For Juan Zaragoza, the last few weeks have been extremely active. From his chair as the Head of the "Departamento de Hacienda" (Treasury Department), he is captaining the proposal to "transform" the taxation system with the introduction of the Value Added Tax (better known by its Spanish acronyms "IVA") and the reduction of income tax.
It's a controversial initiative that has awoken political opposition and concerns in many scholars, merchants, analysts, and politicians who question from the philosophy behind the change to the procedural details, such as the system that will process the checks that seek to mitigate the regressive effect of the IVA.
There are multiple oppositions to the proposal that took more than a year to develop and that, in essence, seeks to change the tax load from the income of the salaried to the consumers, who will have to pay a 16% rate for the IVA in each purchase of taxable goods and services.
In theory, with these changes the government is supposed to collect more taxes from the informal economy. The goal is to have the government's income increase by $1.2 billion. A large sum of this money, just as Governor Alejandro García Padilla anticipated, will be used to pay the public debt that, all together, exceeds $73 billion dollars. In fact, reports from the "Banco Gubernamental de Fomento" (Government Development Bank or "BGF") establish that the payments for this debt will increase in the next few years, while the credit rating agencies warn the bondholders that the government has very little resources to achieve the pending payments.
Two weeks after the announcement of the establishment of the tax reform project there are still many questions regarding the new system, which is somewhat new for a U.S. jurisdiction, but that is very common in the world, mainly in European countries.
The questions are partially fueled by a series of lagoons that the initiative seems to have. For example, it is not specified in detail the way in which people with lower incomes will receive the checks that would mitigate the tax's regressivity. In an interview with El Nuevo Día, Zaragoza answered questions regarding the touchy subject.
To what do you attribute the critiques made towards the IVA?
I attribute them to ignorance and mistrust in Hacienda.
Where does this mistrust come from?
There are people who do not understand how the IVA works and there are others who understand the system, but doubt in Hacienda's implementation capacity.
Wouldn't that mistrust have to do with the secrecy with which the IVA was developed?
I'm a little prejudiced in that sense. I've participated in so many reforms and, traditionally, the reforms go through the same process. The reform is announced, the consultants are hired, the analysis is done and people find out about it when it's filed. I was surprised because here we gave out plentyof information before filing the project.
Do you think it's fair for an entire Internal Revenue Code reform to be evaluated in barely a month?
I think that a month or a month and half is enough, especially since we spent a lot of time with Legislators, and part of the process of understanding the concept and analysis is being done. I spent plenty of time with them for weeks before filing the project. They are arid subjects but we've come a long way.
But the Legislature will have to evaluate in a month and a half something that took you more than a year to develop...
But much of that process was comparing what other countries were doing and analyzing economic data. Now we are almost at the end and the issue is easier to process.
The projections that have been made with the IVA place people with limited resources and those with high consumption patterns in a very bad situation...
The question you have to ask yourself is on what do you spend your income. If you tell me that you pay for a car, a house, water, electricity, food, medication, well none of that is taxable... To think that people use their entire salary on taxable things is not realistic.
According to the Puerto Rico Planning Board, right now personal expenses exceed the available personal income... The Country's consumption level is very high.
Again, the question is on what they spend it. Those high levels of expenses happen more often in high-income levels.
In the public hearings, you presented examples of the reimbursements that you would give out. People's taxable consumption was calculated between 15% and 20%. Is this true?
We even ran the model with 30% of expenses taxed with IVA and the result is a positive one. Normally, a person that works in the government has 21% withheld between Social Security, retirement, and savings. Now you know that you can't spend more than 80%. To that, you'd have to take away mortgage, food, etc.
For the reimbursement, do you seek to refund half of what people with limited resources spend extra due to the IVA?
It's not necessarily a reimbursement. A reimbursement implies that people will keep their receipts in an envelope and send them to Hacienda. We will create profiles of the population that will have the right to this compensation. According to this profile we will determine what percentage is spent in a taxable way and, according to that, we will give people what corresponds to them (100% or 50%) for the increase the IVA implies.
Why isn't this explained in the bill?
We didn't have time to develop the exact language. Some general concepts were placed. We hired a firm to examine the issueclosely.
It is said a lot that this is a bad time for a change in taxation... the government is in deficit, the BGF has limited liquidity, the economy is weak...
I see it the other way round. I think the situation in which we find ourselves is what compels us to make a radical change in the system. I think that since this is a system that isn't found in the United States, they are attributing extra risk factors. It's in times like these when it becomes essential to review the system.
The plan is to collect $1.2 billion more than what is currently collected. Doesn't that weaken the private sector even more?
We are really convinced that those who are paying for the ticket here are those who haven't been contributing. Those who have complied and citizens are being given more than one billion dollars in savings. Sharing the burden between more people is beneficial for the economy.
How does Hacienda ensure that it is ready for the change?
More than 70% of our system is already IVA with the collection done in the docks. We are adding technological tools to strengthen that. In here, what we have to do is a technical change in staff to focus on the highest risk areas, which are docks and claims that do not proceed.
Why not increase the IVU rate, like some mayors suggest?
We could increase the rate in the system we have now. This is an approach that has been done a lot, but we are already so close to an IVA and the IVA has been such an effective tool in other parts of the world that it really doesn't make any sense to stay where we are.
Why not let the municipalities collect the money? They have a better collection rate.
We understand that one of the reform's goals is simplicity and to have a uniform system. If we change to the IVA we would be running two parallel systems (IVA and IVU). We understand that from a merchant and economic development standpoint, we have to seek simplicity: to have just one tax return and just one set of rules.
Was it a mistake to include the IVA for private schools and universities?
I don't think so. Here we can stipulate that exemptions have not let the systems work. When I talk about exemptions I think it's best not to allow them and surgically go to those who are affected and compensate them. The problem with exemptions is that a group is protected but, along the way, many people that don't deserve it benefit from it. I think that now in the legislative process we open up a space to look after that.
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