The Rich Stay Richer

Last week, as I was getting ready to sit down and write about the details of the new draft tax reform that I wrote about last time but had just received a copy of, I learned that President Abinader had already promulgated a very slightly amended version as Law 30-26. A major tax reform, from announcement of the intent to the signing of the law, in only a week. Unheard of. What just happened?

Historian (and President) Juan Bosch once wrote that a businessman with capital of 25,000 pesos in 1930 (=US$25,000 at the time) was a wealthy man. Indeed, until around 1950, the Dominican Republic is considered to have been the poorest country in Latin America.^[1] During the 1950s, rapid economic growth began, accompanied by heavy public investment, growth that has continued with few pauses until the present.

This has created no small number of fortunes. In many cases, entrepreneurs were content to accumulate wealth, with little thought to the later division of that fortune. Inheritances were taxed at 25%, and rules for division were fixed by law. I know of several cases in which men passed away without even communicating the full extent of their holdings to their families, or where to find the required documentation to gain title to their inheritance.^[2]

The new law remedies that situation, at least in regards to taxation, to an important extent. A common strategy is to invest growing wealth into the accumulation of real estate, which is often then rented out. So:

• The new law essentially reduces the taxation of rental income from 25% (or now 27%) to only 15%.

• Once property is sold, the capital gain is subject to taxation, but no longer as ordinary income at 25%/27%, but rather at a new 10% rate.

• Those who plan ahead, and transfer real estate while still living, are rewarded by being able to transfer property to heirs by paying a simple transfer tax. Even the transfer tax, long at 3%, is now being phased down to 1%.

In the short term, these changes probably won’t cost the Treasury much, but the long-term costs may be very large. It will, however, help to maintain the wealth of successful business families. I am not ready to call the Dominican Republic an oligarchy, though it has always had some clear class distinctions. But this law will help move the country further in that direction.

Meanwhile, attention has been focused on other provisions, notably the resetting and indexation of tax brackets for formal sector workers , the elimination of estimated tax payments for microenterprises (creating a one-time cashflow boost), and other minor provisions favoring the middle class. By my calculations, the income loss from much-publicized resetting of income tax brackets (RD$9-10 billion) is less than the RD$11 billion loss from the eventual reduction of real estate transfer tax from 3% to 1%.

The fall in the oil price—which may or may not rise again this year—has sharply reduced the fiscal cost of freezing motor fuel prices. While I was skeptical that the planned cutbacks in administrative expenses would be sufficient to fund these subsidies through the end of the year, this is no longer an important concern.

I suspect that the Ministry of Finance has done its sums, and that the tax package will indeed create important revenue gains in for 2026-27.. But, as I argued last time, the main function of this tax reform is to redistribute income. And this it has done cleverly, in a way that will be felt, at least by the wealthy, for many many years, as the rich will now stay richer than before.

^[1] Haiti scholar Craig Palsson of Utah State University argues that evidence indicates Dominican Republic overtook Haiti many years earlier; I may come back to this one day, but it is not relevant to the current discussion.

^[2] See also the Disney film, “Mary Poppins Returns”. ;-)