By: Marshall Kirby, Public Policy Analyst
Israel Ortega wrote a short piece in the Washington Caller, in which he praises Puerto Rico’s economic model which was laid out by Governor Luis Fortuno. (The article can be found here). Mr. Ortega has long been a conservative voice in the Hispanic policy community. In his analysis, he lays out strong arguments supporting the governor’s economic policy including the overhaul of the tax code.
Mr. Ortega’s analysis is spot-on in some aspects. Puerto Rico was in the midst of a serious economic crisis stemming from a lack of investment, slow economic growth, and ballooning government deficits only several years ago. In the years that have followed, strong economic growth has been made, partially led by large amounts of investments made by foreign firms in technology and life sciences. The investments made by these firms were not a product of an economic miracle, but rather a product of opening up the island to business by producing an investment friendly environment, simplifying the tax code, and lowering the tax rate. We have seen this have a positive effect for domestic firms and small entrepreneurs.
Additionally, Mr. Ortega is right in saying that Governor Fortuno has succeeded in establishing an administration which has managed the economy rather well – including cutting the size of government and spending. Reducing spending has helped the island reduce its expenditures and become much less conscious of raising revenues with additional taxes. Lower taxes allow businesses and individuals to have more money and to spend it within the economy, which has created a multiplier effect and increasing growth rates.
However, Mr. Ortega’s analysis misses a key point – the new tax system adopted in Puerto Rico under Governor Fortuno’s plan has a very economically damaging aspect to it. Creating a two tiered system where foreign firms are taxed at a higher rate clearly deviates from a wise tax policy. Puerto Rico is heavily dependent on investment from foreign firms, particularly in crucial sectors of the economy such as life sciences and technology. Raising taxes only on their operations creates a disincentive for further investment, something which is not a wise choice in these economic conditions. And let’s not forget that these firms allow for technological transfer to Puerto Rican firms, which over time will make them more competitive.
The Commonwealth of Puerto Rico certainly does deserve praise for its economic success and the model it is providing to the continental US and the region. However, glossing over a clear policy failure to make a political point does not put the economic climate in the correct context. What we need to do is praise our policymakers for the correct and successful implementation of policy reforms, and advocate removing or altering unsuccessful or potentially damaging ones.