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Summer 2006-02 The Tax Bamboozle Act of 2006

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Number 64
Summer 2006
A CPA's view
contributed by Virgilio Vega III, CPA

The Tax Bamboozle Act of 2006

Yes, that's what it is. We-you and I, and most of the hard-working, taxpaying individuals-have been taken for the proverbial ride.

What should have been . . .

But we will get to that in a minute. First let's look at what real tax reform should have looked like: a sales tax plus reductions in tax rates and simplification of filings. Tax rates should have been knocked down by about half; going from 5% to 17 % on active income only. All passive income (dividends and interest) should have been untaxed, in order to promote investment and savings, as long as those investments were located in Puerto Rico. Tax deductions should have been limited to mortgage interest, education, and medical and child-related.

Property taxes

Real estate valuations for property tax purposes should have been updated to more current values (we are not saying market), and rates adjusted accordingly, as well the homestead exemption. Increases in revenues should have been allocated between the corresponding municipality and public education.

Budget cuts

In addition, the central government should have cut its budget, as it is out of control. These folks have no idea what fiscal responsibility is. It is not unreasonable to ask the central government to bring expenses down to equal revenues.

What it is . . .

But it takes political gumption to do this; and besides that would have been too easy. No, they went out of their way to work the screws.

Very few issues have been so widely studied and analyzed like the sales tax and tax reform. The Puerto Rico Society of Certified Public Accountants, the Puerto Rico Chamber of Commerce and other trade and business associations had for the last five years been submitting studies and proposals to the government on this matter. Even the House of Representatives worked on this between years 2000 and 2004. You know what they did with all that information?: ZIP. They proceeded to create a Frankenstein law with bits and pieces of everything and nothing; incoherent and so full of holes and bumps that it closely resembles our highway system.

Tax "breaks"

For example, future or promised tax "breaks" are dependent on the revenues provided by the sales tax. That has been the governor's explanation of where the real benefits are. Be patient, for they will be here by 2008, of course depending on "central" collections.

The Legislature estimated revenues to be generated at $328 million for each percentage point of "central" sales tax. Sources indicate that the most they might generate is $228 million. That's a $550 million shortfall. At that clip, "breaks" are going to be hard to come by, and we will be left holding the bag.

Redo your taxes

The new tax law does contain some actual breaks, but my math leads me to believe that they will not be neutral as far as the sales tax goes. Look at your tax return and redo the math with these new "breaks." See how much your income tax will decrease, and compare that to an estimate of what you will pay in sales taxes. Estimate your sales tax at 7% (total) on a consumption level of about 50% of your disposable income. If you add this new tax to your tax responsibility you will see that your effective tax rate will jump up by 3% on the average. Congratulations, you are now in a new "tax bracket": the consumed tax victim bracket.

Dream

Can we join forces and sue the government for damages, lost profits, and lost faith? Dream on! For now just dream at what happens when strangers manage your checkbook. Scary, isn't it?


© 2006 Goldman Antonetti & Cordova, LLC

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