04 May, 2017

whadupbuttercup comments on NYTimes: Puerto Rico Declares a Form of Bankruptcy

whadupbuttercup comments on NYTimes: Puerto Rico Declares a Form of Bankruptcy:

in 1976, in accordance with the prevailing economic beliefs at the time, Congress passed legislation that added section 936 to the U.S. Code
This section created the incentive for people to invest in Puerto Rico by making the returns to all investments in Puerto Rico tax free. The end goal was to spur Puerto Rican development though the inflow of capital and eventually do away with the section.
This worked rather well. Puerto Rico became a major manufacturer of electronics and pharmaceuticals as well as a number of other things and the island prospered.
The problem was that this basically made Puerto Rico an insane tax haven for the wealthy.
In 1996, Bill Clinton signed into law a provision that put a 10-year sunset period on section 936 so that in 2006 returns on investments in Puerto Rico would no longer be tax free.
as a consequence, after 2006 the capital flow to Puerto Rico started to dry up, a phenomenon exacerbated by the financial crisis which dried up liquidity throughout the system. The loss of that money is tied to a substantial decrease in taxable income and in order to maintain a level of service that over a generation of people had grown accustomed to, Puerto Rico started borrowing money - and was able to do so at favorable rates because of it's unique status and the implication that if it ever got into trouble it might be bailed out by the Federal Government.
The problem is that the initial idea, to develop Puerto Rico to quickly become a modern economy and then remove the "training wheels" of economic development was initially flawed.

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