Puerto Rico Doomed Without Tax Reform

Puerto Rico Local Economy Underperforms Statehood Model In Good Times and Bad

There are tangible signs of a private sector led economic upsurge across our nation. Time will tell how sustainable recent impressive growth trends prove to be, but for now it appears tax cuts mostly benefiting corporations but also some middle class earners helped jump started a stalled economy. If Puerto Rico were a state it would have a piece of the action at a time when the island needs growth more than ever before.

Puerto Rico has a larger economy and pays some federal payroll taxes (Social Security/Medicare) at higher levels than some small states. Yet, if current trends continue Puerto Rico will not participate fully or proportionally with any of the states in an improved national economy.

This is not because federal spending in Puerto Rico must be diverted to hurricane recovery. It is because the failed “commonwealth” regime of territorial home rule does not enable Puerto Rico to participate in the U.S. national economy on an equal footing, or under uniform federal and local tax laws, compared to the states of the union.

That also is why Puerto Rico did not participate equally or benefit fully during the upsurge in U.S. national prosperity triggered by tax cuts and reforms in the 1980s. In the midst of ensuing prosperity in the 1990s, Puerto Rico had to settle for corporate tax shelters that fell far short of equal footing and uniform fiscal policy like the states.

Instead of stimulating a sustainable, diversified local economy with state-like levels of employment, dependency on those federally tax subsidized corporations failed to mitigate economic failure of the “commonwealth” territory status. Huge mainland corporations were evading tens of billions in federal taxes annually, with disproportionately limited job creation.

Meanwhile, unemployment in all of Puerto Rico’s non-subsidized enterprise sectors soared far higher than the national jobless rate. In 1993 the Clinton administration identified the Puerto Rico tax shelters as bad tax policy that should be ended, and in 1996 Congress agreed to phase out that failed “corporate welfare” scheme by 2006.

While previously tax sheltered companies were adjusting to loss of subsidies and the local economy was stabilizing, Congress and the Pentagon retaliated for local protests shutting down one live fire air, sea and land training range by effectively pulling out and shutting down all major U.S. military historically based in Puerto Rico.

That pulled the plug overnight on 6,000 skilled, well-paid jobs with federal benefits and $300 million in annual U.S military spending in Puerto Rico. Combined with the loss of federal subsidies the military base closings reduced local government revenues at the same time leaders of the commonwealth” regime for local government were promising a “best of both worlds” quality of life and “state-like” standard of living to 3.5 million U.S. citizens in the territory growing restless with political and economic limbo.

That is when the local government started keeping promises beyond its means by borrowing from Wall Street banks more than it could afford to repay. By granting the territorial regime “autonomy without accountability” the U.S. Congress had created a rogue regime. Without federal oversight all other territories have, it was only a matter of time before the “commonwealth” regime imploded into bankruptcy.

Will National Tax Reforms Again Leave Puerto Rico Behind?

Half the country opposed the new federal tax reform law. That half sees it taking from the poor to enrich the wealthiest Americans.

Politics aside, the states currently have the lowest unemployment statistics in 40 years. Dozens of large corporations have paid dividends to stockholders and raised wages for workers without being forced by government. Subsidiaries of U.S. corporations organized as foreign to shelter profits are repatriating hundreds of billions to take advantage of new corporate tax rates lower than other developed nations.

Is it irrational, temporary, “froth,” a bubble? We are told by master economists not to invest or spend based on emotions, but the same wizards of Wall Street tell us the single greatest market force is investor and consumer confidence.

What is confidence if not an emotion? It is hope, trust, optimism, need, desire, ambition and even greed, all highly volatile emotions combined to make economic nothing if not emotion driven.

It’s not easy to quantify tangible cause and effect as  government takes less money out of the private sector. Yet, an emotionally driven economic nationwide upturn expresses – at least for now – new confidence.

Intangibles like feelings and mood are powerful market forces with effects that government can encourage but never manage. Only the producers and consumers in the marketplace have the motivation and information to manage wealth production in the private economy.

If nothing else, optimism alone has improved cash flow in the national economy. With less money being taken out of the markets, private sector expansion and growth promises to do greater good for a greater number of people than over-regulation and higher taxes for new experimental government spending.

Once again we are reminded there is no such thing as government money. The government does not produce wealth, it consumes wealth produced by the private sector enterprise of the people in large and small businesses. The government cannot print currency or spend money that is not ultimately tied to private wealth production.

The lesson we seem to learn over and over again is that government does not have enough money to spend the nation into prosperity. The money that sustains the greatest good for the greatest number of people comes from the people not the government.

Money government gets from taxing the private enterprise of the people, if used sparingly and wisely, can give the people tools for success, including rule of law to create a level playing field and infrastructure to serve the public in support of private enterprise. Government economic measures are always imperfect and not always fair, but must be predictable, stable and uniform enough to enable private business to thrive.

No government can sustain a policy and practice of making promises it can’t keep without borrowing more than it can pay back. That means government must live within its means or risk insolvency. Borrowing to give voter more government services and benefits that cost more than tax revenues can pay for eventually leads to bankruptcy.

Because the federal government and states must operate within the equalizing disciplines of the U.S. Constitution, the nation either sinks or swims together. Each state must be treated on an equal footing.

Through the genius of the representational scheme for government by consent in Congress and the Electoral College, all regions and small as well as large states are interdependent and cast their lot with the nation in good times and bad.

Puerto Rico has been left out of U.S. national economic life for a full century since U.S. citizenship was conferred by Congress. As federal economic and tax policy has moved to the left and then to the right, returning over the center, Puerto Rico was cast adrift and allowed to experiment with government command economics not allowed in states.

Instead of equal footing and uniform taxation with the states equally represented Congress, as well as limits of federal power over state budgets, Puerto Rico has been treated as a federal reservation for social experiments not allowed in states. Tax gimmicks and government ownership of enterprises left to the private sector in states were common for decades.

Now as the voters express an aspiration to complete the transition to statehood and full partnership in U.S. federalism on an equal footing, dependence on federal subsidization has increased beyond any prior boundaries due to the irreducible minimum of federal disaster assistance now required.

Post-hurricane Can’t Afford More “Commonwealth” Socialism Lite

Those who forgot the lessons of the collapse of communism need to be reminded that private sector led development out performs government managed command economics. For a U.S. territory the Cuba model of socialism truly is what Nobel Prize winning economist F.A. Hayeck defined as the road to modern feudalism and serfdom.

States have sovereign rights to separate social and economic policies not governed under federal law. At the federal and local level there is constant process of accountability and course correction responds to upward and downward economic trends.

In contrast, as a territory ready but not yet confirmed to be a state, the federal and local government in Puerto Rico were not limited by the U.S. Constitution. The socialistic policies of the “commonwealth” regime were underperforming economically, and development stalled. Gimmicks to prop up the “commonwealth” regime failed.

In return for artificial federal stimulus of the local government managed economy, the “commonwealth” regime promised to provide Washington with a long term alternative to statehood or independence for Puerto Rico. That worked for 65 years, until bankruptcy, Maria and two majority votes for statehood made “commonwealth” unsustainable economically as well as democratically.

Federal Subsidization of “Commonwealth” Made Puerto Rico A Colonial Plantation

As a U.S. territory with a so-called “autonomous” regime of local government propped up by federal tax shelters and other forms of subsidization by Washington, Puerto Rico had achieved a standard of living higher than other Caribbean island societies, but below the states of the union.

The mantra of the “autonomist” political cult in Puerto Rico was that “commonwealth” was the best of both worlds because the people were better off than poorer island nations, but had the benefits of being subsidized by the U.S. at a “state-like” standard of living.

In contrast, the pro-statehood faction gained political equivalency and gradually eclipsed the autonomist status quo party by arguing that equal rights and duties of U. citizenship under statehood would secure a permanent stable and sustainable higher standard of living the same as rather than like the states of the union.

The counter narrative of the autonomists was that the U.S. was a racist nation that would never grant statehood, and even if it did the U.S. would never end race-based discrimination against Puerto Ricans. Statehood supporters simply reminded voters that accepting inequality and discrimination in exchange for life on the planation that was better than the less fortunate was volunteer servitude.

The statehood party won popular support by advocating equal rights of U.S. citizenship under the U.S. Constitution available only to citizens of a state was the only way to end discrimination and developmental arrest.

Time For Transition From Partial To Full Uniform Federal Taxation Is Now

The response of the “Commonwealth” regime to the loss of federal subsidization in the form of tax shelters propping up the status quo was to blame already chronic underperformance on the phase out of tax shelters that had been abused by corporations and the local government. When leaders of the “commonwealth” party were in power they defied termination the tax shelters by debt financing government expansion.

Because the “commonwealth” regime is a creature of federal territorial law instituted by Congress, the local government was able to abuse its autonomy from Washington by exploiting its favorable credit rating as a U.S. government entity. That led to bankruptcy before the hurricanes and ends any political or economic pretext for delaying full rather than partial transition to uniform federal taxation for Puerto Rico.

Now that statehood enjoys majority popular support, uniform taxation is historically inevitable. Indeed as a matter of statutory federal territorial policy, the Northwest Ordinance mandated that citizens in the territories organized under its provisions pay federal taxes to defray the cost of government as citizens in the states are required to do.

It appears this was not the result of application of the equal protection or more narrow uniformity clause of the U.S. Constitution as it relates to taxation, but rather the taxation and federal revenue requirement was included in the articles of incorporation set forth in the Northwest Ordinance to promote the policy of developing each territory in readiness for admission as states.

Because of the plenary power to make rules for each territory given to Congress in the Territorial Clause, in both incorporated and unincorporated territories the Congress is not subject in an unduly rigid way to the same equal protection and revenue uniformity clause limitations that apply in a state. Even in new states there is a history of tolerance for transitional special treatment and accommodation to achieve the goal of increased integration into nation’s economy with all states on an equal footing.

The U.S. Supreme Court upheld numerous federal laws treating taxpayers and citizens in Hawaii and Alaska differently than the federal law and policy in the states or other incorporated territories. See, pp. 279-283, https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=3478&context=californialawreview. Puerto Rico already pays some but not all federal taxes and that policy presumably could continue under incorporated territory status leading to statehood.

Puerto Rico is already more integrated into uniform fiscal and tax policy than most territories that became states. As a result, the distinction between “incorporated” and “unincorporated” has lost its political meaning and legal purpose in the case of Puerto Rico.

Discriminatory, i.e. non-uniform, treatment of unincorporated territories was perhaps justified by the need to regulate and make rules until Congress decides on incorporation. Non-uniform discriminatory treatment of an incorporated territory is justified to regulate and make rules until Congress decides on terms for admission. Even terms for admission can include non-uniform discriminatory treatment during the transition from territory to state until integration based on uniformity can be achieved.

An unincorporated territory can be admitted without incorporation. Both territorial categories are treated as determined by Congress. Puerto Rico is an unincorporated territory more integrated than many incorporated territories at time of admission. If Texas can be admitted without incorporation so can Puerto Rico.

As noted, some federal taxes already have been phased in, and residents of Puerto Rico pay billions in federal taxes. Phase in process needs to continue and accelerate. Alaska and Hawaii residents paid taxes on income from state and overseas, so do residents of PR. PR pays payroll taxes for SS/Medicare. So cutting back local taxes to small state levels and phase in federal taxes on local income is next phase. Local government downsizing is already underway, making reconciliation between federal and local taxation necessary.

Only The Private Sector Has Money Needed For Puerto Rico Recovery

When Puerto Rico is taxed uniformly with the states, private capita will begin to flow at levels needed to bring Puerto Rico forward to a state-like level of development. When Congress finally declares that statehood will be the future status of the territory, private capital in-flows will be more important to the people and to private enterprises than government programs and services.

The federal and local governments do not have enough money to bring Puerto Rico back to the level of development it had achieved before the bankruptcy and hurricanes. Only a declaration of future statehood and uniform taxation will attract the capital investment needed to make the quality of life and standard of living in Puerto Rico better than it was before the bankruptcy and hurricanes.

Every day that federal and local officials delay the declaration of future statehood the risk increases of Puerto Rico slipping into chronic if not irreversible social and economic conditions worse than the period before the bankruptcy and hurricanes.

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