Tatito Hernández

In Puerto Rico, our tax system has been designed as a reaction to a more pressing need, which is to raise money to pay for what is the mantra of the government- to provide essential public services to the people. The level of expenditures is determined by the government and then, and only then, are economic activities identified so as to levy taxes on them and bring in the resources that are needed to meet all obligations of the State. This philosophy of financing the government has been mainly responsible for the recent bankruptcy of the central government, its instrumentalities their collapse.

During the last decades, the government has been following this methodology and has been consistently falling short of collecting sufficient resources to cover expenses in the budget. The result has been that, unable to stop the spending machinery in midstream, the public entities resort to borrowing and selling assets with the expected consequences that we all have been exposed to these last few years.

But for purposes of this column, let us forget past practices and think differently. Let us say that we start by outlining a tax system we can reasonably agree on that will permit us to develop our economy and compete head on in the global markets. This will give us resources that we can extract from the economy without holding back its growth and it will show us the way to a new fair and just tax system. Having set this revenue goal, government then has to adjust the budget to this reality. This process will be a great improvement over the present tax system that is highly complex, with a reduced tax base, promoting tax evasion and imposing tax rates that are way too high in comparison to other jurisdictions.

Every tax system, in general, has three main sources of revenues: income taxes, consumption taxes and property taxes. These are some ideas that we can implement to be competitive.

1. No filing of tax returns if your income is $50,000 or less.

a. The government will account for the taxpayer’s income by using the forms filed by the employer in the case of an individual employed or by using the information in the system of the Treasury Department if the taxpayer files income for professional services or a proprietorship.

b. The government will compute the tax and send the tax return electronically to the taxpayer.

c. The taxpayer will only file a tax return if there is an error in the tax form sent by the government or if the taxpayer’s income exceeds $50,000.

2. The tax rates for individuals, or for those filing jointly or for businesses will be a maximum of 15 percent, set progressively, for those with income exceeding $50,000.

a. Set the capital gains tax for local taxpayers, as well as for taxpayers from out of state, at 5 percent.

3. Integrate the sales and use tax, excise tax and personal property tax in one simple system where the end value of the goods or services is taxed.

4. Simplify the tax base for the real estate property tax setting one base quota per unit for the whole island based on the need for municipalities to provide essential services to the people and where the citizen can hold accountable the local government.

a. For example, picking up, disposing of and recycling solid waste, maintenance and repairs of local streets, safety and job creation.

These changes will reduce the tax burden in a fair and just manner for all taxpayers, with the people retaining most of their hard earned income and not having the government take it away for unproductive purposes. This model will bring more certainty in estimating revenues, it sizes the central government to what the local economy can afford, and increases revenue for the municipalities without the intervention of the central government.

No doubt that this proposal forces us to rethink the intervention of the government in the lives of its citizens. We will continue in our next column.

House of Representatives Minority Leader and Former House of Representatives Chairman of the Treasury & Budget Committee

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