Wooing the rich with promises of special favors appears to be Puerto Rico’s plan for getting out of the financial quagmire in which the island finds itself, according to a column by Orlando Sotomayor for The Bond Buyer.
Sotomayor points out that persuading millionaires and billionaires to move to Puerto Rico with income tax incentives would have the effect of bringing cash to Puerto Rico, while paying for the special deals by sending less to the federal government in the form of taxes — an inexpensive option for Puerto Rico.
Paired with special tax deals for U.S.-based manufacturers, these tax breaks for wealthy individuals can bring in some cash for Puerto Rico’s government. As a temporary answer to a desperate situation, any step that could bring dollars to the island might have appeal.
Is it a good strategy for improving the economy? Sotomayor says not.
It increases inequality.
Rather than providing more jobs at better wages for the people of Puerto Rico, this approach simply creates an enormous divide between rich and poor. Puerto Rico already has a higher gap between haves and have-nots than any state, according to census data (it’s right behind Washington, D.C., and ahead of New York state).
Having a small number of very rich people and a large majority of much poorer people can have political, social and economic consequences that, according to Sotomayor, “are still far from well understood.” It is a very specialized definition of economic improvement.
Sotomayor points to Puerto Rico’s loss of population as evidence of this:
Most striking is the statistic that concerns the number of Puerto Ricans who have voted with their feet and chosen to move to the U.S. mainland in search of a better life. Just in the past three years, the equivalent of 4% of the population has opted for that way out. Middle class Puerto Ricans go north while U.S. millionaires and billionaires take their jets south.
It doesn’t lead to further growth.
Persuading high-income individuals to move to Puerto Rico might provide temporary help with cash flow, or an improvement in statistics to show investors, but it doesn’t create wealth for Puerto Rico. Sotomayor points out that “a middle class self-employed Puerto Rican faces a top tax rate of 48% when both local and Social Security taxes are taken into account. Corporations face even higher taxes, withdeclaring an average tax rate of over 70% and other businesses paying even more.”
Creating a more positive climate for business could lead to ongoing job creation. Extending the federal Earned Income Tax Credit could provide a route for more people in Puerto Rico to enter the workforce. (The governor’s tax proposal to woo billionaires also eliminates the local Puerto Rican EITC.) Sotomayor proposes improvements in education and the end of monopolies. “Unnecessary,” says Sotomayor, “are cheerleaders or an Uncle Sam with deep pockets but a short attention span.”