PUERTO
RICO, A US TAX HAVEN IN TATTERS BY AFP. PUBLISHED: 18:35
GMT, 6 MAY 2016 | UPDATED: 18:35 GMT, 6 MAY 2016.
USA, MAY 7, 2016.
Strangled by debt and a decade of recession, US territory Puerto Rico is
pleading for help from Congress.
But ironically the
Congress is partly to blame for the Caribbean island's woes, having helped
devise its failed economic strategy of becoming a corporate tax haven, and then
allowing that attraction to expire.
The island, which
defaulted on a huge bond payment on Monday, is grappling with a massive $70
billion debt and a decade of recession after pursuing for years a growth
strategy based on offering tax breaks to investors.
Between 1976 and 2006,
Section 936 of the US tax code provided US companies operating in Puerto Rico
tax-free income from those operations.
US giants like software
maker Microsoft and drug makers Pfizer and Johnson & Johnson were among the
companies rushing into Puerto Rico to offset the 35 percent US corporate tax
rate, the highest among advanced economies.
The surge in investment
boosted Puerto Rican growth, with the expansion hitting a robust 9.8 percent
annual rate in 2001.
Burst bubble. But when
the tax break ended after 30 years, little by little companies deserted the
island, draining revenues, shedding jobs, and pushing the economy into
recession.
"It created a kind
of bubble that burst when the mechanism expired in 2006," said Scott
Greenberg, an analyst with the Tax Foundation, an independent tax policy
research group, in an interview.
"It didn't create a
sustainable growth model for Puerto Rico, because the companies were only
investing there because of the tax benefits, and because Puerto Rico failed to
capitalize on the business activity to develop its economy," Greenberg
said.
The island's government,
which had a decade to prepare for the end of the tax benefit, did nothing, said
Argeo Quinones-Perez, an economics professor at the University of Puerto Rico.
"No effort was
made, no industrial policy was decided, no plans were made," he told AFP. He said that the island
had gotten little in return to support growth for various tax advantages
offered to companies since the middle of the 20th century.
"We should have
obtained more benefits by requiring job creation or direct investment on the island,"
he said. Tax-free bonds. Another tax
break has aggravated the economic woes of Puerto Rico.
Under a 1917 law that
gave Puerto Ricans US citizenship -- but not the right to vote in US
presidential elections -- the interest earned on bonds issued by Puerto Rico is
exempt from taxes, unlike that for other US states and cities.
That advantage enabled
the island to issue huge amounts of debt to hungry US buyers, even as the
island's finances and economy deteriorated.
"If their bonds
wouldn't have been subsidized by the US tax code, the investors may have
stopped buying bonds earlier because their concerns about Puerto Rico's fiscal
situation would have outweighed the potential gains from the bond income,"
Greenberg said.
Bleeding financially,
the government of the island of 3.5 million people has recently warned that it
can no longer reimburse its creditors, and is hoping that Congress will give it
the legal right to restructure the crushing debt.
However, despite the
crisis and plunge in revenues, Puerto Rico continues to offer tax incentives,
now to lure mega-rich individual investors.
The territory approved a
law in 2012 that allows Americans who become tax-domicile residents of Puerto
Rico a 100 percent exemption on all capital gains, dividend and interest
income.
The governor of Puerto
Rico, Alejandro Garcia Padilla, defends the incentive, which has lured managers
of investment funds like billionaire John Paulson to the island.
"We need to share
wealth, not poverty," he has said. "These people are bringing wealth
to Puerto Rico, that's good for everybody here." Quinones-Perez criticized
the tax-based strategies, saying they were an "exhausted model" that
was depriving the island of crucial resources amid its economic crisis. "The
cost of keeping that model running became higher and higher and higher," he
said. Foto by FACEBOOK.COM . Courtesy Published by
VAZCORP CORP.
