By Simon Cawdery
Why do governments always seem to want to chase a headline?
A case in point is the recent increase in duty free allowance for residents returning to the Cayman Islands from $500 to $800. (I will explain the bolded and italicised texts shortly).
This strikes me as a shameless headline-grabbing, attention-seeking change designed to simply remind voters that ‘government is on their side’. But is it? Who actually benefits?
Definitely not shops or workers in Cayman. More people will now be buying more clothes, more electronics and more everything else when on their travels. The most likely ‘winners’ from this would seem to me to be high-income people who travel regularly for business. Now they can bring back all manner of goodies in their luggage every time their employer pays for their flight to somewhere else in the world. What this doesn’t do is benefit a huge number of Caymanians struggling to make ends meet and pay their bills.
Let me now turn back to the bolded and italicised text at the beginning of this article. Just imagine you are a family of four going to Miami for the weekend. Sum up the cost of flights, accommodation, meals and rental cars/taxis, and it’s likely the trip is going to cost you about $2,700 (maybe a bit less but probably a lot more).
Remind me how many people on low incomes, in subsidised housing, or struggling to pay their grocery bills or electricity or water bills have the funds to splash out on a $2,700 trip to Miami? Is this a subtle way to encourage more people to fly Cayman Airways, which was seemingly the lucky winner in the recent Cayman spending lottery to the tune of $13 million? As an aside, Cayman Airways seems to have a lot of ‘uncontrollable costs’ that always seem to need extra subsidies; perhaps it should hire some management from Ryanair – I bet some of those costs would quickly become eminently controllable.
When I originally read the policy, I’ll confess that my immediate reaction was “great, I will save some money”. But then I thought about it some more and realised that this was precisely the policy’s Achilles’ heel. I can afford the 22% tax on the allowance increase (it works out at about $66 – assuming imports are of clothing or electronics, for ease as those are taxed at the 22% rate).
There are many, however, who can’t afford to pay for a flight and so can’t benefit. Cayman quite rightly should want to encourage economic growth and wealth creation and want to attract wealthy people to live and invest here. It’s doing pretty well at this, but it seems to be doing far less well at giving the bottom tiers of the community a chance to climb the ladder.
There are so many better policies that could have been adopted, but let me just propose two:
1. Cut the duty on fresh food and vegetables and other basic staples. This way, grocery bills fall and health outcomes improve. This would disproportionately benefit lower incomes (as they spend a higher percentage of their earnings on groceries), thereby helping to ever-so-slightly tilt the balance back in favour of the less fortunate. It would also have the tremendous side-effect of improving health outcomes if ‘healthy food’ goods were to become more affordable. I appreciate we have fortunately moved on from the days of the $13 cauliflower, but fresh fruit and vegetables still cost way too much in Cayman (the famous cauliflower was $8 when I looked last week).
2. Give every registered voter an annual duty-free import allowance (say $5,000). Then every Caymanian can benefit from tax-free imports, not just the wealthy in the community who have the funds to go on international trips. Targeting the voter roll would have the side benefit of encouraging greater voter participation too, a more-than-worthwhile side-effect.
By doing this, lower-income families could make use of freight forwarding and shipping companies to bring in certain goods without the 22% government tax mark-up (shipping companies that, incidentally, hire workers in Cayman). This way, every Caymanian gets the same economic benefit, whereas the current policy is skewed towards the affluent. Some may quibble that this benefits Caymanians at the expense of immigrants. This is true and intentional, but if one wanted to grant a (lower) tax-free annual allowance to immigrants then that can easily be included.
By the end of my reflection on this new duty cut, I was down-right annoyed and frustrated. What’s worse is that the wealthier you are and the more you travel, the more you save. Those business people, travelling five times a year, get a tax benefit of $330 from this policy, while the lowest income levels get zero. In effect, the poorest in society are subsidising the rich. The policy is atrocious, it’s regressive in nature, and, frankly, deserves to be buried deep within Mount Trashmore.
Perhaps the policy is designed to simplify the customs process at the airport? Perhaps the policy is designed to allow customs officers to focus on stopping the imports of drugs, guns or other illicit items? If so, great. But there would surely be an easier route? Just make it easy for people to declare their goods. Set up an online system for pre-declaration prior to arrival and then people can pay their duty and not trouble the customs officers who can then be reallocated to higher-priority activities. This policy doesn’t even do well at achieving this possible aim!
Is it too late to change the policy? Do governments ever admit mistakes? This is a badly thought-out, badly designed and badly organised policy. Better, simpler, fairer, more logical options abound. Why weren’t they considered? If they were considered, why were better options not selected?
Cayman needs far more thoughtful policy consideration. Cayman needs far better critiquing and stress testing of ideas. Where’s the melting pot of good, ready-baked ideas for government to introduce? Where are policy ideas thrashed out, debated and critically analysed for their economic impact? Honestly, I don’t know because, on the evidence of this policy, we are very seriously lacking in innovative thinking and very seriously lacking in critical analysis.
It’s never too late to correct a mistake. It just takes courage to admit one.
Simon Cawdery, CFA, is an investment manager and governance professional who lives and works in the Cayman Islands. He writes regularly for the Compass.
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