Commentary: Puerto Rico’s Billionaires Strategy

By Orlando Sotomayor
6 May 2014
The Bond Buyer
BBYER
3
Vol.123, No.86
English
(c) 2014 The Bond Buyer and SourceMedia, Inc. All rights reserved.

Recently relocated millionaires are a happy lot in Puerto Rico. Their lifestyle was a selling point in an April investors’ summit dedicated to luring financial sector firms and wealthy individuals to the island in exchange for exemption from United States taxes and a light local touch.

It’s not hard to empathize with their optimism. If Puerto Ricans faced a 4% top marginal tax rate, they would surely be quite happy. They would feel optimistic if they could afford to send their children to one of a handful of excellent preparatory schools that are testament to what financial resources, parental involvement, clear goals and accountability can achieve.

They would be on their way to becoming billionaires or at least millionaires if they could buy assets at a fraction of the cost taxpayers paid to remodel them. They would be over the moon if invited to a private function by one of the world’s great opera singers.

But life at the bottom 99.9% is another story. 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, with Walmart declaring an average tax rate of over 70% and other businesses paying even more.

The average Puerto Rican household would need to devote half of gross income to send a single child to a top preparatory school. It would most certainly not be able to walk a child to school through the streets of El Condado, as suggested in a testimonial during the investors summit.

Rather, parents would have to wake up at five or six in the morning in order to beat gridlock traffic and get the student to a mediocre school in time for homeroom.

Local business owners would get few tax breaks and survive in spite of a government that provides few services but demands much in return.

Like it or not, getting wealthy individuals to move to the island in order to avoid U.S. taxes appears now to be a cornerstone of Puerto Rico‘s growth drive and is characteristic of the country’s eternal search for a quick and painless way to grow. Contrary to most other initiatives — many gathered through an Internet suggestion box — this one is in fact based on sound economics.

Although it does nothing to abate the outflow of talented Puerto Ricans, it builds productive capacity by attracting in-migration of stateside residents. Even better, the strategy does not cost the commonwealth one single penny since it is entirely financed by the U.S. Treasury through foregone taxes.

It is then similar in effect to a law enacted in 2011 charging a tax that manufacturing sector firms can deduct from their U.S. liabilities. Puerto Rican officials have become quite adept at diverting income from the U.S. Treasury to the Puerto Rican Treasury.

Even more interesting is the strategy’s distributive dimension. Every time a billionaire moves to Puerto Rico, inequality in the U.S. goes down while the opposite happens in the commonwealth, with consequences that are still far from well understood.

In a democracy each man and woman may be entitled to a single voice and vote, but some voices are louder than others. Some pointed out in the recent investors’ summit that statistics do not reflect their view of the performance of the island’s economy. Furthermore, they have suggested that indexes be changed to reflect such views.

Yet, official statistics paint a consistently bleak picture of the Puerto Rican economy. Yes, unemployment has fallen for three consecutive months, but so has employment. According to the same household survey, it is down 20% from a peak in 2006 and has declined every month without exception since mid-2012.

Sales tax collections are often offered as signs of economic recovery, but they are rarely corrected for inflation and do not account for expansions of their tax base. Likewise, overall tax-intake announcements do not come with warnings of one-time tax events and sharp hikes in corporate rates that are not sustainable over the long or medium term.

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.

The United States government does a disservice to the Puerto Rican people when it turns a blind eye to the back-door bailout it provides through the billionaire and manufacturing tax loopholes — the latter already accounting for over 20% of public revenues. It allows the commonwealth to avoid the politically costly reforms it must undertake if the island is to survive as a viable economic entity.

Both the tax code and the welfare state must be reformed to reward work and investment. Public schools need to provide education and not just jobs for potential voters. Utilities and other monopolies must be broken down or effectively regulated. This is what the island needs.

Unnecessary are cheerleaders or an Uncle Sam with deep pockets but a short attention span. If the U.S. government really wants to give us a hand, please do continue with the bailout, but demand reforms in return. Life in Puerto Rico is sweet at the top, now let’s work on the other 99.9%.

SourceMedia, Inc.

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Por Sergio M. Marxuach

“Esta columna se publicó originalmente el 31 de diciembre de 2013.  Sin embargo, creemos que es importante volverla a publicar hoy, después del mensaje de presupuesto del gobernador, ya que provee el contexto histórico de la crisis que estamos viviendo y sufriendo todos los puertorriqueños.   Las decisiones difíciles que tenemos que tomar hoy son la consecuencia directa de varias décadas de mala administración.  No surgen de la nada ni de un vacío.  Además, la situación ha empeorado desde diciembre: el crédito de Puerto Rico fue degradado a nivel especulativo en febrero, la deuda ha aumentado a mas de $72,000 millones, y la economía sigue en contracción. Todo esto significa que Puerto Rico enfrenta varios años más de decisiones difíciles antes de poder declarar que hemos superado nuestros problemas fiscales.”

Por mucho tiempo, a nadie le importó el precio de los bonos de Puerto Rico, ni las tasas de interés que pagaríamos, ni las comisiones que cobraban los banqueros, ni en qué se iba a gastar ese dinero, ni como lo íbamos a repagar. En verdad, nada le importaba a nadie mientras había dinero. La economía estaba creciendo, el dinero fluía, se estaba “haciendo obra”.  Por otro lado, los banqueros nos aseguraban que la “calle pedía papel”, como si estuvieran hablando de libras de pan.

La decadencia comenzó allá por la década de los setenta. En respuesta a la crisis global, aumentaron las transferencias federales, la nómina pública, y la deuda gubernamental.  Se consiguió la sección 936. Eso fue suficiente para revivir la economía por unos 25 años más y posponer reformas estructurales, dolorosas, difíciles de explicar.  Procedimos entonces a gastar millones en pabellones en Sevilla, en celebraciones del quinto centenario, en juegos centroamericanos en Ponce y Mayagüez, en campañas publicitarias, en contratos de asesores y consultores, en baile, botella y baraja, en faraónicas estaciones de tren, en acueductos, coliseos y natatorios de escala romana. READ MORE

Política fiscal y degradación del crédito de Puerto Rico

Presentación de Sergio M. Marxuach, director de Política Pública del Centro para una Nueva Economía, en la Facultad de Derecho de la Universidad Católica de Ponce el 6 de marzo de 2014.
 
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Puerto Rico Faces $940 Million Bill as Debt Is Cut to Junk

S&P dropped the territory to BB+, the highest speculative grade, on Feb. 4 because of limited access to capital markets as officials struggle to revive a shrinking economy. Moody’s today lowered it to Ba2, one step below S&P’s score. The moves trigger accelerated payments on debt and calls for increased collateral on swaps. Almost half may need to be arranged within 30 days, said David Hitchcock, an S&P analyst.

While S&P said its new rating reflects the assessment that Puerto Rico can handle its immediate cash needs, the island may have to pay the full amount out of a $9.77 billion budget already in deficit if it can’t alter the terms of the swaps agreements or refinance the debt. Officials are trying to renegotiate the transactions and also sell the first bonds from the commonwealth since August, Governor Alejandro Garcia Padilla said on Feb. 5.

“If we don’t have access to the markets or if we can only borrow at very high yields, then we may have to make the payments,” said Sergio Marxuach, policy director at Center for a New Economy, a not-for-profit research group in San Juan that focuses on economic development. “We may not have the option of rolling over the debt,” he said in an interview from the island’s capital. READ MORE

CNE-led coalition gets $1.9 million from Open Society to spur local progress

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By CB Online Staff
cbnews@caribbeanbusinesspr.com; cbprdigital@gmail.com

A coalition of Puerto Rico nonprofits headed by the Center for a New Economy will get $1.9 million over two years to bring about lasting local change, the Open Society Foundations announced Thursday.

Buffalo and San Diego will also get $1.9 million each under the new Open Places Initiative, which aims to increase the ability of communities to work together to secure greater justice and opportunity for their residents.The foundation anticipates funding the sites for at least three years and, in some sites, as long as ten years.

The Open Society Foundations noted an “urgent need” to strengthen the civic sector on an “island facing very difficult social and economic situations, high unemployment, and very low labor participation rates.” READ MORE

Dándole peso al futuro

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Por Gustavo J. Bobonis

¿Es cierto que nuestra sociedad está dirigida al ocio en lugar del trabajo? ¿Al consumo en lugar del ahorro? Muchos analistas argumentan que esto es cierto, dado los bajos niveles de participación laboral, de ahorro y de inversión en el país. Además, se opina que la falta de voluntad para darle peso al futuro, que tiende a incidir sobre estos patrones económicos, es un rasgo social y/o cultural de alta prevalencia en Puerto Rico muy difícil de cambiar. La respuesta a estas interrogantes es importante: la voluntad para postergar la gratificación al futuro se considera un factor crucial, no sólo para nuestro desarrollo económico sino también para nuestro desenvolvimiento social y político. READ MORE

Puerto Rico Survey of Consumer Finances: Executive Summary

The following is the Executive Summary for CNE’s published Puerto Rico Survey of Consumer Finances (PRSCF) Top-Line Report.

The publication of the Top-Line Report for the Puerto Rico Survey of Consumer Finances (PRSCF) marks an important milestone in CNE’s research history, and signals the arrival of an important and unprecedented data source for scholars, policymakers, and private sector actors interested in Puerto Rico’s future. The PRSCF is the first-ever survey that provides detailed information on the socioeconomic dynamics of household and individuals in the island. As such, it helps fill major information gaps on critical topics that are central to CNE’s mission of advancing Puerto Rico’s socioeconomic development.
 
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Or read the document below:
 

Puerto Rico Survey of Consumer Finances: Top-Line Report

The publication of the Top-Line Report for the Puerto Rico Survey of Consumer Finances (PRSCF) marks an important milestone in CNE’s research history, and signals the arrival of an important and unprecedented data source for scholars, policymakers, and private sector actors interested in Puerto Rico’s future. The PRSCF is the first-ever survey that provides detailed information on the socioeconomic dynamics of household and individuals in the island. As such, it helps fill major information gaps on critical topics that are central to CNE’s mission of advancing Puerto Rico’s socioeconomic development.

 
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Ni público, ni privado: Coproducido

20100512202723_two_chairs

 

Por Deepak Lamba-Nieves

En un país que ha sido una colonia española y norteamericana por más de cinco centurias, y ha servido como puerto de transbordo para un sinfín de propósitos, la hibridez no debe ser una característica foránea, o difícil de entender. La mezcolanza es parte integral de nuestra identidad isleña, y se puede identificar con facilidad en las altas esferas de la oficialidad— ¿habrá algo más híbrido que el Estado Libre Asociado?— en la cotidianidad del spanglish o en los ritmos de la salsa interpretada por rockeros. No obstante, la heterogeneidad que nos atraviesa transversalmente encuentra sus límites cuando se habla de desarrollo y se pasa inventario sobre los activos nacionales para determinar lo que es público y lo que está en manos privadas. READ MORE

Golpea a la economía la fuga de talentos

El_Nuevo_Dia
29 sep. 2013
El Nuevo Día
POR MARIAN DÍAZ
mdiaz1@elnuevodia.com

Puerto Rico podría dejar de recibir $2,000 millones en esta década

El fenómeno de la migración ha sido una constante en la evolución socio económica de Puerto Rico. En varias instancias desde principios del siglo pasado ese movimiento ha sido provocado por el propio gobierno, y en particular entre los años 1947 al 1964, cuando comenzó a implantarse el modelo económico Manos a la Obra, que llevó a más de 600,000 boricuas a partir de la Isla rumbo a los Estados Unidos. Precisamente, en ese periodo la Isla registró el mayor crecimiento económico de su historia.
Sin embargo, el éxodo de puertorriqueños en los últimos años, lejos de ayudar a resolver la difícil situación económica actual, podría complicarla, según algunos economistas y expertos en el tema migratorio. Esto debido a que la mayoría de los que se están yendo son profesionales y personas productivas.

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