Throwing us a Bone

This past Monday, Gov. Fortuño unveiled his new tax reform plan, which promises to put "más dinero en tu bolsillo" (translation: more money in your pocket). This plan calls for a gradual decrease of taxes for all taxpayers immediately beginning income tax year 2010. By 2016, those with an annual income of $20,000 or less would pay 0% income taxes. An estimated 450,000 taxpayers fall under this tax bracket. For a breakdown of the new income tax rates, please click on the image to the right. Local businesses and corporations will also see their tax rates lowered. In order to finance this tax reform plan, a 4% excise tax will be levied on foreign corporations with operations on the island starting income tax year 2011. This corporate tax will be gradually lowered until 2016, when it phases out.

The excise tax on foreign companies is expected to bring in a total of $1.4 billion in its initial year, and a total of $5.689 billion in its entirety, while "más dinero en tu bolsillo" is expected to save taxpayers (or cost the government coffers) $1.2 billion during the first year. One important, but little mentioned caveat is that the tax reform plan calls for an evaluation to be done in 2013 to weigh-in on the effects of the tax cuts. The approval of the Puerto Rican Congress would be required in order to continue with the rest of the tax reductions slated for 2014 through 2016. After all, the tax cuts largely depends on the assumption that these foreign companies, which are mostly in the pharmaceutical industry, would remain on the island.

Fortuño's plan has largely been met with a warm reception, except for those from the opposing parties, naturally. Some claim it's too little too late. On the other hand, there were many Fortuño supporters yelling "cuatro años más" (translation: four more years). The governor is up for re-election in 2012. Meanwhile, other critics have made some valid points. Tax breaks are meant to provide short-term relief, as well as garner points for politicians who depend on their constituents' votes to stay in office. The economist Thomas Friedman rightly likens such policies to the injection of "steroids, instead of doing real bodybuilding." In the long run, what sustains and brings about a robust and dynamic economy is innovation, productivity, and an environment where businesses and individuals can flourish.

(Note: The graphic above appeared on www.endi.com).