Puerto Rico's Potential Tax Reform
- Feb 11, 2015 | Gail Cole
Puerto Rico is in need of tax reform. It suffers from a shrinking population, high unemployment, and no economic growth. The commonwealth has over-borrowed and has more than $70 billion in junk-rated bonds. Something must be done.
Governor Alejandro García Padilla knows this and is working toward a solution. His administration is expected to release a bold tax reform proposal soon (Forbes).
According to the Commonwealth of Puerto Rico Tax Reform Project, which is very much a work in progress, the new tax structure should do the following:
- Produce adequate revenue
- Distribute the burden of taxation fairly
- Promote economic growth
- Increase international competitiveness
- Minimize interference with private decision making
- Streamline compliance and administration
Change could involve overhauling the “island’s loophole-ridden 7% sales and use tax,” replacing it with “a broad-based VAT.” Currently, Puerto Rico allows many sales and use tax exemptions for services but taxes many business-to-business transactions. It also has a very low rate of compliance, between 56% and 65%.
Of several possible solutions, the most popular seems to be to adopt a GST. A GST with a single rate would do the following:
- Tax final consumption, not businesses
- Be a multi-staged, transaction-based tax levied at each stage of the supply chain
- Be a broad based tax on most goods and services
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