INDUSTRIAL TAX EXEMPTION IN PUERTO RICO*

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DURING THE PAST TEN YEARS the Commonwealth of Puerto Rico has lifted itself above the horizon of almost universal poverty. This economic metamorphosis is principally attributable to an embryonic industrial revolution in the form of an influx of mainland United States manufacturing firms. To the degree that industrialization is the corporeal substance of Puerto Rico's recovery, industrial tax exemption is viewed on the island as its principal spiritual progenitor. That so much credit is given to industrial tax exemption will come as a surprise to those who are familiar with the history of this fiscal device on the mainland United States, where it is viewed as ineffective, perverse, inequitable, and even unethical. How industrial tax exemption can be so universally maligned in public finance literature, and yet gain congenial and widespread support in Puerto Rico has served as the raison d'etre for a comprehensive inquiry into the industrial tax exemption program on the island. This new assessment appears to have timely social significance, moreover, because of the paramount interest within recent years in raising the level of living of underdeveloped areas. Industrialization is an integral part of many developmental programs, and this raises the issue of the desirability of using subsidies in order to attract capital from the more advanced countries. This study indicates that tax exemption in Puerto Rico has served as an effective inducement in attracting mainland capital. But the aggregate cost of the tax subsidy, on the other hand, has been inordinately high. The principal cost-incurring disadvantages of tax exemption are: (1) The direct revenue loss is sizable, but is largely concealed and indeterminate. (2) Tax exemption lacks selectivity to a marked degree. (3) The administration of tax exemption is difficult and burdensome. (4) Tax exemption tends to become permanent and to proliferate to other taxable areas of the economy as well as to other political areas. (5) Tax exemption frustrates the achievement of a fair distribution of the tax load. What emerges as a policy conclusion for Puerto Rico is that the shortcomings of the tax subsidy