Puerto Rican Perils

A domestic economic crisis is taking place right now and has been for the past few years, and yet most Americans are completely unaware of the situation. This is likely due to the fact that this crisis is not located in any one of the fifty states. The territory of Puerto Rico is currently experiencing a massive fiscal and debt crisis. Years of economic depression, population decline, and capital outflows have led to the island’s inability to pay even the interest payments on its $70 billion debt. To put that into perspective, their debt to GDP ratio is nearly 100% and the state pension fund is $30 billion in the red. The poverty rate is 45%, more than three times the average in the fifty states. Why should Americans in the upper fifty care? While many Americans may not see Puerto Rico as a part of the union, its 3.5 million residents are United States citizens and are free to migrate to any state. Two-thirds of United States pension and retirement funds also hold Puerto Rican municipal bonds and a default could cause billions of dollars to vanish. As a territory, the island is also privy to American tax revenues, and if the current financial situation continues down south, a bailout may be necessary simply to maintain levels of electricity and plumbing for the people who live there.

Congress is piecing together legislation to remedy the issue as soon as possible and early reports point to the likely construction of a fiscal control board that will unilaterally monitor spending and taxing policies by laying off government employees, cancelling government contracts, and maximizing tax revenue. If the board is anything similar to the institutions put in place in the District of Columbia and Detroit during their crises, then they will also be given the power to negotiate debt restructuring between bondholders and Puerto Rican governmental agencies.

Are these fiscal austerity practices enough though? Keeping in mind the spectacular failure of European austerity measures, the answer seems to be no. While the current Congressional proposal at best fixes the debt issues in the short term, it has no plan to increase the amounts of capital inflow into the island. Simply cutting spending and increasing taxes does not ensure long-term stability or prevent future debt crises from taking place. Instead, a more sustainable solution may be the conversion of Puerto Rico into an enterprise zone. First proposed by Jack Kemp, the former U.S. Secretary for Housing and Urban Development under George H.W. Bush, the idea of an enterprise zone roughly translates to lower corporate tax rates, lower personal tax rates, and zero capital gains taxes in specific, delineated regions. The idea has been dismissed as a duplicitous conservative tactic meant to create urban tax havens, but it may be a simple solution to the island’s struggles.

For one, the United States has the highest business tax rates in the developed world and keeping these rates at 15% instead of 35% would encourage both capital flow and entrepreneurship. Secondly, over 440,000 Puerto Ricans have left for the mainland in the past decade, and lowering personal income tax rates would attract workers and keep families looking to maintain higher wages. Lastly, by not having any capital gains taxes, investments in Puerto Rican start ups and ventures will rise, thereby increasing GDP and overall tax revenue. Obviously, the arguments made against Kemp’s idea in the 1980’s still have validity today, but much less so especially with an island territory geographically separated from the rest of the nation. As an enterprise zone, Puerto Rico by definition becomes a tax haven, but it seems far less plausible that executives will relocate to the area from the traditional hubs of New York, Los Angeles, or Chicago simply to save money due to its isolation and cultural differences, especially with states like Florida already implementing a zero income tax. Relocation fees and transportation costs would mitigate the benefit of most tax evasion plans. The idea of an enterprise zone is also not too radical if one looks at countries like China and its relationship with Hong Kong. As a low tax, low regulation locale, Hong Kong has flourished as a business hub for decades now, attracting international talent and investment.

Now, these two policies of fiscal austerity and an enterprise zone are not mutually exclusive and more likely than not government spending should be curbed. However, we should keep in mind the historical examples of Greece and Hong Kong when we consider the concept of an enterprise zone, rather than focusing on ideological divides and seeking out sinister motives. We often overlook Puerto Rico when considering domestic policy, but with the impending financial danger it poses, we simply cannot anymore, and perhaps a radical solution is exactly the solution we need.

One thought on “Puerto Rican Perils”

  1. This is a concise but effective article about the pension problem and the tax reduce.
    It may cause the attention about the unknown place that can be used to hide something, but I think the crisis is that the poor of the island provoke the governance to attract the labour.
    However, the low tax is not the only way yo induce the company. And low tax is not only the reason that cause the 500s go there.
    And there is not only one place can hide. Anyplace that need more investment, labour,company will use this way.
    So finally is a big circle. It can be a compkex problem include the economic development,finance,and the public policy.
    But we can not deny that the development is the final aim, so you can’y deny the exist of it.

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