By: Marshall Kirby, Public Policy Analyst

Mr. Kirby joins The National Puerto Rican Chamber of Commerce with an experienced background in Public Policy Analysis.  He has worked for Americans for Informed Democracy, the Center for US Global Engagement, and for local governments in Virginia on issues ranging from international finance, national security, and other areas of foreign and domestic policy.  He holds a Master of International Development Degree from the University of Pittsburgh.

In the news, a lot of time and coverage has been spent on the issue of taxes and the responsible course of action of spurring economic growth in a recession and balancing real concerns of government deficits when major spending cuts are no longer politically feasible.  In Washington, there is a lot of political rhetoric surrounding tax cuts and tax credits for the middle class and small businesses or whether increasing taxes on the top earners and large corporations will bring relief to the struggling or help pull the country out of the recession.   In Puerto Rico, there are similar talks, especially as the governor has announced a new policy which has left many at odds over the decision.

Luis Fortuno, the young governor of the island, has made a shocking move that has left differing stakeholders at odds.  The governor’s plan, which was announced earlier this month, has already increased the tax burden on non-domestic companies with annual revenues over $75 million a year.  In a proposed move, the governor has proposed a massive tax cut on middle class families and small business to reduce their burden.  Over the next seven years, if becoming law, the governor has estimated that over $1 billion will be kept in the pockets of middle income families and small business (PR Governor Unveils).  Families could expect their tax burdens to be halved, and small businesses could see a reduction of as much as 30% (Puerto Rico Raises Taxes).  Meanwhile, the increase felt on large non-Puerto Rican firms will begin at 4%, and will be gradually reduced to current levels over the span of six years (Puerto Rico Raises Taxes).  The governor has already called this plan a stepping stone for economic reform which will allow the government to be more fiscally responsible, the tax code to be simpler and more enforceable, and which will provide incentives for individuals to work and benefit themselves (PR Governor Unveils).

Many observers have seen this move as uncharacteristic of Mr. Fortuno.  Coming from a supply side economics background and beloved by conservatives, [many of whom consider him the Puerto Rican Ronald Regan] he has had a history of reducing the deficit, reducing the budget, reducing the size of government, making strides towards producing a balanced budget, and has increased the Commonwealth’s credit rating (PR Governor Unveils).  Additionally, like some of his predecessors, he has made immense strides in attracting foreign investment and bringing new and important industries in addition to manufacturing, such as pharmaceuticals, biotech, and chemical companies (New Tax Increase).  Foreign investment in these industrial sectors has produced well over 100,000 jobs and accounts for over a quarter of the island’s GDP (New Tax Increase).

Obviously advocates for large investors in Puerto Rico are not happy.  They claim that this large increase on large foreign firms will substantially hurt their ability to operate.  If their ability to operate competitively and profitably is hurt, then these firms will not be able to grow and create new jobs, which would also cause the economy to lag.  Others have voiced their support for this plan, emphasizing that with over $1 billion back in the economy from tax cuts, the economy will grow at a fast and robust pace which will lead to high levels of growth domestically.  With normal multiplier effects, this would lead to several billion dollars circulating in the domestic economy, plus will allow struggling families some breathing room.  Small businesses and those firms not affected by the tax increases would be able to be more competitive, grow, and invest in expansion faster than without the reduction.  This would allow these smaller firms to hire more employees.  It is important to note that one very vocal proponent of the decrease of tax burdens on families and small business and the increase on foreign firms are the domestic labor unions.  The unions are advocating making the taxes on foreign businesses permanent (Puerto Rico Raises Taxes).  [It is important to note that while the tax increase on large non-domestic firms is law, the proposed tax cuts for families and small businesses have yet to become law.]

Different sides on this issue will likely indicate that one policy is a “job-killer” or a “job-creator,” when in reality the truth is somewhere in between.  Economists, policy makers, politicians, and businesses already know that taxes play a huge factor in employment growth and economic growth.  The truth and likely outcome of this tiered approach is that job growth will likely slow or even a slight reduction will be witnessed, while small businesses will likely be able to grow and create more jobs.  At this point, accurate estimates over net job growth or gain are unknown and dependent on many factors.  However, a key point is that recently Puerto Rico has had some relative success at attracting investment from foreign and US based firms.  Foreign investment is a very important factor for a growing economy as it allows an influx of physical and monetary capital which helps build the local infrastructure and bring in newer and better technology. This technology can, over time, be transferred to smaller domestic firms.  Investments from foreign firms often times [and in the case of Puerto Rico] bring many well paying jobs (New Tax Increase).  Raising taxes on them, while it may produce more short term revenue for the government will hurt this sector and reduce the tangible short and long term benefits.  Puerto Rico will need a lot of short and long term growth to catch up and have higher standards of living and competiveness as other places in the United States.   In a complicated economy like it is, a decrease in foreign investment will not be likely to produce prosperity.

While there are myriad of concerns and stakeholder at the table, policy makers should begin to think long and hard over the consequences of their actions involving tax policy.  There is no doubt that government budgets need to be balanced and important programs need to be funded.  However, the need to meet campaign goals and budget and deficit promises should not get in the way of producing an investment friendly environment which will create jobs.

Works Cited

Matthews, Merrill.  “Puerto Rico Raises Taxes and Promises Tax Cuts.”  Forbes. November 9, 2010.

“New Tax Increase in Puerto Rico Could Cost Jobs, Says Industry Groups.” Industry Week. October 27, 2010.

“Puerto Rico Governor Fortuno Unveils Comprehensive Tax Cut Plan for Business, Individuals.”  PR Newswire. October 26, 2010.