From the From the CommonplaceCommonplaceto the Common Ground to the Common Ground on Developing on Developing IncentivesIncentives

Juan LaraJuan Lara

University of Puerto RicoUniversity of Puerto Rico

Advantage Business Advantage Business ConsultingConsulting

ContentsContents

An easy consensusAn easy consensus An uneasy debateAn uneasy debate What is the Best Law?What is the Best Law? Some desiderataSome desiderata Some guiding principlesSome guiding principles A closing thoughtA closing thought

An easy consensusAn easy consensus

Is manufacturing Is manufacturing important?important?

Do we need tax incentives?Do we need tax incentives? Do our competitors use tax Do our competitors use tax

incentives?incentives? Should we provide Should we provide

incentives for learning and incentives for learning and innovation?innovation?

YES!

YES!

YES!

YES!

An uneasy debateAn uneasy debate

Should we raise preferential Should we raise preferential corporate tax rates?corporate tax rates?

Should we level the playing field Should we level the playing field (tax-wise) for all corporations?(tax-wise) for all corporations?

Should we migrate to a mainly Should we migrate to a mainly non-tax incentives regime?non-tax incentives regime?

Should we start NOW?Should we start NOW?

What is the BEST What is the BEST Incentives Law?Incentives Law? The one with the lowest corporate The one with the lowest corporate

tax rates in the World?tax rates in the World? The one that covers everything?The one that covers everything? The least controversial?The least controversial? The one that no one can copy?The one that no one can copy? The one that strikes an optimal The one that strikes an optimal

tradeoff between tax and other tradeoff between tax and other incentives?incentives?

Some desiderataSome desiderata

A diversified economyA diversified economy– In products, markets, playersIn products, markets, players

A dynamic economyA dynamic economy Focus on business enviromentFocus on business enviroment

– Inputs costs, transactions costs, tax Inputs costs, transactions costs, tax costscosts

Jobs, jobs, jobs…!!!!Jobs, jobs, jobs…!!!!Instead, Puerto Rico must diversify and strengthen its economy by developing its own dynamic private businesses and the jobs that they will bring.

Bosworth/Collins, Restoring Growth…

Some guiding Some guiding principlesprinciples...a small country should aim for taxes that ...a small country should aim for taxes that are close to—neither higher nor lower thanare close to—neither higher nor lower than—the tax rates of the countries from which —the tax rates of the countries from which capital imports can be expected.capital imports can be expected.

……it is important to consider—and quantifyit is important to consider—and quantify—the benefits and costs of incentives—the benefits and costs of incentives

AlmAlm

Some guiding Some guiding principlesprinciples……in a highly competitive global economy, in a highly competitive global economy, Puerto Rico needs to be made an attractive Puerto Rico needs to be made an attractive base for international business. That calls for a base for international business. That calls for a simple and highly transparent system of simple and highly transparent system of business taxation with low rates.business taxation with low rates.

Puerto Rico cannot continue to rely on tax Puerto Rico cannot continue to rely on tax advantages as the primary attraction for advantages as the primary attraction for multinational firms.multinational firms.

Bosworth and CollinsBosworth and Collins

Some guiding Some guiding principlesprinciplesThe government has found it difficult to break The government has found it difficult to break with the decades-old practice of relying on local with the decades-old practice of relying on local and U.S. tax exemptions to attract investment by and U.S. tax exemptions to attract investment by U.S. manufacturing multinationals…U.S. manufacturing multinationals…

……the hope of reviving some version of section the hope of reviving some version of section 936 dies hard. As we see it, the central challenge 936 dies hard. As we see it, the central challenge for Puerto Rico is devising government policies for Puerto Rico is devising government policies that can focus on supplementing rather than that can focus on supplementing rather than substituting for market forces.substituting for market forces.

Lawrence and LaraLawrence and Lara

A final thoughtA final thought

To paraphrase my friend and To paraphrase my friend and colleague Francisco Catalcolleague Francisco Catalá, á,

author ofauthor of

IN PRAISE OF IMPERFECTION…IN PRAISE OF IMPERFECTION…

A final thoughtA final thought

We donWe don’t need ’t need perfection…perfection…

We can do better than We can do better than that.that.