Risk Assessment for 2015 Puerto Rico Tax Reform

Ooooo doggie, did I strike gold. I found me a glory hole!

I was poking around on the Transformacionpr Web Site and found the risk assessment for the new Puerto Rico Tax Reform (PDF), prepared by KPMG.  As an introduction to this new glory hole information, I offer you the top five threats to a successful implementation of the VAT (IVA) in Puerto Rico

• 1) Current Economic Instability - Yeah, this is pretty high risk, it's what we call a doozy.
• 2) Ad Hoc Legislative Changes - Already happening! So I'd also pretty high risk, like 100% likely.
• 3) Continued Culture of Tax Evasion - Funny how easy it was to find pertinent information about IVA evasion in other countries.  Don't hear so much about that part of "other places use it too!" See the tale of the Scorpion and the IVA.
• 4) Inconsistent Enforcement Efforts - In a kleptocracy like ours, this is a given.  This is almost certainly to go hand in hand with the the culture addressed above.
• 5) Population Loss - In the end, the true measure of the new tax reform is will it rescue the economy?  Will it prevent the mass exodus of Puerto Ricans looking for greener pastures in a much evolved United States.  Almost exclusively, when this happened before, many went to New York.  Now much more of the US is ready to receive the flood of Puerto Rican refugees.  Prediction: highly probable.

I didn't want to get to heavy into this, but if you study the risk document, it is rich with context and strategy.  Let's get this party started!

The Fable of the Scorpion and the Puerto Rico IVA

Recently the ex-governor of Puerto Rico, Anibal Acevedo Vila made an interesting announcement on his blog, entitled "Refrescando la Memoria."  In his discourse, he suggests that the IVU, which he signed into law in 2006, is one of the reasons that the Puerto Rico economy has not emerged from it's decade old depression.

Yes, let's refresh our memories and see what emerges, but first, I'm reminded of an Aesop Fable, that might help us with our memories:

A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, "How do I know you won't sting me?" The scorpion says, "Because if I do, I will die too." 

The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of  paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp "Why?" 

Replies the scorpion: "Its my nature..."

The Moral

As some of you political monsters out there might remember, during his political campaign against ex-govenor Pedro Rossello, Acevedo Vila was likened to a scorpion. So let's keep that in mind as I unwind the tatters of history and reveal the moral.

But didn't Acedo Vila, himself, sign the bill into law? Yes, but he remembers thinks a little differently: "Aunque tenía dudas muy fuertes sobre la imposición de un impuesto al consumo, acepté la propuesta del PNP. (While I had strong doubts about the IVU, I agreed to the PNP proposal.)"   So let's deconstruct that statement, because it's a doozy.  So the PDP governor, accepted the IVU proposal from the opposition party, the PNP.  Yeah, that happens here, like, never.

Maybe the blog post is a secret cry for help, because the governor is surely suffering some type of memory robbing affliction. Maybe it's the early stages of senility, because Acevedo Vila must not remember having had the power to veto while governor. Anyway, I digress.

The Informal Economy

When the IVU was implemented it was heralded as the way to increase tax collections from the informal economy (the black market) and those pesky tax evaders.  But like a horrible punch line to a sadistic joke, long story short, it didn't.  As the landscape changed, so did the behavior of the evaders, as well as the merchants and consumers of the black market.

Unlike our fable, in this version, Acevedo Vila isn't the scorpion, he's the frog. And the willing participants of the black market and those wily tax evaders are the scorpion.  For you see, as ugly as it sounds, if there is one thing tax evaders excel at, it is bending the rule of law to their favor.

What's My Point?

If one of the motivations for the new tax law is to capture taxes from the informal economy and tax evaders, then the VAT (IVA) is doomed already.  For just as certain as the sun rises in the east and sets in the west, the moment the VAT becomes law, people will find a way to beat the new system. It is just our nature, we can't help ourselves, even if we tried.  Therefore, all of the tax revenue projections are based on a flawed assumption.

Puerto Rico Governor Calls Us All Crooks

What makes the Daily Show and other "fake-news" shows so effective,a and funny, is when they can draw on the assumptions of how current events are explained and reported.

Holy Freaky Assumptions Batman!

So lets take the implementation of a VAT (IVA in Spanish) in Puerto Rico.  What are the plan's basic assumptions?

The obvious ones are:

• The Puerto Rico economy is in a bad way, IMHO, which never really recovered from the global financial meltdown of 9/11.  Still crippled from that downturn, the banking meltdown of 2008 put our economy on life-support.
• We owe a shit load of money, and want to borrow more.
• People are fleeing Puerto Rico like rats jumping a ship, something the country already saw happen after the Great Depression; when millions of Puerto Ricans jumped the pond in search of a more prosperous life.
• There continues to be a large black and grey market within Puerto Rico.

The subtle assumptions are:

• To fix our economy we must reform our tax system.
• We need to fix our tax system, because our current tax laws are generating less income.
• Finally, we are not raising more tax income, because there are some who are evading the current system. 

So, with that logical sequence of assumptions, we can can come to one conclusion, that the Governor of Puerto Rico, Alejandro Garcia Padilla believes that Puerto Rico is full of liars and crooks who will do anything to keep from paying taxes.  And there you have it, comedy gold.  With the focus on this new assumption, let the joke begin, the IVA, I mean.

Same as it ever was

Well here we go once again, I'm struggling with a heavy gift. For I am allowed to glimpse the future and I am saddened by it. Most everything I have written here about Puerto Rico's economic situation has come to fruition. So I share what I can, describe what I can, and predict what I can. But sometimes it all seems for nothing.

Over the long weekend the debate and analysis of our ongoing economic crisis continued. With the governor pushing for the implementation of the IVA, and everyone pushing back against it. One analysis I read from the Center for a New Economy here in Puerto Rico provides a good overview of the pros and cons of the proposed new tax.

One observation that the analysis was clear on was that placing a tax on food, medicine, and education was immoral. I agree. However, one aspect of the new IVA that was not pointed out is the potential problem for citizens who already do not pay income tax, such as the poor, the retired, and the disabled. 

The basis for this new tax is replacing income tax for the majority of citizens with the new tax which is based on consumption, or what is known as a value added tax (VAT). But suppose that a citizen or household currently doesn't pay income tax under the current tax structure, then this new 16% tax on goods and services will go straight to the bottom line of their household budgets.

Another troubling aspect of this tax reform is the intention to refund the value added tax to those currently exempt from income tax, as mentioned above. How will this return process work? When will it begin? How will the government know how much I am due in my return?

As the debate continues, hopefully we will learn more about the detailed plans to implement the new IVA, and wait with baited breath to see if the new tax reform passes the Puerto Rico House of Representatives and Senate.