Rethinking Tax Systems & The Importance of Revenues


February 11, 2014
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State of the Motor City. Yesterday was a day of another round of voting to round out Detroit’s process of filling a vacancy on its City Council—with the Council yesterday narrowing the list of candidates sixteen to two after seven rounds of voting: the finalists are Janee’ Ayers, a 33-year-old union leader, and Debra Walker, a community organizer and retired Chrysler executive. Yesterday’s voting was done in public, so Councilmembers did not have an opportunity to speak in private between votes. Councilmember George Cushingberry, who admitted to cutting a deal ahead of last year’s vote for council president, attempted to call a recess so members could speak privately; however, Council President Brenda Jones rejected the request, hinting that such conversations would violate Michigan’s open meetings act. The next round will be early next week, after the Council completes interviewing Ms. Ayers and Ms. Walker a second time—after which a final vote is anticipated. The next round became necessary after the Council was unable to obtain the requisite super-majority of six members yesterday to settle upon either of the two candidates—and that was in the wake of four rounds of voting at yesterday’s public meeting to narrow the field to two finalists. In the subsequent three rounds, the votes for the two aspirants remained the same, so an impasse was declared. The job pays about $76,000. Councilmember Cushingberry after the session said he has no problem with open government, but the Council’s fear of breaking the open meetings act has hamstrung the appointment process, because members are hesitant to talk freely about the issue in public meetings, claiming the council is “severely constrained by this damn act.” While he told the Detroit Free Press he would switch his vote, other members said they would go into the next interview phase with a less rigid stance. Candidate Ayers, who attended the session, said her experience as elected vice president of Metro Detroit AFL-CIO and as a tutor for children would be an asset to the council: “I build bridges, I problem solve and I can get along with everybody…I don’t do anything in order for somebody to know my name. It’s all about what happens to benefit the people.” For her part, Ms. Walker, who lives in Corktown in District 6, said she is humbled to be among the final two candidates: “If they’re looking to truly get a candidate that can work with the entire council and bring the depth and breadth of energy and experience and ideas, then hopefully they would recognize that individual to be me.”

Raising Revenues. Moving swiftly after Judge Francisco A. Besosa of the United States District Court in San Juan, Puerto Rico, last Friday ruled that Puerto Rico’s Recovery Act violated federal law―and enjoined commonwealth officials from enforcing it, Gov. Alejandro García Padilla of the Commonwealth of Puerto Rico—under pressure to realize more than a 10 percent increase in tax revenues―has proposed a major overhaul of the island’s tax system in an effort to reduce tax evasion and promote economic growth—key steps if the territory is to avert fiscal failure. The Governor is proposing to move to a VAT or value added tax system, under which the system would move to taxing consumption from its current significant reliance on individual income taxes (please see pie chart below—as well as the chart at the bottom to assess how the Commonwealth’s year-to-year revenues have changed), stating: “With this tax system overhaul we can help direct the island’s revenues towards the future and ensure that we will borrow less, pay our current debts, and pay down the debt previous administrations committed to without the appropriate means for repayment.” Under his proposal, the commonwealth’s income tax would no longer apply to those earning less than $40,000 annually—as opposed to today’s $20,000 trigger. Under the proposal, Puerto Rico’s 7% sales and use tax would be replaced by a 16% VAT tax, according to Government Development Bank President Melba Acosta Febo. Under such a system, value added taxes are charged at each stage of an item or product’s path to the final purchaser—as opposed to a traditional state or local sales tax, which is only applied at the final transaction. The government hopes the move to a more European type of revenue system will help pump up critically needed new revenues, but will also address significant tax evasion. Last year, the government expanded its sales and use tax base and increased corporate income tax rates—and halted its projected reductions in corporate excise taxes—the second largest source of revenues. Puerto Rico’s corporate tax collections increased sharply last year, while individual and non-resident withholding tax collections fell. Gov. Padilla—in pressing for the significant tax changes noted: “We currently have a tax system that penalizes work and productivity while encouraging evasion…It is inefficient and unfair. The current system punishes the middle class and the poor who work so hard to provide for their families,” noting that last year only 12,000 taxpayers filed tax returns for $150,000 and up in income—something which appears in sharp contrast to the island’s many luxury cars and beautiful homes—raising concerns that many taxpayers are significantly underreporting their income—a door that will be shut, under the revised system used by most European countries as it is likely to mean significantly reduce tax avoidance, according to what Puerto Rico’s Treasury Secretary Juan Zaragoza Gómez told The Bond Buyer. Under the VAT tax, prescription medications, groceries, rents, mortgages, and public higher education charges would be exempt. Under the switch, the government predicts it will achieve significant savings, because it will not have to process 850,000 tax returns.