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Tax relief and fairness
May 20, 2005
The tax system in Puerto Rico, as it now exists, applies only to honest individuals and corporations. Tax evasion by thousands of individuals and businesses on the island that should pay taxes but dont even file tax returns is one of the biggest problems faced by the Commonwealths present tax system.
There are probably 25,000 companies in Puerto Rico that should and dont file to pay income taxes. In a study commissioned by the commonwealth government and conducted by Booz Allen & Hamilton in 1984, it was estimated that Puerto Ricos nontaxpaying economy was about $2.5 billion and consisted of many professionals such as lawyers, architects, engineers, doctors, and other licensed professionals who arent paying taxes on income generated. By 2004, Estudios Técnicos estimated the nontaxpaying informal economy to have reached $10.5 billion. As a result of Puerto Ricos informal economy, billions of dollars are lost in tax revenue due to the outright nonfiling of tax forms and by tax evasion through underreporting.
Puerto Ricos tax code not only encourages tax evasion and underreporting, it is extremely complicated, having endured decades of patchworks that have made paying taxes extremely aggravating and unfair for those taxpayers who do pay. To help solve the islands tax problems, the Special Commission for Fiscal Reform appointed by Gov. Aníbal Acevedo Vilá has done an excellent job of coming up with many good and bold ideas for tax reform. CARIBBEAN BUSINESS supports most of the suggestions produced by the commission and believes they should be turned into laws and regulations. While generating $2 billion in additional revenue for the Puerto Rico Treasury, the proposed tax reforms will limit the taxes imposed on individual and corporate income to 10%, down from an average of more than 30%.
The commissions tax-reform proposal encourages economic growth without penalizing individuals and corporations for doing well economically. Combined with the consumption tax, the flat-tax measures that have been proposed are expected to lower the amount of taxes paid by working individuals, reduce tax evasion, increase government revenue, and make Puerto Rico more attractive to foreign investors.
However, we are concerned the commission still leaves a complicated system in the form of a point-of-entry tax on cargo. If the current excise-tax system, which is a point-of-entry-tax system, hasnt worked because of high levels of inefficiency by Hacienda to operate this program, why is another type of point-of-entry tax expected to work any better. Regardless of any law, stating that the cost of such a tax wont be multiplied as it is passed on, just wont work. Money costs money and importers, distributors, and retailers are going to have to pass on this multiplying cost to consumers. Besides, having this point-of-entry tax will mean the tax collectors now collecting the excise taxes still will have to deal with some form of a point-of-entry tax. By providing tax credits to single individuals who earn up to $25,000, married working couples with incomes of up to $50,000, and hundreds of thousands of low-income families who are beneficiaries of the federal Nutritional Assistance Program receiving money from the proposed Social Fairness Fund, we dont see the need for any other complicated mechanism to give relief to the poor. That has been allowed for as it should be. To complicate the system with more complex point-of-entry taxes is going back to just thatcomplicating the tax system we would like simplified.
The best part of the flat-tax proposal is that its simple, fair, transparent, easy-to-understand, costs less to comply with, is easier for the Commonwealth to implement, and would have a major impact on the islands economy. Countries such as Hong Kong, Russia, and 11 Eastern European nations have adopted a flat-tax system, which has contributed to their economies growing as much as 7.3% in some cases, certainly a lot higher than the 2.3% growth reported in Puerto Rico last year.
The tax reform proposed by the commission is certainly a step in the right direction and mustnt become another political battleground in Puerto Ricos bipartisan government. The islands economy cant afford it. If handled correctly, the commonwealth government will end up collecting more revenue that will help resolve the deficit position Puerto Rico is in. Of course, it all depends on efficient tax collection by the Treasury Department, something Puerto Rico has never had.
This Caribbean Business article appears courtesy of Casiano Communications.