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Citizens in Latin America and the Caribbean often associate corruption with economic crises. Since 2016, survey data show that individuals who believe their country’s economy has worsened are significantly more likely to say that most politicians are corrupt. But are politicians actually more corrupt when the economy is bad, or are citizens just more sensitive to misconduct during downturns?
In a new IDB study, we explore how economic conditions influence corruption and the willingness of citizens to hold politicians accountable. Combining theory and experimental evidence, we reveal a surprising pattern: politicians become more corrupt during economic booms, not because citizens stop caring, but because good times make corruption harder to detect and less likely to be punished.
To study this phenomenon, we designed a theoretical model where citizens fund public goods through taxes, and politicians decide whether to allocate those funds honestly or siphon some off as private rent. Citizens can then choose to punish politicians, at a personal cost, such as joining a protest or pursuing legal means, if they believe corruption occurred.
Good economic conditions are modeled as reductions in the cost of creating public goods. This is equivalent to what happens in many countries in Latin America when local authorities receive additional funds because the price of abundant natural resources goes up or when exchange rates make it cheaper to buy inputs. When the cost of producing public goods falls, politicians can offer more goods for the same level of taxes. That makes it harder to detect when politicians skim money. Moreover, citizens may be less inclined to punish them, even when they suspect foul play.
To test these ideas, we ran a laboratory experiment with 800 university students in Colombia. Participants played the roles of either citizens or politicians, making decisions across several rounds that mimicked the incentives and uncertainties of real political life. The citizens received money with which to pay taxes, which were then transferred to the politicians. The politicians then had to decide how much to allocate of those funds to provide public goods (and how much they could pocket). In some rounds, the cost of producing public goods—manifested in real money—was high (bad times), and in others, it was low (good times). Once citizens observed the public goods provided, they could decide to punish the politicians by reducing their salary if they believed the politician had been corrupt, mimicking what would happen in real life if voters decided to vote the politician out of office.
The results were clear: corruption increased by 14% when the economy improved. Meanwhile, the rate at which citizens’ punished politicians remained mostly stable, but their ability to detect corruption and their desire to respond to it was weakened.
One of the most striking results came from what politicians expected: they believed they were less likely to be punished during good times, and they were right to think so. The public goods looked better, even when the politicians had skimmed off the top, and citizens were less likely to act on their suspicions. As a result, politicians had stronger incentives to engage in corrupt behavior.
It is worth noting that because public goods are usually provided by the different levels of government (local or municipal, state or provincial, national) and citizens have a hard time disentangling who provided what, corruption can be further obscured by the actions of other levels of government. That is, a local corrupt politician may not be voted out of office if at the same time the higher levels of government are investing heavily in the district.
This study upends the assumption that corruption thrives only in times of hardship. Instead, it shows that booms may shield misconduct by creating the illusion of competent governance. Politicians can skim off the top without triggering alarm bells, especially when citizens are materially satisfied or politically cynical. For policymakers, the implications are clear: oversight and accountability mechanisms are crucial even when things seem to be going well. Transparency in public spending, citizen access to detailed budget information, and clear attribution of public goods provision (who funded what) can help make corruption more visible and accountability more effective. Otherwise, periods of prosperity may come with hidden costs—not just in money lost, but in trust eroded.
Deo Adjuvante, Non Timendum
“With God as My Helper, I Have Nothing to Fear”
As we sit and meditate in The Bahamas, our region is waking up to a new geopolitical agenda. Guyana is heading to the polls on the first of the month, Jamaica follows with its general election on the third, and Venezuela shows signs of anxiety and paranoia. We must be mindful of one fact: America will not invade Venezuela. Instead, we must learn to recognize the art of propaganda and the craft of deceit. These two forces dance like partners in a Machiavellian tango.
Brazil sits quietly, watching as the wider region anticipates a shift in direction. This is the complexity of our world: nations caught between hope and manipulation, where the ambitions of men can easily pull us into conflict. And when that conflict erupts, history reminds us there are no heroes, only survivors.
“The greatest victory is that which requires no battle.” — Sun Tzu
We must understand that the strength of a nation lies not in war, but in the wisdom to avoid it. We should reflect deeply on the lessons of Vietnam and Afghanistan, where decades of bloodshed proved that there are no true winners in wars of intimidation.
Point One: The Role of Regional Unity
One of the greatest weaknesses of the Caribbean has been its fragmentation. Each island often pursues its own agenda while outside powers exploit division. The Caribbean Community (CARICOM) was designed to strengthen cooperation, yet its voice is too often muted on global stages. If we fail to speak as one, we risk being manipulated as many small pieces rather than one strong collective.
“Unity is strength… when there is teamwork and collaboration, wonderful things can be achieved.” — Mattie Stepanek
Point Two: The Economic Battlefield
Geopolitics is not only about armies. It is also about economics. Foreign powers use loans, trade deals, and aid packages as weapons of influence. The region must be careful not to trade independence for short-term financial relief. Debt diplomacy is as dangerous as military occupation because it shackles future generations to decisions made in desperation.
“It is not the creation of wealth that is wrong, but the love of money for its own sake.” — Margaret Thatcher
Point Three: The Importance of Youth and Education
The future of the Caribbean does not belong to the politicians of today but to the youth who will inherit tomorrow. Education must prepare our young people not only for jobs, but for leadership, diplomacy, and critical thinking. If our region fails to invest in its human capital, we will remain vulnerable to external manipulation. A population that cannot think critically is easily swayed by propaganda.
“Education is the most powerful weapon which you can use to change the world.” — Nelson Mandela
Point Four: Climate Change as a Political Weapon
The politics of the region cannot be separated from the reality of climate change. Rising seas, stronger hurricanes, and environmental stress place small island nations at risk. Wealthy countries make promises of aid and green funding, yet often use climate negotiations to exert influence over poorer nations. For the Caribbean, survival itself is political, and climate change is now part of geopolitics.
“We do not inherit the Earth from our ancestors; we borrow it from our children.” — Native American Proverb
Point Five: Venezuela and the True Prize of Oil
At the center of much of this regional tension is Venezuela, a nation that sits on the largest proven oil reserves in the world. This wealth of natural resources makes Venezuela a constant point of contention. For decades, outside powers have eyed Venezuelan oil as if it were a prize for the taking. Yet we must be clear: Venezuelan oil belongs to the Venezuelan people, not to Washington, Beijing, or any foreign capital.
Exiled Venezuelans who were driven away by political repression yearn to return home not only to reclaim democracy, but also to reclaim the oil wealth that rightfully belongs to them and their children. Oil should be a national inheritance that lifts Venezuelans out of poverty, not a bargaining chip in global power games. The true prize of Venezuela’s oil is the survival and prosperity of Venezuela itself.
“Natural resources should serve humanity, not dominate it.” — Wangari Maathai
Point Six: Security and Migration
Instability in one nation often spills into its neighbors. The Caribbean has seen waves of migration from Venezuela and Haiti, placing pressure on small island states with limited resources. This is not just a humanitarian challenge but also a political and security issue. Increased migration fuels debates about border control, law enforcement, and social stability. How the region responds will determine whether it embraces compassion and order, or allows chaos and division to spread.
“Peace is not merely a distant goal that we seek, but a means by which we arrive at that goal.” — Martin Luther King Jr.
Point Seven: Macha Positioning and Geopolitical Posture
Another layer of politics in the region is what can be called macha positioning. This is the display of strength, the flexing of influence, and the posturing of nations without committing to open war. Countries use military exercises, diplomatic statements, and economic alliances to show dominance and intimidate rivals. It is a game of appearances, where leaders project toughness to secure leverage at the negotiation table.
The danger of macha positioning is that it can create unnecessary tensions. Pride and image become more important than peace and cooperation. History shows us that wars have often been sparked not by necessity, but by leaders refusing to lose face. The Caribbean must be wise enough to avoid becoming a stage for these dangerous displays of bravado.
“It is not power that corrupts, but fear. Fear of losing power corrupts those who wield it.” — Aung San Suu Kyi
“More the knowledge, lesser the ego. Lesser the knowledge, more the ego.” — Albert Einstein
“War does not determine who is right, only who is left.” — Bertrand Russell
Conclusion
The Caribbean stands at a crossroads. Its unity, economic independence, and the education of its youth are the pillars that will determine whether the region thrives or falters. Climate change and migration test our resilience, while Venezuela’s oil reminds us that the true wealth of nations lies in the hands of their own people.
Macha positioning and external pressures challenge our ability to act with wisdom rather than ego. To navigate this complex landscape, the Caribbean must prioritize cooperation over division, long-term vision over short-term gain, and vigilance over impulse. Only by putting people first, respecting sovereignty, and embracing strategic patience can the region safeguard peace and prosperity for generations to come.
August 29, 2025
Tax Reform Brazil
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One of the defining features of Brazil’s tax system is the complexity of its indirect taxes. Notably, the system is marked by fragmented tax bases, the cumulative taxation at each stage of the production process (known as the cascading effect), and the administrative challenges posed by the jurisdiction to tax consumption of three levels of government— the Federal Union, 27 states, and 5,570 municipalities—each applying different tax bases and rates.
For decades, Brazil tried to reform this complex tax structure, with little success. However, the situation changed in 2023 when the country approved a landmark reform introducing three modern mechanisms that will likely be a model for the future of the value added tax (VAT). This tax is currently present in 175 countries around the world and is the main source of revenue for most developing countries.
In this post, we will discuss the findings of an upcoming study on three innovative VAT mechanisms of the Brazilian reform that can make this tax more effective, less regressive and adjusted to the country’s federal structure. We hope that the lessons from the Brazilian case will offer valuable insights for any government seeking to improve the design and application of this tax.
Conceived by the German industrialist Siemens over a hundred years ago, the value added tax (VAT) is a tax on consumption levied on the value that businesses add at each stage of the production and distribution process. The VAT taxes consumption at destination with a broad base and a uniform rate, fulfilling three criteria of sound taxation.
First, it is a highly effective tool for revenue generation. Secondly, by not distorting the supplies among goods and services and by adopting the credit system, it does not influence the taxpayer’s choice, maximizing neutrality. Thirdly, its administrative simplicity lowers compliance costs for taxpayers and enforcement expenses for tax authorities.
The VAT was introduced in the mid-1950s in France, and Brazil was the third jurisdiction in the world to adopt it in 1964, albeit imperfectly. In Brazil, most indirect taxes are currently levied on the supplies of goods and services, in the form of four different taxes: PIS/COFINS by the federal government, ICMS by the states and ISS by the municipalities.
These four taxes are largely levied on origin (where the suppliers of goods and services are located) and represent the largest source of revenue in the country, with a 36.4% share of the total revenue of the three levels of government (Graph 1), and representing the main source of revenue for the states and most municipalities. Furthermore, Brazil has become the world’s biggest collector of this consumption tax.
Because of Brazil’s federative model, the reform adopted the Dual VAT model, with the creation of two separate taxes: the Contribution on Goods and Services (CBS), which is the responsibility of the federal government, and the Tax on Goods and Services (IBS), which is shared between states and municipalities.
In addition to the IBS and CBS, the reform also provides for the introduction of an excise tax on certain goods and services that are harmful to health and the environment, in line with the international excise tax model.
The model to be implemented solves three major problems with the current tax system:
To ensure federative balance and regional competitiveness, four funds[2] were created under the responsibility of the federal government, aimed at fostering development, reducing regional inequalities, especially in the Amazon region, and compensating for the phasing out of the ICMS tax benefits. Although they reinforce federative equalization, they impose a significant financial burden on the federal government, requiring planning and strict fiscal management.
In addition, differentiated regimes were established as exceptions to the general IBS and CBS regimes for sectors such as health, education, basic food baskets and agriculture, through reduced rates and presumed credits. The favored regimes benefit specific regions and sectors, including the Manaus Free Trade Zone (ZFM), which maintained its free trade area tax incentives, and Simples Nacional, which preserved reduced and progressive rates for micro and small companies.
The Brazilian tax reform brings three important innovations, including the creation of mechanisms for implementing and coordinating Dual VAT between the different federal entities and a split payment mechanism, which reduces tax evasion. A third innovation is the partial refund of VAT to low-income families to combat its regressivity (cashback).
As we mentioned earlier, the Dual VAT includes two taxes, one of federal responsibility and the other subnational, to be shared between states and municipalities.
The great novelty of the Brazilian tax reform compared to the dual VAT models of Canada and India is its institutional arrangement. A steering committee (Comitê Gestor) will be set up with representatives from the states and municipalities to administer the IBS, which will be responsible for collecting this tax on all transactions and distributing the proceeds according to federative transition rules and the place where the taxable supply occurs.
The Steering Committee represents an important simplification for taxpayers, as they will only need to register and remit the tax for a single entity instead of potentially for the 27 states and 5,570 municipalities. In addition, it will ensure that taxpayers can claim and receive credit refunds, since revenue collected on B2B supplies will not be transferred to the federative entities.
From the point of view of the sub-national entities, the Steering Committee (Comitê Gestor, as it is known in Portuguese) will have equal participation from representatives of the states and municipalities and will distribute the collection to the respective destination entity. Shared governance ensures the autonomy of sub-national entities in the administration of the tax, as the federal government will have no participation in Committee.
Another novelty of the Brazilian reform is the split payment model, or the collection of taxes when the payment is settled. This model has already been implemented in some European countries and was criticized for having a negative impact on business’ cash flow, since taxes were automatically remitted to tax authorities without considering any VAT credits of the suppliers. This meant that firms accumulated tax credits and had to wait to be refunded, which often took a long time, generating financial costs and cash flow problems.
The Brazilian model has solved this challenge by adopting an “intelligent split payment” model, in which there will be a prior consultation with the tax authorities to check whether the supplier has IBS and CBS credits before determining whether the split payment will be made.
If the supplier holds IBS and CBS credits, the split payment mechanism will not apply. Instead, the seller will receive the full transaction amount (i.e., price plus tax), ensuring that the firm’s cash flow remains unaffected (see Graph 2). If this consultation is not possible and the split payment is made, the tax administration must refund the amount of the taxes to the supplier within three days.
According to the graph above based on a hypothetical case, the supplier makes a sale to the buyer of $100 on which $26.5 of IBS and CBS are collected (1). The buyer then makes a payment of $126.5 through a financial institution (2). Before making the split payment, the financial institution checks with the tax administration to confirm if the supplier has IBS/CBS credits (3). If the supplier does not have enough IBS/CBS credits to settle the IBS/CBS on the transaction, the payment institution will make the split payment, remitting the amount of the taxes ($26.5) to the tax authorities (4) and the value of the item sold ($100) to the supplier (5). If the supplier has tax credits to settle the transaction, he will receive the full payment of the price and the IBS/CBS ($126.5) and no tax withholding applies.
The implementation of this model is possible because of the high level of digitization of VAT assessment and management. Brazil was one of the world’s pioneers in implementing electronic invoicing, digital accounting and has advanced instant payment systems such as PIX[1]. Split Payment is expected to reduce fraud conducted with false invoices and fictitious credits, paving the way for the reduction in the tax gap and, consequently, the standard rate too.
The main problem with VAT is vertical equity: in almost all jurisdictions the VAT is proven to be regressive when measured in relation to income. Lower-income taxpayers pay proportionally more tax than higher-income consumers on their consumption. To mitigate this impact, many countries reduce tax rates or exempt certain mass-consumption goods and services. However, this approach lowers revenue and can worsen inequality, as higher-income individuals tend to consume more in absolute terms.
The Brazilian reform adopted the Personalized VAT (P-VAT) or Cashback to solve this challenge. This solution consists of generalizing the tax base, adopting a single rate and returning what has been paid in IBS and CBS to low-income populations or disadvantaged groups. This maximizes collection and neutrality while reducing VAT’s regressivity. In short, P-VAT (Cashback) substitutes indiscriminate tax expenditures with focalized (expenses) tax refunds. Tax administrations can use electronic means (e.g. electronic invoices, especial card for beneficiaries, electronic payment, etc.) to improve the targeting of beneficiaries while combating fraud.
Families with a monthly per capita income of up to half of Brazil’s minimum wage will benefit from P-VAT. Cashback will correspond to 100% of the CBS and 20% of the IBS paid on the purchase of gas cylinders, electricity, water supply, sewage and piped gas and telecommunications, and 20% for other goods and services.
Brazil’s reform of taxes on consumption aims to address two simultaneous challenges. First, it seeks to simplify the system, eliminate “cascading effects” and reduce the regressivity. To achieve this, it applies a broad base with low rates and full input tax crediting and introduces partial VAT refunds for lower-income individuals.
Secondly, it maintains the tax jurisdiction of all levels of government through the implementation of a dual VAT system (CBS and IBS). This system is overseen by a representative steering committee and ensures a fair and transparent distribution of tax revenues based on electronic invoicing.
The solutions implemented in the reform demonstrate that the adoption of good international tax practices combined with innovations in the design of institutional arrangements and the use of modern digital technologies for both tax management and financial transactions will be important allies for improving this century-old tax in the coming years.
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Domestic Economic Developments
Overview
Preliminary indications are that the domestic economy’s pace of growth moderated during May 2025, relative to the same period last year, as performance continued to move closer to their expected medium-term potential. Tourism inflows, although at healthy levels, rose at a slower pace, owing to capacity constraints in the high value-added stopover category, albeit the cruise sector remained buoyant. In price developments, average consumer price inflation posted a flat outturn during the 12 months to March 2025, relative to the comparative 2024 period, underpinned by reduced cost pressures from imported fuel and other goods and services. Monetary sector developments featured a buildup in banking sector liquidity, as the accumulation in the deposit base exceeded the growth in domestic credit. In contrast, external reserves decreased, mainly attributed to a rise in net foreign currency outflows through the public sector.
Real Sector
Tourism
Initial data indicated that during the review month, the gains tourism sector earnings slowed, as activity in the stopover segment remained constrained by accommodation capacity. However, the cruise segment maintained its healthy pace of growth.
Preliminary data from the Nassau Airport Development Company Limited (NAD) revealed that total departure—net of domestic passenger—declined by 3.2% to 133,397 in May, relative to the same 2024 period. Underlying this outcome, U.S departures fell by 3.7% to 113,984, and non-US international departures, by 0.6% to 19,413, vis-à-vis the corresponding period last year.
On a year-to-date basis, total outbound traffic decreased by 2.3% to 0.7 million. Specifically, U.S departures reduced by 2.8% to 0.6 million, relative to the comparative 2024 period. Contrastingly, non-US departures grew by 0.7% to 0.1 million compared to a year earlier.
In the short-term vacation rental market, data provided by AirDNA showed that in May, total room nights sold rose by 5.0% to 66,830 vis-à-vis the corresponding period in the prior year. The average daily room rate (ADR) firmed for entire place listings by 10.4% to $571.89 relative to the comparative period of 2024, and by 1.3% to $189.16 for hotel comparable listings. However, given the inventory boost, average occupancy rates for entire place listings decreased to 44.1% from 47.3% a year earlier. Likewise, hotel comparable listings declined to 43.5% from 47.7% in the preceding year. On a year-to-date basis, total room nights sold grew by 10.7% and the average daily rates on entire place and hotel comparable listings, by 8.6% and 3.6%, respectively.
2025/2026 Budget Communications Highlights
The Government’s Budget Communication for FY2025/2026 was presented to Parliament on May 28, 2025 under the theme “Expanding Opportunities, Island by Island”, and approved by the end of June. The Government’s announced an agenda aimed at prioritizing enhanced food and national security, offsetting the rising costs of living, upgrading public infrastructure, protecting the environment and advancing education and employment.
In the 2025/26 Budget, the Government plans to strengthen its fiscal position by improving revenue collection efficiency to counterbalance a targeted tax relief strategy. In this regard, the budget forecasts a revenue intake of $3.9 billion for FY2025/26, compared to the projected $3.5 billion in FY2024/25.
With regard to revenue measures, no general increase in taxes nor fees were scheduled for FY2025/26. Measures to increase tax proceeds largely focused on enhancing collection efficiency, and bolstering tax compliance.
Heightened efforts concentrated on strengthening tax compliance from cruise liners. Measures to improve collection efficiency include the introduction of the Frequent Visitors Digital Card (FVDC) initiative, aimed at expediting the immigration process for frequent leisure travelers arriving by private vessel or aircraft.
To increase non-tax proceeds, the Budget introduces a series of targeted fees to protect the marine environment, such as an environmental levy on seabed leases and fines for unsafe marine operations. In addition, the Government foreshadowed the establishment of a Maritime Revenue Unit to support compliance, with expanded enforcement powers granted to relevant authorities.
Further, the Government outlined a series of tax relief measures to offset rising living costs. Notably, a reduction in the VAT rate to 5.0% was announced for a range of essential products, such as medical and dental supplies, prescription and non-prescription drugs, and basic hygiene products. In addition, concessions included the extension of VAT relief on building materials for religious institutions, the planned reduction or removal of customs duties for several household hardware items, and the elimination of excise duty on butane fuel used for cooking. To encourage the adoption of cleaner technology, the budget also offered duty exemptions for energy efficient appliances.
Aligning with the Government’s goal to create employment opportunities, the Budget introduced the Business Development Incentives Program Act to offer tax-related benefits to large firms investing in local job creation, training, and sustainable development.
To promote equity in the Real Property Tax system, Parliament approved that, foreign homeowners would qualify for the owner-occupied exemption on properties valued up to $300,000, with partial exemption granted after 90 days of residency and full exemption after 183 days.
As it pertains to Government spending, expenditure was projected at $3.8 billion for FY2025/26, surpassing the $3.6 billion estimate in FY2024/2025. Recurrent outlays were expected to reach $3.4 billion, vis-à-vis the $3.3 billion approximation in FY2024/2025. Capital spending was forecasted at $376.3 million, higher than the $344.5 million estimate in 2024/2025. With regard to major expenditure measures, the Government outlined numerous planned infrastructure projects across the archipelago, inclusive of roadworks, school and clinic repairs, aviation enhancements and expansions, upgrades to water systems and improving drainage in flood-prone areas. As it relates to public safety, the Budget included allotments to enhance emergency services infrastructure. The Government also provisioned funds for the upgrade of law enforcement technology, the construction of new facilities and for new recruits. For the judicial system, the Budget allocated funds to expand the Virtual Courts platform.
Targeting food security, the Budget increased the overall agriculture allocation to $35.0 million from $25.0 million. Notably, the Government planned to raise its commitments to Bahamian farmers and provision for the creation of a new Centre for Food and Nutrition Security, to drive innovation, research, and policy development. In addition, $9.0 million was earmarked to outfit the Golden Yolk Project with new poultry housing and an egg processing facility. Further, the Government signaled plans to support construction of hydroponic farms on several islands to modernize farming techniques.
In terms of entrepreneurship, the Government proposed allotments for targeted programs through the Small Business Development Center and the Bahamas Development Bank. For education, proposed investments include $2.6 million for the National Maritime Academy, expanded support for BAMSI and BTVI, and scholarships for university students. Further, the Government provisioned for the launch of The Bahamas Polytechnic Accreditation and Training Hub, alongside the Upskill program, to strengthen technical and vocational pathways through paid online and in-person certification courses.
Based on the current economic outlook, the Government anticipates a fiscal surplus of $75.5 million, or 0.5% of GDP for FY2025/2026, as compared to the projected $69.8 million deficit (0.4% of GDP) for FY2024/25. Given the projections, a reduction in the direct debt charge was forecasted, alongside a decrease in the corresponding ratio to GDP.
Prices
Average consumer price inflation—as measured by the All-Bahamas Retail Price Index—was relatively flat during the 12 months to March 2025, following a 2.4% increase in the comparative 2024 period. Contributing to this development, average costs declined for clothing & footwear, by 1.9% and housing, water, gas, electricity & other fuels, by 1.3%, after recording respective increases of 0.2% and 4.7% in the same period last year. Likewise, average prices decreased for recreation & culture, by 0.6% and restaurant & hotels, by 0.3%, following the prior year gains of 1.7% and 3.4%, respectively. In addition, average inflation moderated for furnishing, household equipment & routine household maintenance (2.7%); food & non-alcoholic beverages (2.4%); miscellaneous goods & services (2.3%); alcoholic beverages tobacco & narcotics (1.8%); education (1.7%); and health (1.7%). Providing some offset, the reduction in average prices slowed for communications (3.5%) and transport (1.6%).
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