Albert Einstein, the author of the theory of relativity, had a problem with taxes, he considered them too complicated. Einstein once told his accountant “The hardest thing in the world to understand is income taxes.” Einstein was not wrong. However, taxes should not be complicated—it is the policy-making process which makes them so.
Over the years, tax simplification has been discussed, legislated, proposed as policy, you name it. In 1998, President Clinton signed a law that required that the Internal Revenue Service (IRS) develop a “return-free” system, which resulted in a confusing system that only works for some. More than 20 years later, Senator Elizabeth Warren and Congresswoman Nydia Velazquez are still leading the fight to ensure that this type of simplification occurs.
Puerto Rico has mirrored the federal government and attempted tax reforms that “simplify” our filing systems. While our legislators have made attempts to address this, the recipe always seems to be missing a key ingredient.
Ironically, tax simplification has always been a bipartisan effort. However, simplification simply does not happen. Puerto Rico’s so-called tax reform in 2018 was no exception to this.
The many drafts and proposals that paved the bumpy road to that tax reform, had the intention of identifying significant tax evasion and controlling inaccurate expenses with the deceitful objective of paying little to no tax at all.
A random sampling of tax returns was plentiful evidence to support the theory that tax evasion was rampant and that seemingly legitimate expenses were nothing other than a cover for tax evasion. Through this sampling alone, the Puerto Rico Treasury Department began a mailing campaign through which notices were sent to taxpayers requesting an explanation of deductions. The lack of an explanation resulted in payments and collections of over 20 million dollars during my incumbency as secretary of treasury.
This small operational change led to proposals initially included in the 2018 tax reform, which required that those taxpayers who were not submitting an audited financial statement submit an informational statement supporting the services and articles taken as deductions.
The concept was taken a step further and under other legislation amending the tax reform, Act 60 of 2019, providers of services such as electric power, water and sewage, internet, professional fees and continuing education, among others, were required to file annual informative statements for every client—commercial or residential—by February 28 of each year.
This was a horrendous mistake, made by the legislature and approved by the governor. In practice, this meant an undue burden on companies such as cable tv suppliers and cell phone companies. On one hand, the government aims at reducing expensive processes and in streamlining services and on the other, it will make PREPA, the sole energy provider on the island, send these notifications to every single client. The result of this mistake will be an undue burden on both the Department of Treasury and service providers.
Whether he said it or not, Otto von Bismarck is credited with saying: “Laws are like sausages. It’s is best not to see them being made.” Unfortunately, in this case, I am not sure if we have an adequate law or something edible.
Some may joke about the absurdity of this kind of legislation, and rightly so. When some legislators attempt to solve a problem creatively, they in fact create another slew of problems that did not exist before. Thus, a law created to avoid tax evasion, does not avoid evasion and poses an undue burden on the business opportunities and environment on the island.
The original concept envisioned in the 2018 tax reform and proposed as law would have cost taxpayers much less and would have avoided compliance missteps, accounting errors and undue burdens and costs to business owners who are already struggling to make ends meet in Puerto Rico.
This is the reason why Washington D.C. is working on bipartisan efforts to simplify the tax system.
Einstein was right. The more complex we make taxation, the harder it is to understand. Our legislators need to be very conscious of detail. A simple stroke of a pen can hit the island’s competitive edge and burden its small businesses and working class.