Puerto Rico Squaredance

First these words from the prophet Marshall Mathers:

"All these people I had to leave in limbo
I'm back now, I've come to release this info
So I'll be brief and let me just keep shit simple..."

You know that one metaphor about re-arranging the chairs on the Titanic?  Well since we have to Boriqua-ize everything, try this one on for size.  The debt-reduction plan that Puerto Rico's Governor, Alejandro Garcia Padilla announced this week, amounts to nothing more than installing new glass windows in your house, right before a category 4 hurricane hits the island.

While the jury, read the US Congress and Wall Street, is still out on whether the new plan will be accepted, the news leaking out about the plan is very disturbing.  In general, the new plan seems to be constructed on basic financial and psychological assumptions about Puerto Rico which are just not true.  Chief among these assumptions are:

Lowering government spending will help the local economy grow

Only on the spreadsheets of the Governor’s advisors and in the wet dreams of Republican presidential hopefuls does spending less equate to more and better paying jobs in the public sector.  As I’ve noted before, the financial clout and largess of our economy was purchased on the backs of various administrations creating unnecessary government jobs and doling out cushy government contracts.

Is it any coincidence that our economy peaked, just as the government payroll peaked?  No, the only way to grow the economy in Puerto Rico is to stimulate the creation of more high paying jobs.  Just as Operation Bootstrap brought the island out of an agrarian economy and into 20th century using high paying manufacturing jobs, Puerto Rico needs hundreds of new hi-tech global businesses and the creation of thousands of high paying jobs.

By tightening up tax policy and other business restrictions, the grey economy will produce more taxable income

While it isn’t everyone’s first talking point, the plan includes all of the previous tax reform policies.  Remember all of that hullabaloo about the IVA?  Well it’s back!  Only this time the stakes are even higher.  The new plan contains even more policies that are aimed at making tax evasion more difficult.  I’ve written ad nauseum about this, so I won’t rehash those points.  The bottom line remains the same, as long as the grey economy is easier, more profitable, and carry minimal risk of punishment, the underground economy will thrive.

Much of our current tax evasion problem comes from people and organizations who simply choose not to follow the existing rules.  Unless these new policies make tax collection easier to enforce, they are mere words and promises.

Labor participation rates will increase

This should be evident from the first two assumptions, but it is worth it’s own discussion.  Think of it as their corollary.  One of the primary justifications for this new plan is that by adjusting our economic policies, it will encourage more people to join the labor market.  I can’t think of a more ridiculous idea than suggesting that lowering wages will incite more young people to join the job market.  That is, unless you're a Republican, which theoretically the Governor is not.

In the past, this ploy was feasible, because they were cushy government jobs, however isn’t that what this new plan is supposed to eliminate?  Where will these new low paying jobs come from?  Isn’t our economy just about saturated with service economy businesses?  Let’s get real here, thinking that Puerto Rico can compete with the low cost labor available in China, Mexico, or even the Dominican Republic is impossible.

Rico will eliminate it’s debt

As hard as these new policies have been defended, you’d almost expect them to leave Puerto Rico free and clear of it’s debt, but that has never even once been suggested.  So let’s be clear, in order to pay for it’s current debt, Puerto Rico must refinance, or restructure,  that debt with more debt.  Further, the only legal mechanism for restructuring debt is bankruptcy, which both Congress and Wall Street are dead set against.

So where does that leave Puerto Rico? In my summation, I’d say just about exactly where it is now.  The only thing different is that the “economic hurricane” that is just about to hit Puerto Rico has been upgraded to a category 5, but it’s just going to hit us just a little bit later.  

With lower than expected tax incomes due to a stubborn and evolving underground economy, lower than expected labor participation rates, and without a rapidly growing economy, Puerto Rico will revisit, time and time again, the looming "economic hurricane" of outstanding debt. Alas, the lost Xanadu that Operation Bootstrap brought to the island will never be seen again.

The Illusion of Fairness: Part 1

As promised here is the follow-up on the “Incentives for the Payment of Taxes in Advance of the Tax Transformation Project Act.”  In this installment, I’d like to breakdown the provisions which allow for citizens to prepay taxes.

First of all, it should be crystal clear to everyone, that tax reform is coming to Puerto Rico.  There is no question whether the IVA will pass or not, it is only a matter of time.  How else can you explain the Puerto Rican government creating a process for citizens to prepay taxes?  I mean let’s get real here, it’s in the title of the new law.

Our old friend Occam’s Razor almost guarantees us that the only way to explain the creation of this new law is because it is a forgone conclusion that tax reform is coming.  I would go further to suggest that this law represents an unspoken covenant between the richest citizens of Puerto Rico and the Puerto Rican government.

Still not convinced?  Let’s just imagine that the tax reformation does not happen.  If that’s the case, then the Department of Hacienda has quite a mess on their hands.  They will have received payments for taxes, based on future tax rates that did not become law.  I guess they could simply refund the payments, that is, unless they really needed the cash (which they do).  What happens if the government spends some of the money?  Where will they get the money to make the refunds?

As I mentioned in the previous post, this program is aimed at a very selective group.  Here is a summary of the types of taxes eligible (PDF) and who would be likely to benefit from the discounted taxes.

Type of tax	Beneficiaries
Annuities	Owners of life or endowment insurance annuities
Capital Gains	Individuals, estates, trusts
Capital Gains	Corporations
IRA's and Educational IRA's	Individuals with IRA or IRA educational accounts
Dividend Distributions	Share holders of public corporations issuing dividends
Implicit Distributions	Corporations with accumulated earnings and profits

Secondly, as you can see, these discounted tax payments are aimed at any citizen with annuities, IRAs, and stocks.  In other words, these discounted taxes will benefit the richest of our citizens.

In addition, it is also aimed at companies large enough to have long term capital assets and those fortunate enough to have large profits.

I'm always suspicious of laws that claim to be doing one thing, but actually authorize something completely different. In this instance, the press release from the Department of Hacienda claims the governor signed into a law a tax amnesty program.  However, if you read the release or review the law (Ley de Incentivos para el Pago de Contribuciones en antelación a la Transformación Contributiva), you will realize that it also sets up a new program for the most wealthy Puerto Ricans to prepay taxes at discounted rates.

Prelude: Corrupt is as Corrupt Does

Puerto Rico Tax Collections Take The Easy Road

https://youtu.be/uwlAvsPvPfg

Very quietly this week, Governor Garcia Padilla signed into law, the 2015 Puerto Rico Incentives for the Payment of Taxes in Advance of the Tax Transformation Project Act. The new law offers an amnesty for payment of taxes.  The hope of the Garcia Padilla administration is the new incentive will encourage the payment of overdue taxes.  Beginning immediately, the amnesty will be open until June 30, 2015.

With the new law, the Puerto Rico government is looking to raise around $290 million during its operation.  The taxes collected are predicted to help reduce the government's fiscal deficit for this year.

Analysis

What surprised me most about the news is who the new law is targeting.  Besides snuggling up to those evil evasores, with the new law:

"taxpayers can prepay, at incentivized rates, tax that will be payable in the future on the capital gains arising from the increased value of certain assets, including equity investments, and contributions to individual retirement and savings accounts."

Wait a minute, hold the phones. This is a pretty dense way of saying that, if you're rich enough to actually have capital gains, you can reduce your income taxes with this new amnesty law.  How convenient for those who have the "burden" of capital gains.

Conclusion

I'm saddened that our government doesn't have the will to pursue the taxes our laws demand be paid.  But, I've seen this before, it's fairly common.  In fact, our legislators are offering a two-fer, consequently with the Hacienda amnesty, CESCO is also currently offering an amnesty on toll violations. 

In a previous life I worked in IT for a major wireless carrier, so I know what collections is all about.  Cutting edge technology was always a factor in collection rate optimization.  Because going in, it was already accepted that collections would never reach 100%, ni por tanto.  If memory serves me, I think we had an average  30% success rate on past due collections.  Your company's rate may vary. ;-)

I offer this anecdote to provide a perspective for these questions:

• What is the minimum accepted collection rate for this program?
• What is the overall amount of past taxes due?  And how many people or companies are we talking about?
• Just how many toll violations are there and how much is owed in the corresponding fines?
• Don't we have their contact information?  What, we don't know how to "find" them?  
• What is the Government's resolve concerning enforcing the rule of law? 

Puerto Rico's Prepaid Tax Program

Rarely do you see the clear intention of laws made to benefit the few, maybe only the "1 percent" of the Puerto Rico general population.  Of course, since corporations are now people, they're included in the 1% as well. For brevity's sake, I'll break down this new program and prove that it straight up "informal corruption."

IVA Propaganda - Departamento de Hacienda

I found some nice pro-IVA artwork on the Departamento de Hacienda website.  Here are my favorites:

Income Tax Versus IVA

Everyplace is using IVA

Less taxes, um hum, sure...

No more income tax withholding

Again, income tax and IVU is less than IVA - refunds

My absolute favorite!

Besides the consultants (KPMG), the clear cut winner with the IVA so far, are the advertising agencies and the ad sellers (mostly El Nuevo Dia, or should I say GFR Media?)

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!