The ideological divide in most of the industrialized world breaks down roughly between conservative classical economics and liberal Keynesian macroeconomics. However, in Puerto Rico, a political abstraction called “colonialism” interferes with admitting to and rectifying profound but strictly local policy blunders.
Almost daily I seem to encounter another "colonialism" grand narrative to explain Puerto Rico’s $72.2 billion debt crisis. These “colonialism” arguments – with protean dynamics to suit the user – help to obscure disastrous local policy errors for which the U.S. territory, my home island, is solely responsible.
These errors include exempting 90 percent of the island's $104 billion GDP from taxation and imposing absurdly low tax rates on owners of high-value real property. Neither total sovereignty nor voting representation as a U.S. state would absolve us from other critical policy errors involving gross underspending (yes, underspending) in public services and the maintenance of the island’s notoriously stifling bureaucracy and punitive labor laws.
Regrettably, the "colonialism" arguments play well to the vast majority of my Puerto Rican family who view reality through the kaleidoscopic prism of the island's status-based politics. These status politics often trump any principled economic reasoning or objective data to explain or present solutions to the crisis.
The rare evidenced-based attempts at supporting the status arguments are of two main varieties: For the sovereignty seekers -- those wanting independence or more autonomy from the U.S. -- these are 1) The Jones Act (also known as the Merchant Marine Act of 1920) that requires U.S.-owned and operated vessels to carry goods between Puerto Rico and the U.S. mainland, 2) lack of monetary autonomy, and 3) lack of commercial treaty authority. For statehood seekers: 4) more public welfare benefits.
These arguments are dubious at best. Let’s take them in order:
The Jones Act: Hawaii is also burdened by the Jones Act, but it has one of the strongest economies in the U.S. On the other hand, the U.S. Virgin Islands are exempt from the Jones Act, but unemployment is as high as Puerto Rico's and consumer prices are even higher. As Puerto Rico’s sovereign next door neighbor, the Dominican Republic is not subject to the Jones Act, but its gasoline prices are almost double Puerto Rico's.
Monetary autonomy: The ability of Puerto Rico to print its own currency would not help because the island’s debt is payable in dollars. Also our long history of fiscal mismanagement bodes disaster for the stability and credibility of any future Puerto Rican currency.
Commercial treaty authority: The meager home-grown exports of this small island economy would deprive it of any meaningful leverage to negotiate favorable commercial treaties. As a U.S. territory with the right to unfettered trade of goods, services and people with the U.S. mainland, Puerto Rico already has one of the most coveted free-trade arrangements in the world that no other countries get.
More federal public assistance: While recognizing the principle of equal rights for U.S. citizens, any disparity in public benefits can be fixed without actually making Puerto Rico a state. The Territorial Clause of the U.S. Constitution gives Congress wide berth. Even a proposal to extend the federal Earned Income Tax Credit would not require changing Puerto Rico’s territorial status.
Real or imagined “colonialism” presents no obstacle to the island’s adequately taxing the top half of the economy. Instead of a mere $9.8 billion projected for fiscal year 2016, Puerto Rico’s central government tax revenues should be no less than $20 billion, still substantially below the 34 percent of GDP average of tax receipts for rich, developed jurisdictions.
While fostering a more progressive tax system and combating tax evasion, this additional revenue should come from three main sources: multinationals, high-value real property and automobiles. A gross receipts tax should replace the income tax since Puerto Rico has shown that it lacks the resources to effectively administer a tax system based on net income. Tax exemptions and preferences should be prospectively repealed.
The island vitally needs the extra revenue to fund major improvements of its energy and water resources, transportation, schools, public safety and hygiene as well as pay any debts that are lawfully owed. And with just strokes of a pen, the local government can eliminate our stifling bureaucracy and repeal our punitive labor laws that intimidate even the boldest of entrepreneurs. All these changes are within the power of Puerto Rico’s government, and “colonialism” is a convenient pretext for not making them.
Martin is managing attorney of D.R. Martin, LLC. He is also the author of “Puerto Rico: The Economic Rescue Manual.”
By David R. Martin
Puerto Rico’s “colonialism” pretext
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