Why Puerto Rico Needs a Total Tax Overhaul
Puerto Rico’s fiscal crisis is the result of many things, chief among them a tax system that is unfair, inequitable and complicated. It’s a complicated problem but it is not an unsolvable one.
The recession hit Puerto Ricans and Puerto Rican businesses hard, and too many have turned to gaming the tax system as a way to stay afloat. Our current system not only encourages this behavior, it penalizes work and productivity. It’s a system where some pay more to cheat than they would in taxes.
That’s why Puerto Rico’s tax system needs more than just a reform -- it needs a total transformation. That is the only way to guarantee justice and equity for everyone. We have seen the results of frequent stopgap measures and reforms. Those measures created the complicated system that taxpayers and the government battle with today.
The administration of Gov. Alejandro Garcia Padilla knows it is time to have a tax system that is stable and permanent, a system not subject to constant changes. The administration is also convinced it is time to move to a system under which taxpayers will contribute primarily through consumption taxes instead of through income taxes. Under a VAT system, Puerto Ricans will pay taxes on what they consume -- not on their work or on their productivity. It’s a self-regulating system employed as a central pillar of tax policy in more than 160 countries throughout Asia, Europe and South America.
Our current system places the burden on a few individuals while others intentionally hide their income from a system they know lacks the resources to pursue them. The gaps in the filings are obvious. We need more than a quick fix, or a superficial reform that would leave Puerto Rico in the same situation in the long run.
The world’s leading tax experts analyzed the situation in Puerto Rico and found that a system that depends primarily on the VAT will be more just and less complicated. In a VAT system the person who has been responsibly paying their taxes and the person who has been evading them will now both pay the same tax when buying a TV, a couch, or a table.
VAT applies to the majority of goods and services purchased in Puerto Rico and reduces evasion by taxing the level of consumption of each individual directly. By regulating the system through the chain of supply we eliminate opportunities for individuals to cheat.
Moving to a VAT system brings our formal, informal and underground economies into our tax system. And we need to bring our $16 billion underground economy into the light -- it’s the equivalent of one-quarter of our gross national product and is unaccounted for.
For responsible taxpayers, VAT means a dramatic reduction in their taxes; for businesses it means the potential for tax credits; for low-income families and our aging population it means reimbursements to help make ends meet. For 82 percent of Puerto Ricans, it means not having to file tax returns. For the government it means a more efficient tax process.
It not only improves Puerto Rico’s tax system, but our chances at greater economic development. That development will lead to fewer people struggling to stay afloat and fewer people feeling a need to cheat the system.
Some think our country has hit rock bottom. Others, like myself, refuse to accept that fate and realize it is time to be brave and to act. We have seen other countries overcome similar crises. They’ve shown that if you make tough decisions you can reach a better future. There’s no question that a transition to value added taxes will take work, but it’s a change worth making. It’s a change Puerto Rico needs and deserves.
By Juan Zaragoza Gomez
Why Puerto Rico Needs a Total Tax Overhaul
The recession hit Puerto Ricans and Puerto Rican businesses hard, and too many have turned to gaming the tax system as a way to stay afloat. Our current system not only encourages this behavior, it penalizes work and productivity. It’s a system where some pay more to cheat than they would in taxes.
That’s why Puerto Rico’s tax system needs more than just a reform -- it needs a total transformation. That is the only way to guarantee justice and equity for everyone. We have seen the results of frequent stopgap measures and reforms. Those measures created the complicated system that taxpayers and the government battle with today.
The administration of Gov. Alejandro Garcia Padilla knows it is time to have a tax system that is stable and permanent, a system not subject to constant changes. The administration is also convinced it is time to move to a system under which taxpayers will contribute primarily through consumption taxes instead of through income taxes. Under a VAT system, Puerto Ricans will pay taxes on what they consume -- not on their work or on their productivity. It’s a self-regulating system employed as a central pillar of tax policy in more than 160 countries throughout Asia, Europe and South America.
Our current system places the burden on a few individuals while others intentionally hide their income from a system they know lacks the resources to pursue them. The gaps in the filings are obvious. We need more than a quick fix, or a superficial reform that would leave Puerto Rico in the same situation in the long run.
The world’s leading tax experts analyzed the situation in Puerto Rico and found that a system that depends primarily on the VAT will be more just and less complicated. In a VAT system the person who has been responsibly paying their taxes and the person who has been evading them will now both pay the same tax when buying a TV, a couch, or a table.
VAT applies to the majority of goods and services purchased in Puerto Rico and reduces evasion by taxing the level of consumption of each individual directly. By regulating the system through the chain of supply we eliminate opportunities for individuals to cheat.
Moving to a VAT system brings our formal, informal and underground economies into our tax system. And we need to bring our $16 billion underground economy into the light -- it’s the equivalent of one-quarter of our gross national product and is unaccounted for.
For responsible taxpayers, VAT means a dramatic reduction in their taxes; for businesses it means the potential for tax credits; for low-income families and our aging population it means reimbursements to help make ends meet. For 82 percent of Puerto Ricans, it means not having to file tax returns. For the government it means a more efficient tax process.
It not only improves Puerto Rico’s tax system, but our chances at greater economic development. That development will lead to fewer people struggling to stay afloat and fewer people feeling a need to cheat the system.
Some think our country has hit rock bottom. Others, like myself, refuse to accept that fate and realize it is time to be brave and to act. We have seen other countries overcome similar crises. They’ve shown that if you make tough decisions you can reach a better future. There’s no question that a transition to value added taxes will take work, but it’s a change worth making. It’s a change Puerto Rico needs and deserves.
By Juan Zaragoza Gomez
Why Puerto Rico Needs a Total Tax Overhaul
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