Throughout Hato Rey’s Golden Mile, sotto voce, there is talk about an imminent amendment to Law 154 to increase taxes on foreign corporations. Under the present law, the excise tax on these corporations just declined from 4 percent in 2011, to 3.75 percent in 2012, and effective this month down further to 2.75 percent.
This would represent a tax cut of some $450 million. Given the precarious fiscal condition of the Puerto Rico government, a review is unavoidable.
Both France and the United States just enacted increases in taxes to individuals that hold lessons as to amending Law 154 and the search for an optimal income tax rate for both the corporations and Puerto Rico.
France increased its tax on wealthy individuals all the way up to 75 percent, although there is still a constitutional challenge to the measure. Gerard Depardieu, an icon of French cinema, chose to emigrate to Russia where the tax rate is 13 percent. Jurisdictions are free to impose any tax they want on individuals and corporations. Such individuals and corporations are also free to leave the jurisdictions.
The U.S. increased its tax on wealthy individuals from 35 percent to 39.6 percent. However, there is no talk of actor Jack Nicholson leaving for mother Russia. First of all, in the U.S. he gets to enjoy the benefits of being part of Hollywood, a most successful economic cluster, which enhances his income. Thus, by staying put, he pays a higher tax rate but on a much higher total income. Second, there are other issues to consider in addition to taxes. In Nicholson’s case, he gets to watch the Los Angeles Lakers, although arguably not a particularly pleasing sight this year.
Too high of a tax rate would drive away foreign corporations. Thus, our legislature must tread carefully. Since Law 154 is an excise tax applied on sales, not net income, it is a rather blunt tax mechanism. It would be a mistake to repeat the process of 2010 when lawmakers passed Law 154 over a weekend, without public hearings and the participation of the corporations themselves.
Too low a tax rate leaves the task of paying taxes on the overburdened Puerto Rico middle class. No serious economist would defend today the very low taxes on foreign corporations enacted in 2008 (Law 73) by a PDP governor and an NPP legislature. It would be a mistake to repeat the process of 2008 in which the claims of the corporations were taken at face value and no proper distinction was made between the needs of manufacturers of products under patent from those manufacturing generics.
Surprisingly, foreign corporations have been silent on the subject of what they would consider the optimal tax rate, preferring to argue the non-helpful proposition that the lower the better. A good place to start the discussion of amendments to Law 154 would be for foreign corporations to state what they consider the “optimal income tax rate.”