Recently the ex-governor of Puerto Rico, Anibal Acevedo Vila made an interesting announcement on his blog, entitled "Refrescando la Memoria." In his discourse, he suggests that the IVU, which he signed into law in 2006, is one of the reasons that the Puerto Rico economy has not emerged from it's decade old depression.
A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, "How do I know you won't sting me?" The scorpion says, "Because if I do, I will die too."
The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp "Why?"
Replies the scorpion: "Its my nature..."The Moral
As some of you political monsters out there might remember, during his political campaign against ex-govenor Pedro Rossello, Acevedo Vila was likened to a scorpion. So let's keep that in mind as I unwind the tatters of history and reveal the moral.
But didn't Acedo Vila, himself, sign the bill into law? Yes, but he remembers thinks a little differently: "Aunque tenía dudas muy fuertes sobre la imposición de un impuesto al consumo, acepté la propuesta del PNP. (While I had strong doubts about the IVU, I agreed to the PNP proposal.)" So let's deconstruct that statement, because it's a doozy. So the PDP governor, accepted the IVU proposal from the opposition party, the PNP. Yeah, that happens here, like, never.
Maybe the blog post is a secret cry for help, because the governor is surely suffering some type of memory robbing affliction. Maybe it's the early stages of senility, because Acevedo Vila must not remember having had the power to veto while governor. Anyway, I digress.
The Informal Economy
When the IVU was implemented it was heralded as the way to increase tax collections from the informal economy (the black market) and those pesky tax evaders. But like a horrible punch line to a sadistic joke, long story short, it didn't. As the landscape changed, so did the behavior of the evaders, as well as the merchants and consumers of the black market.
Unlike our fable, in this version, Acevedo Vila isn't the scorpion, he's the frog. And the willing participants of the black market and those wily tax evaders are the scorpion. For you see, as ugly as it sounds, if there is one thing tax evaders excel at, it is bending the rule of law to their favor.
What's My Point?
If one of the motivations for the new tax law is to capture taxes from the informal economy and tax evaders, then the VAT (IVA) is doomed already. For just as certain as the sun rises in the east and sets in the west, the moment the VAT becomes law, people will find a way to beat the new system. It is just our nature, we can't help ourselves, even if we tried. Therefore, all of the tax revenue projections are based on a flawed assumption.