How can a chief executive and his legislative leaders be so indifferent to the warnings and admonitions of the overwhelming majority of their constituents? Indifferent not only to the overwhelming opposition of their constituents, but to the persistent opposition of the majority of public finance experts, economists, businesspeople, special interest groups, bankers, cooperatives, the middle-income group, elderly people, persons with disabilities and almost everybody else. If the Governor’s and legislative majority’s indifference weren’t enough, they add insult to injury by illegally spending millions of the public’s dollars for radio, television and newspaper ads that pretend to convince the public that the imposition of the VAT, or value-added tax (IVA by its Spanish acronym), is not only necessary, but the best of all available options.

Even their own advisers, KPMG, have told the Governor and the Legislature that it isn’t advisable to impose a value-added tax system when the economy is in a recession, and least of all, during a depression. It must be pointed out that the CPA firm KPMG (the government’s paid expert adviser) warned against imposing a VAT system under our present economic depression. Another worldwide renowned CPA firm, Ernst & Young, also warned Congress against imposing a VAT system of consumption taxes during an economic depression in a 2010 report requested by the National Retailers Association when Congress was considering imposing the VAT system nationwide.

Obviously, one must wonder why the Governor insists on imposing such a repudiated tax system during the present economic depression. The obvious answer to that question is that the only reason the Governor is so adamant about imposing the VAT system, while reducing income taxes, can only be for political reasons, for personal economic profit, or both.

If the reason, as I believe, is political, then it can’t be based on the assumption that people will be paying less taxes, because obviously they won’t. As a matter of fact, they will pay much more in taxes, but because the Governor wants to reduce income taxes to a level lower than federal income taxes, to use it as an argument against statehood, they insist on their chaotic plan. His plan is to fool people into believing they will be paying more income taxes if we become a state. The Popular Democratic Party would use it as an argument against achieving equality. They would reduce income taxes as a smokescreen to hide the fact that as a state, we would receive many more billions of dollars in federal funds for education, health, crime control, housing, highways and to build other much-needed infrastructure.

The other possible reason I mentioned was the Governor’s personal economic profit. Since he doesn’t pay the IVA for his food, laundry, dry cleaning or the hard liquor, wine and Champagne he and his friends consume at La Fortaleza, nor does he pay the IVA for plumbing or electrical repair services, nor the «crudita» for his gasoline while he is Governor—but by reducing income taxes, he raises his and his wife’s salaries. Obviously, he will have more money in his pockets, but not the people. He actually believes he will win the next election, so he plans to enjoy those benefits for at least six years.

But that isn’t the only personal financial benefit to be gained by the Governor if his VAT plan is passed. His other financial and political benefits will come from the millions of dollars, of the people’s money, that he will authorize to be paid to a private enterprise that he will ensure is granted the contract to organize, implement and collect the IVA taxes for the government, without any intervention or participation from the New Progressive Party as to who should be awarded the contract. The Governor’s influence and control over the VAT collection by the private hands he selects will not only be extremely profitable politically, but it would also provide the Governor and his cohorts many more opportunities to politically and personally persecute their opponents. It further opens the doors to widespread political corruption.

Now that we have shown how profitable, both politically and personally, the implementation of a VAT system and the income-tax reduction would be for the Governor, we can see behind and beyond his friendly and good-natured facade. The Governor’s governmental actions and his plans are guided by his political ambitions and personal economic benefit, not by the people’s best economic and personal interests.

Last but by no means less important, let us discuss the alleged merits of the VAT system. We have been constantly told that the VAT system is the best tax system. As a matter of fact, the VAT has been adopted in 164 countries, according to an article titled «The Global VAT Craze,» which was published in the Wall Street Journal last month. The article, however, doesn’t praise the VAT system as a good method for raising funds by governments. On the contrary, the article is highly critical of the VAT system. It does recognize that the VAT system is very efficient as a tool to raise government revenues, but upon acknowledging that, it warns: «Politicians love it because it is the most efficient revenue-raiser known to [humankind], and its rates can be raised gradually to finance new entitlements or to fill budget holes. The VAT is typically introduced with a low rate but then moves up over time until it swallows huge chunks of national economies» (our italics). Obviously, the VAT system won’t provide any stimulus to reduce the size of our government. On the contrary, it provides more funds for additional spending programs, which is the least of our needs. According to the Wall Street Journal article, the standard VAT rates in the European Union average 21.6%. The average rates in the Organization for Economic Cooperation & Development are now 19.2%.

The Wall Street Journal article also tells us that in Japan the VAT system was introduced at 3% in 1989, and was raised to 8% last year. As a result, it whacked consumption and sent «the economy to negative growth.» It is precisely negative growth that most economists have predicted will increase in Puerto Rico if the VAT system is adopted.

As you can see, the higher the rates for the VAT system, the more adversely our economy will be affected. That is the reason the proposed income-tax reduction is such a negative proposal. The income-tax reduction will immediately affect the much-needed cash fl ow. Many salary tax deductions, which are being sent every month to the Treasury Department, will be eliminated, and the remaining tax deductions will also be substantially reduced. The effect on Treasury’s available cash will be considerable, and the only way to make up for the reduction in cash fl ow is to increase VAT rates.

The problem is that most businesses and private consumers are taking more time to pay for their received goods and services than they were before. Today, most people are paying in two, three or four months what they were paying within one month a few years ago. However, the Treasury Department needs more cash fl ow, so it will be demanding prompt payment of the VAT. If businesses and individual professionals are made to pay the VAT before they themselves have been paid for their goods and services, they will have to borrow and pay interest on their loans. The effect on the economy will be devastating. The Governor, however, can’t understand this situation, or else, if he does, he doesn’t give a damn! 

Carlos Romero Barceló is a two-term former governor of Puerto Rico (1977-84), a two-term former resident commissioner (1993-2000), a two-term former mayor of San Juan (1969-78) and was president of the New Progressive Party for 11 years. While Governor, he became president of the Southern Governors’ Conference. While mayor of San Juan, he became president of the National League of Cities. He is now a real-estate consultant doing business as CRB Realty. His email address is rbarcelo@prtc.net. Comments on this article are welcome at caribbeanbusiness.pr. Go to the «Sign in» link on the homepage to participate. Emails also may be sent to column@caribbeanbusiness.pr.