Nearly every empirical study of taxes and economic growth published in academic journals concludes that implementing the former has a direct impact on the latter.
Preliminary analysis conducted by economic analysis firm Heidie Calero Consulting Group suggests the impact of new taxes implemented in Puerto Rico this month could lead to a reduction of 3.3 percent real growth during the next two fiscal years, with a loss of up to 30,000 jobs.
This fiscal year’s budget, which went into effect July 1, is pegged at $9.77 billion, excluding $575 million of debt service restructuring, which makes it about 8 percent larger than the Fiscal 2013 budget. The budget includes $1.5 billion in additional revenue taxes stemming from new taxes on corporations and individuals.
The amount is broken down into: $450 million from adjustments to the alternative minimum tax calculation, including a new National Tax on gross sales of businesses; $270 million in higher corporate income tax rates; $237 million from the expansion of selected business-to-business services; and $533 million in other initiatives including hikes in crude oil and petroleum products taxes, as well as excise taxes on cigarettes.
New taxes are almost automatically conducive to higher prices, which the firm headed by Economist Heidie Calero believes will lead to lower real wages and consumption, thereby resulting in lower revenues than estimated.
If no further action is taken to boost the island’s already bleak panorama, “Puerto Rico will continue to lose competitiveness,” she said as part of the conclusions include in the latest edition of the company’s “Economic Pulse” monthly publication.
What should be done?
The economist believes that a plan to increase public and private investment is urgent.
“Without investment, the economy will not grow and pharmaceutical exports alone cannot carry the weight of growth and jobs,” she said. “A lot has to be undertaken in tourism, agriculture, telecommunications, and high value-added services, to name just a few sectors.”
The firm also noted that public agencies “need to buy into performance budgeting processes.”
“They will be reluctant to participate if they think that performance budgeting will be used simply as a way to reduce their funds. Statistical data and metrics need to be in place to gauge the effectiveness (or lack thereof) of public programs,” the economist noted.
“Staff training is key. When performance budgeting is implemented, all civil servants involved must be trained in the new processes,” she said.
Another urgent area to address is Puerto Rico’s tax system, which needs to be made (1) suitable for finance public management, (2) simple to manage and enforce, (3) efficient in minimizing tax distortions on people and business behavior (4) neutral with respect to prices, and (5) equitable.
“The Internal Revenue Code of Puerto Rico with too many credits, deductions, exemptions, exclusions and preferential rates, does not meet any of these principles. New taxes in Puerto Rico may temporarily solve the budget problem but a tax and fiscal reform are badly needed.”