New Incentives & Tax Code Will Boost Investment and Help Puerto Ricans

puerto rico capitol.jpg

Puerto Rico's legislature recently delayed the consideration of the Governor of Puerto Rico's proposal to revamp the tax code.  For Puerto Rico to continue on its path to eventual economic growth, the legislature should consider, and pass, the remodeled code as soon as possible.

The first proposal is intended to reconsider the tax incentives applied over the last decade or so, which were first intended to promote growth through external investment.  While some incentives have fared well, others have been money pits that benefit only the recipients.  It makes sense to improve efficiency by weeding out the latter and doubling down on those that create jobs and contribute to growth.

Latin American countries throughout the 80s and 90s, as well as all fledgling economies, have experimented with incentives in the same manner and all have eventually shifted policies to improve their efficacy.  Puerto Rico must do the same to stay on forefront of innovative and effective policies.

In the second proposal, the Governor's administration wants to return "money to the people" by reducing tax rates on individuals and businesses.  In the face of fiscal austerity (see proposals by the Fiscal Oversight Board), it seems counter-intuitive for a government to reduce tax rates, but contemporary research gives sufficient evidence to positive fiscal outcomes (especially in regards to tax receipts) in light of rate reductions.  Considering the more common Keynesian economic views, more money in the hands of individuals will lead to more money being spent and a boost to the economy. 

While many counter that such a transmission works differently in reality, the many continuing needs of struggling individuals and businesses (to buy new furniture or rebuild post-Hurricane Maria, for example) it is likely that higher net income will have such a positive impact on the economy, ceteris paribus.

In the end, both proposals will likely result in positive contributions to future growth.

Justin Vélez-Hagan is the executive director of The National Puerto Rican Chamber of Commerce and the author of The Common Sense behind Basic Economics, as well as the upcoming The Paradox of Fiscal Austerity.

Economic activity on the rise in Puerto Rico . . . hopefully

The Economic Development Bank of Puerto Rico (EDB), which took over the administration of certain economic statistics for the now defunct Government Development Bank of Puerto Rico, released the most updated data from its Economic Activity Index (EAI) this week.

Good news: according to the agency's data, economic activity has increased month-over-month for the entire year to date. 

  Source: https://www.bde.pr.gov/BdeSite/PREDDOCS/EDB_EAI.pdf

Source: https://www.bde.pr.gov/BdeSite/PREDDOCS/EDB_EAI.pdf

While the index is still not on par with the pre-disaster levels of 2017, it has shown an unexpected resilience in the face of numerous obstacles including out-migration, lack of electricity and damaged infrastructure for much of the island over the same time period, and a general sense of investor wariness. 

Many economists expected a continued economic decline through at least some portion of 2018.  

Combined with a steady labor force (see yellow arrow below) in recent months and improvements in employment (green arrow) and, subsequently, the unemployment rate (red arrow), and economic indicators point to a generally positive trend over the first third of 2018.  

  Source:   https://data.bls.gov/timeseries/LASST720000000000003

Source: https://data.bls.gov/timeseries/LASST720000000000003

Let's hope it continues.

Justin Vélez-Hagan is the executive director of The National Puerto Rican Chamber of Commerce and the author of The Common Sense behind Basic Economics, as well as the upcoming The Paradox of Fiscal Austerity.

The Economics of Puerto Rico . . .

. . . coming soon. 

This blog will host weekly updates on the economy of Puerto Rico, breaking down the complicated statistics, BLS data, and policy implications surrounding Puerto Rico’s beleaguered economy and provide just the basics so you can make better-informed decision related to investment opportunities and advocacy efforts . . . all from the perspective and understanding of highly-trained economists.  

Please send tips/ideas to: info@nprchamber.org