Puerto Rico’s dilemma

These are crucial weeks for the fragile economy of Puerto Rico, a United States territory. The current administration of Governor Alejandro Garcia Padilla (D) is pushing hard for the implementation of an Added Value Tax of between 12 and 16 percent to all goods and services sold.

Since 2006 the Island has used a flat sale tax rate of 7 percent. The new proposal will eliminate that structure and in favor of a double digit tax on almost everything. There’s no denying the fact that the government’s finances are in shambles. Puerto Rico has an overall accumulative debt of around 72 billion dollars, and we have been in a recession since the last quarter of 2005 with no end in sight.

Because of the deceleration in the economic activity, almost 100,000 Puertorricans have migrated to the states, most particularly, Florida, since 2013. That’s a huge hole in our labor force as well as in our tax collection base.

Plain and simple, with fewer people to share the burden, the new tax hike will end almost all profitable enterprises, at least in the beginning. The problem is that we can’t sustain even a month of stagnation. Puerto Rico’s economy is based almost exclusively on consumption. An increase of 100 percent in taxes will kill whatever chance we have of getting out of this prolonged recession.

If passed, the new tax increase will cut deep in retail sales, which is the backbone of our economy. We can expect a major dip in the Gross Domestic Product output and Consumer Expending Index for the third quarter of 2015, if the Added Value Tax of 12 percent, for example, becomes law this month. This will basically end any hope for a recovery in the next two years.

Anyway, tax increases alone will not do much to reduce the government’s terrible debt burden, unless the administration takes real and concrete actions towards downsizing.

The only way to reduce the enormous size of our debt is to stimulate the economy. We need to diversify our product output and to reengineer the labor force in order to achieve a sustainable base in which revenue could start flowing back to the Treasury.

Instead of raising taxes, it’s time to cut them.

Tax cuts really do provide a stimulus. The main reason for it is flexibility: people who want to consume more can use their tax cut for that purpose; people who want to save more can use theirs to buy up the new government bonds at discount prices. This is the perfect scenario during a recession and one that we should implement immediately.

Tax cuts for everyone are a much more effective path to job creation as well. Lower-income taxpayers tend to spend a higher share of their tax cuts in consumer goods and services, prompting the hiring of people and the development of new businesses.

After two years of tax hikes with less than stellar results, it’s time for a change. Puerto Rico has gone the way of raising taxes and the result is a near collapse of the economy. Pumping money into the people’s pockets, instead of taking it, would prop up the market and stimulate our labor force and tax base. It’s time to do it.

Rodríguez has been a member of the Puerto Rico House of Representatives since 2008.

By Ángel ‘Gary’ Rodríguez

Puerto Rico’s dilemma