Puerto Rico Suave

Last week's Economist highlighted struggling Puerto Rico and the problems that came with tax incentives. True, Puerto Rico is not a state, but it's close enough.

Through tax laws, the federal government has . . . favoured some business investments in Puerto Rico over others. Most notorious is "Section 936," a rule that skewed investment towards technologies that were too advanced for Puerto Rico's stage of development. Drug firms and chemical producers built factories that used lots of capital and few workers, because doing so lowered their tax bills . . .

High technology sounds wonderful. But what Puerto Rico has needed over the past few decades is more medium-tech plants. These would employ more people, teach them skills better suited to the island's level of development, and tighten links to local suppliers and business services . . .

In short, by lowering demand for less educated workers, lopsided investment has exacerbated the welfare-driven distortions in the island's labour supply.

As the last sentence alludes to, the title of the article is "Trouble on Welfare Island." It goes on to note that the Section 936 rules have been phased out over the past decade.

Most of my thoughts up to this point have focused on the lack of fairness of tax incentives. The above excerpt illustrates that these incentives are not only unfair but can be harmful in the long run.