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

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.