Pathways to policy failure: evidence from Puerto Rico’s 2011 tax reform

ABSTRACT

This study aims to enhance our understanding of the complicated relationship between policy design and policy failure. In doing so, it examines whether Puerto Rico’s 2011 tax reform failed to achieve one of its important policy goals – relieving fiscal stress and preventing bankruptcy – to understand how inappropriate designs of policy elements lead to policy failure. Using the synthetic control method, this study finds that the tax reform failed to relieve fiscal stress because it did not raise sufficient tax revenues while Puerto Rico needed them to give key stakeholders in the policy domain such as its lenders and credit rating agencies an assurance that Puerto Rico had sufficient capacity to repay debt. The findings further suggest that prioritizing policy goals, the timing of implementing a policy, and considering distributional outcomes and key stakeholders in the policy domain are all important when designing a policy.

KEYWORDS:

• Policy design
• policy failure
• tax policy
• Puerto Rico
• fiscal stress

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Other scholars such as Schneider and Ingram (1997, 2) define policy design as “the content or substance of public policy – the blueprints, architecture, discourses, and aesthetics of policy in both its instrumental and symbolic forms.”

2 Unlike U.S. states, local governments of Puerto Rico are not divided into counties, cities, towns, and villages. Rather, its single-layer structure consists of 78 municipalities.

3 According to Kaeding (2016, 2), the top marginal rates of U.S. states’ individual income taxes vary “from Pennsylvania’s 3.07 percent to California’s 13.3 percent.”

4 As explained in the previous section, it is not appropriate to use Puerto Rico’s local government data to examine the effects of the tax reform because local governments play a minimal role in fiscal affairs in Puerto Rico.

5 Note that following the classification used in the U.S. Census State and Local Government Finances, sales taxes include both general sales taxes and excise taxes.

6 Latin American and Caribbean countries are excluded from the donor pool for the following reasons. First, the political status of Latin American and Caribbean countries as independent sovereign countries is different from that of Puerto Rico. Whereas Puerto Rico is subject to U.S. federal rules, Latin American and Caribbean countries are subject to their own rules. Second, although socioeconomic and demographic features of Puerto Rico are similar to those of Latin American and Caribbean countries, there are some U.S. states that also consist of large Hispanic population (e.g. Florida and Texas). Thus, the construction of the synthetic control group by including these states is expected to help solve the problem of idiosyncratic features of Puerto Rico without including Latin American and Caribbean countries in the donor pool. Other U.S. territories are also excluded from the donor pool for the two main reasons. First, Puerto Rico has much larger population than other U.S. territories. Second, most of the data sets used in this study are not available for other U.S. territories.

7 This phenomenon is also observed in Abadie, Diamond, and Hainmueller (2015) for the inflation rate between West Germany and the synthetic West Germany because West Germany had lower inflation rates than any other donor pool countries.

8 The effect of the tax reform on tax revenues will be discussed in the next section.

9 Readers may notice that the gaps between the treated unit and the synthetic control group are larger than those in Abadie, Diamond, and Hainmueller (2010, 2015). However, subsequent studies done by other researchers also show a less close fit between the treated unit and the synthetic control group (e.g. MacKay 2017).

Additional information

Notes on contributors

Youngsung Kim

Youngsung Kim is an Assistant Professor of Public Policy and Administration in the Department of Political Science at Colorado State University. His research focuses on public budgeting and finance, education finance and policy, and local government management.