Free Enterprise Gains In Communist Cuba

PRICE OF BEING LEGAL - TAXES

WELCOME to Pancho's car-repair shop, the vanguard of private enterprise in Fidel Castro's communist Cuba. The "shop" - actually a short length of street in the leafy Vedado section of Havana - has tools, electricity supplied through a line from an adjacent house, and a hand-cranked pulley suspended from a tree branch. The three young mechanics are supervised by the owner, Francisco "Pancho" Munoz.

As rudimentary as the shop might seem, to judge from the number of other "Panchos" in the streets selling food, peddling flowers, cutting hair - even repairing disposable cigarette lighters - the idea is catching on.

"What we'll accomplish here in a day would take a state-run repair shop a month," says a proud Mr. Munoz, who used to work as a mechanic in a government ministry garage.

Last June, Cuba's communist regime grudgingly approved an expanded list of self-employment activities that will be officially allowed in what it insists will remain a mainly state-owned-and-operated economy. That decision followed a first, narrow approval of some self-employment in 1993. It came in response to a need to create new sources of income for people at a time when state enterprises are laying them off.

It also acknowledged activities that already had existed clandestinely - and which could be better regulated, and taxed, once they were legalized.

"I'd been doing this under the table since 1968," says Munoz, as his workers - two sons and a friend - hoist a car's engine from the frame. "Now I can work out in the open, but it's also easier for the government to kill me with their taxes."

Today Cuba officially counts 208,000 people with self-employment licenses. Some economists say that number could rise to about 300,000. Figuring that for every person registered, two to three others are also working privately, Cuba could soon find itself with about a quarter of its 4 million workers self-employed, says George Carriazo Moreno, assistant director of Havana's Center for World Economic Studies.

"That activity is not so important in the overall picture of Cuba's economic performance," says Mr. Carriazo, "but it does represent a relatively important element of a changing, adjusting economy." Including expanding agriculture cooperatives, where members work their own land for their own profit, Cuba could soon count about half its workers as self-employed, Carriazo says.

Other factors, such as increased nickel and petroleum production, better harvests, and more tourists, are bigger players in what Cuban officials say was the country's 2.5 percent growth last year, and 7 percent growth in the first quarter of this year.

But the expanding private economy does count for a lot with Cuba's government, in part because it offers a weary populace new ways of making money. It also gives more people access to the US dollars that constitute a parallel economy here.

At the same time, it means a growing slice of Cuba's 11 million people will no longer be dependent on the state for their livelihood. That could lead people to desire less of a state role in other aspects of their life, and thus political change.

Partly as a way to boost government revenues, but also as a means of controlling the fledgling private sector and its growth, the government is in the midst of implementing a tax on self-employment. Taxes on the self-employed who charge for their services in US dollars - most private restaurant owners and some taxi drivers - are steep. A restaurant owner charging in dollars pays $300 a month - $400 if he sells alcohol - plus 10 percent of the first $2,400 in income after that.

The self-employed who charge in Cuban pesos - officially one peso equals $1, although on the black market the accepted rate is 20 to 25 pesos to the dollar - are already charged a monthly "license fee." As of the end of this year, they too must pay an annual income tax.

A new law on taxation for self-employed peso earners was adopted March 20. And even though the rates to be applied have yet to be finalized, Cuban officials say they will be very close to the rates adopted for dollar earners. That means 10 percent for the lowest earners and up to 50 percent on top levels of income - rates some self-employed say will force them out of business.

"If they put it at 10 percent, I can't make it," says Ramon Lazio, a retired technician from the state radio and television ministry who now sells cotton candy out his front door in the afternoons.

He says he would have to sell his cotton-candymaker - an old plastic washtub mounted atop an even older Soviet motor from an industrial dryer.

With a gaggle of neighborhood children patiently awaiting the product of his contraption, Mr. Lazio says he knows exactly why the government is taxing his meager income.

"They really want everything to belong to the state and everyone to work for the state," he says. "It goes against their philosophy to have too much of this" private enterprise.

Cuban officials say the grumblings are to be expected, since taxation is one thing Cubans in the revolutionary era learned happily to live without.

"When I hear people say they won't be able to make it with these taxes, I chuckle," says Silvio Gutierrez Perez, head of the Finance Ministry's taxpayer-assistance department. "It's just that this is new, but people will get used to it - and they'll pay it, because they're making money."

Still, Mr. Gutierrez acknowledges that the Cuban state has an interest in seeing some of today's self-employment wither away, and he predicts that will happen "as the state strengthens and is able to make state-based employment more attractive again."

He predicts many private restaurants will close and most of the private taxi operators will fail as the government is able to offer cheaper, high-quality food to state restaurants and subsidized gasoline to state taxi companies.

Lazaro Cordero, a self-employed Havana taxi driver, says this is already happening, and it troubles and perplexes him.

"People were starting to earn a little money by making churros and selling them on the street," he says, referring to the crispy donut-like pastry found in most Latin countries.

"So what does the government do? They distribute 200 churro machines to state employees, and now they can sell their churros cheaper because the state supplies their dough and other materials. The private guy can't compete and is put out of business.

"The government needs to accept that we now have a private economy along side the state-run one," Mr. Cordero says.