Puerto Rico’s epic tax blunder

Let’s say you’re an elected leader faced with a tough decision about how to revive the lagging economy.

Your predecessors had tremendous success spurring growth by making the local tax environment exceptionally friendly to investment. However, in recent years, as the global economy has contracted, so has yours. GDP has decreased every year since 2007. And unemployment is stuck in the high double digits.

So, what’s the best policy to kick-start industry and get the economy back on track?

Why, imposing a stiff new tax on businesses, of course!

That’s the absurd logic employed by Puerto Rico’s policymakers. Recently, in a short-sighted bid to raise government revenues, Gov. Luis Fortuño signed into law a new excise tax on about 50 large multinational manufacturing firms. (Starting at 4 percent in 2011, the tax gradually decreases every year until expiring in 2016.)

As has been proven time and again, a tax hike like this will scare away investment and hamstring the efforts of existing companies to create jobs and wealth. And, ironically, Puerto’s Rico’s own history shows that the opposite move is what would speed economic recovery.

Starting in the 1950s, the Commonwealth’s government attempted to attract investment from large, multinational companies by scaling back trade barriers and creating tax incentives for business.

The reforms worked precisely as planned. U.S.-based companies now represent around 80 percent of all manufacturing jobs in Puerto Rico, totaling 100,000 positions. These firms account for over a quarter of the country’s $68 billion annual GDP.

This new tax threatens to erase many of those gains.

Take the case of biopharmaceutical research firms, which account for half of the affected companies. This industry is responsible for over 94,200 jobs in Puerto Rico, and generates $3.6 billion every year for the local economy.

But pharmaceutical development is particularly capital-intensive. The average drug costs about a billion dollars to develop and takes a decade to bring to market. A tax hike makes local drug development even more expensive. And many firms will react by scaling back new research operations or pulling out of the country entirely, taking jobs and wealth with them.

The Puerto Rican government has made a huge mistake. A new tax on multinational firms is precisely the wrong way to try to grow the economy. In return for a short blast of cash, it kills jobs and repels investment.

Fortunately, there’s still time for the country to reverse course. The legislature doesn’t go into recess for a few more days. Lawmakers must repeal this misguided tax right away — and then institute the free-market reforms already proven to drive growth in Puerto Rico.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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