Puerto Rico is on the verge of a debt-driven collapse in many of its basic governmental structures. This problem is made worse by the fact that Puerto Rican municipalities, unlike mainland cities and counties, have no ability to restructure using federal bankruptcy law.
But Puerto Rico’s problems go even deeper. If these issues are to be avoided in the future, the island must transform from a black hole of capital to a magnet for capital.
Some think the solution lies in tax increases. That would be like giving poison to a dying man.
The best way to fix what ails San Juan is to turn the entire island of Puerto Rico into an enterprise zone.
Initially conceived by the late, great Jack Kemp, enterprise zones are pockets of pro-growth nirvana (especially on tax policy) strategically placed inside economic disaster areas.
What might some elements of a Puerto Rican enterprise zone look like?
Business tax rates. The United States has the highest business tax rates in the developed world (35 percent for corporations, and as high as 43.4 percent for unincorporated firms). There’s no reason this shouldn’t be 15 percent or even lower in Puerto Rico.
Personal tax rates. You can’t have Puerto Rican businesses without Puerto Rican jobs. So the best workers should be attracted to the island by a low tax rate on wages (15 percent or less), a FICA tax holiday, or both.
Capital gains. We want to encourage capital into Puerto Rico, and that means investing in start up ventures and other ownership ventures. To encourage this, Puerto Rico should be a capital gains tax free zone. Even more to the point, there should be no “death tax” in Puerto Rico.
Business fixed investment. Capital investment in Puerto Rico also means buying the hard assets which become the capital stock a growing economy needs. That’s why Puerto Rico ought to benefit from 100 percent full business expensing for all the computers, machinery, and buildings investors want to deploy. This would move Puerto Rico away from the slow-deduction “depreciation” regime it labors under today.
If this enterprise zone concept, or anything close to it, was put into place, Puerto Rico would become THE place to do business in America.
It may be in the Caribbean, but it would sure start to look and feel a lot like Hong Kong.