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Wanted: Private Sector Leadership

By Francisco Javier Cimadevilla

March 28, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Text of want ad: "Candidates must have a vision of private sector-driven economic development for Puerto Rico, a smaller, fiscally responsible government, lower taxes on individuals and businesses, and fewer government regulations. The chosen candidates must have spine and guts to advocate the private sector’s best interests–which in the long run are the best interest of all Puerto Rico–without fear of governmental intimidation or reprisal."

There’s urgency to fill these positions. You see, some of Puerto Rico’s current private sector leadership should be fired–figuratively speaking, anyway–for gross dereliction of duty.

The reaction–or in most cases lack thereof–by Puerto Rico’s private business, trade and professional associations to the Calderon Administration’s tax increase proposals to balance next fiscal year’s budget (starts July 1) has been timid and self-interested at best, certainly lacking the advocacy of outrage that the situation deserves.

If not excusable, the attitude is perhaps understandable. It’s difficult to do business in Puerto Rico if you openly antagonize the government. The government is not only the largest employer, but also the largest buyer of products and services. Many businesses depend on government contracts and permits. In a small community like ours, it’s dangerous to be blackballed. Who needs that?

But if you are a businessperson, you should be angry.

Last year you probably faced declining revenue courtesy of an economic slowdown-turned-recession, further aggravated in Puerto Rico by the government halt of almost all public works construction. You were forced to make spending cuts to try to avoid ending the year in the red. You know you’re responsible before someone else–your partners, your board of directors, your stockholders, and your employees. Even if you are the sole owner of the business, chances are you’ve kept your banker informed of the actions you’ve taken to stop the bleeding.

Despite news of an upcoming economic recovery, you’re leaving your cost-cutting measures in place. Unless you have plenty of uncommitted excess capital, you are certainly not going to increase your spending, at least until your sales start improving.

Well, that’s you. You’re ONLY a business. You’re not the government. The government, you see, can always spend more than it has coming in. Oh, sure, there’s a constitutional provision that requires a balanced budget. But government officials have a nifty trick to get around that. It’s called RAISING YOUR TAXES.

And that’s just what the present administration is proposing. Call it raising taxes without raising taxes.

In her State of the Commonwealth last month, Gov. Sila Calderon proposed a fiscal year 2003 consolidated budget of $21.8 billion, a full $1.2 billion, or 6.3% higher than the FY 2002 budget. General Fund spending alone will grow by $374 million, or 5% over last year, to $7.8 billion.

In addition to spending increases ranging from 5.2% to 11.3% at major government agencies, the governor decided to spend an additional $180 million to cover a $100/month pay raise for approximately 150,000 public employees.

To pay for the increases, the governor will postpone the effective date of previously legislated income tax breaks for working families, such as the elimination of the marriage penalty tax, but otherwise steered clear of actually raising income taxes.

Instead she decided to increase government revenue in ways that are hidden from the ultimate consumer, i.e., by raising excise taxes on a whole array of goods, from liquor to cigarettes to the popular sport utility vehicles, or SUVs. That way, you see, when the average consumer feels the pinch in the pocket, as his dollar doesn’t go as far anymore, he will not think the government raised his taxes. Instead, the consumer will think it’s the greedy barkeeper, grocery store owner, or the car dealer who raised prices on all those products.

And we’re not talking about a few cents, but about price increases ranging from 12% to 70% as a result of the excise taxes. If it were the businesses proposing those price increases to feed their bottom line, the Consumer Affairs Department would be all over them and the legislature might call for hearings to investigate!

To round off the budget, the administration is proposing–in addition to a couple more electronic lottery games to further dig into the average-to-low income pocket –a three month window to encourage holders of Individual Retirement Accounts to withdraw as much as $20,000 of their retirement savings at a lower tax rate. While any stimulus to consumer spending now would help a recovering economy, encouraging the use of retirement money for that purpose is certainly the jewel of the irresponsible fiscal policy crown.

You would think that the private sector leadership would be up in arms against these proposals, letting its voice be heard in the media, firmly staking its position and living up to its responsibility to inform and educate the people at large on why these tax-and-spend policies are exactly the opposite of what our feebly recovering economy needs right now. You would think that they would take it upon themselves to explain to the public that, as any good economist will tell you, the fastest way to a stronger recovery is money in people’s pockets, so they can spend it and circulate it in the economy, and the surest way to depress it is overtaxing consumers.

Well, think again.

With the only notable exception of the Distillers and Distributors Association (DDA), which has mounted a campaign against the proposed 50% to 78% hike in excise taxes on beer and liquor, many among the private sector leadership have remained mum.

Even the Bankers Association, in its official statement delivered before the House Treasury Committee last week, failed to flat out oppose the IRA proposal, limiting itself to urge that the proposal be studied further. Otherwise, the association has not even made an effort to disclaim the charge that its members are keeping quite because they stand to save some money by cleaning off some of the higher interest rate-bearing IRA portfolios.

But the prize for contemptibly timid private-sector leadership was stolen by the Puerto Rico Chamber of Commerce. First, it caused an unnecessary flap over the issue of its endorsement of the DDA campaign fueling the perception that the private sector was not unified in opposition to the hike in excise taxes.

Then, two weeks ago, the Chamber of Commerce, the ‘voice and action of the private sector,’ valiantly proposed something not even the governor had dared to do. It actually proposed, among other measures, to increase your income taxes by 5% this year in order to pay for the government’s insatiable appetite for more of your tax dollars in order to give its own workers a pay raise and otherwise increase the already bloated government budget.

The chamber justified its proposals by saying that it would be only temporary (yeah, right!) and it would be more equitable, because it does not target one particular group. Well, it seems to us it targets the minority of us who actually pay taxes.

What’s most surprising about the chamber’s action is that in its 10 page document summarizing the organization’s official position to the budget proposals, not one single paragraph is dedicated to what is obvious to any businessperson, namely, that the first thing the government has to do to solve the so-called ’budget crisis,’ as was done by 40 out of 50 state governors in the U.S. mainland (CB Feb. 21), is to cut the budget, not to increase it.

The chamber openly adopted the administration rhetoric that the only way to avert the proposed tax increases would be to incur "massive lay offs of government employees" or drastic "cuts in public services." That’s hogwash. Just one example: the proposed pay raise for public employees will cost $180 million this year.

To be fair, there are a number of good proposals in the chamber’s position, including the call for a major overhaul of our tax system away from the excise tax system (or arbitrios) and into consumption-based, or sales tax system.

Still, one has to ask how is it possible that the very first line of argument of the ’voice and action of the private sector’ not be a call for the administration to postpone that pay raise–which would be well justified considering the economy–instead of proposing a 5% income tax increase on individuals and businesses? Come on!

One can only hope that, perhaps justifiably afraid of governmental frowning or even reprisals for a more public advocacy against the administration’s proposals, some private sector leaders may instead be trying to reach government officials in quite sessions behind the scenes. But, we’re not too optimistic.

Yep! The governor seems to have the private sector right where she wants it; fighting among each other to see who’s going to pick up the tab for her administration’s ill-advised tax and spend policies.

Judging from the record so far, she doesn’t even have to propose tax increases. Apparently she can count on the private sector leadership to do that for her.

This Caribbean Business article appears courtesy of Casiano Communications.
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