licensing, luxury items, and foreign exchange transactions. These new taxes, however, did not make up for the loss of revenue that had resulted from the low rates of taxation on income and business profits.
A fundamental feature of the nation's tax system was the low level of taxes on income and profits. In 1985 income taxes represented only 0.6 percent of GDP, well below the average of 2 percent of GDP for all developing countries. Furthermore, the income tax was effectively regressive because it utilized a flat rate and allowed numerous exemptions. Most new corporations, generally the most dynamic, benefited from at least one of the many fiscal incentives, and these enterprises therefore added little to the public coffers. In 1987 taxes on income and profits accounted for 19 percent of total tax revenue. Because of the political strength of the local and the foreign business communities, major reforms in this section of the tax law were unlikely (see Interest Groups , ch. 4).
In addition to personal and corporate income taxes, goods and services and international trade were also taxed. Taxes on goods and services equalled 36 percent of all taxes in 1987, whereas those on international trade had reached 43 percent, a relatively high share. Steep import tariffs and export taxes on principal commodities constituted the bulk of taxes on trade. Dominican authorities found taxes on imports and exports far easier to legislate and to collect than domestic taxes, despite the fact that they created numerous economic disincentives. Non-tax revenues, such as government income from property and other equity, provided 12 percent of total revenues in 1987.
Data as of December 1989