From the Commonplace to the Common Ground on Developing Incentives

1. From the Commonplaceto the Common Ground on Developing Incentives Juan Lara University of Puerto Rico Advantage Business Consulting

2. Contents • An easy consensus • An uneasy debate • What is the Best Law? • Some desiderata • Some guiding principles • A closing thought

3. An easy consensus • Is manufacturing important? • Do we need tax incentives? • Do our competitors use tax incentives? • Should we provide incentives for learning and innovation? YES! YES! YES! YES!

4. An uneasy debate • Should we raise preferential corporate tax rates? • Should we level the playing field (tax-wise) for all corporations? • Should we migrate to a mainly non-tax incentives regime? • Should we start NOW?

5. What is the BEST Incentives Law? • The one with the lowest corporate tax rates in the World? • The one that covers everything? • The least controversial? • The one that no one can copy? • The one that strikes an optimal tradeoff between tax and other incentives?

6. Some desiderata • A diversified economy • In products, markets, players • A dynamic economy • Focus on business enviroment • Inputs costs, transactions costs, tax costs • 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…

7. Some guiding principles ...a small country should aim for taxes that are close to—neither higher nor lower than—the tax rates of the countries from which capital imports can be expected. …it is important to consider—and quantify—the benefits and costs of incentives Alm

8. Some guiding principles …in a highly competitive global economy, Puerto Rico needs to be made an attractive base for international business. That calls for a simple and highly transparent system of business taxation with low rates. Puerto Rico cannot continue to rely on tax advantages as the primary attraction for multinational firms. Bosworth and Collins

9. Some guiding principles The government has found it difficult to break with the decades-old practice of relying on local and U.S. tax exemptions to attract investment by U.S. manufacturing multinationals… …the hope of reviving some version of section 936 dies hard. As we see it, the central challenge for Puerto Rico is devising government policies that can focus on supplementing rather than substituting for market forces. Lawrence and Lara

10. A final thought To paraphrase my friend and colleague Francisco Catalá, author of IN PRAISE OF IMPERFECTION…

11. A final thought We don’t need perfection… We can do better than that.