Free enterprise, regardless of status, can solve Puerto Rico’s economic woes

On June 11, the voters of Puerto Rico took to the polls to determine our future path. The nonbinding decision before us: seal Puerto Rico’s relationship with the United States through statehood; maintain the commonwealth status quo; or become an independent nation.

Voters overwhelmingly chose statehood, to the tune of 97 percent. But the results were skewed by a boycott from the major opposition party that defends the current commonwealth status, the Popular Democratic Party, and by the smaller Puerto Rico Independence Party, resulting in a voter turnout of just 23 percent.

As the plebiscite vote was nonbinding, any outcome of substance will have to come by an act of Congress. The governor of Puerto Rico’s intention is to use the outcome as leverage to pressure Congress to act. Whether Congress will do so is unlikely.

Let me clear up one glaring misconception that has been circling since the plebiscite was announced — the statehood movement is not a new reaction to current fiscal woes. It is not a scheme devised as the island fell into financial crisis. It is an initiative many decades in the making tracing its roots to the time when Puerto Ricans first were granted U.S. citizenship in 1917, and one that has galvanized as Puerto Ricans have made sacrifices in every American military conflict since.

Statehood has self-imposed hurdles beyond Congressional inaction. Island residents currently do not pay federal income taxes to the IRS on locally sourced income. Puerto Rico is the only place on the planet where an American citizen can relocate and cease to be beholden to federal income tax. Unfortunately, income taxes levied by the local treasury are comparable to the rates in place federally.

With top local rates on personal income at 33 percent and corporate income rates at 39 percent, it’s unimaginable to double this burden by implementing an onerous federal tax layer on top of it. For statehood to be a realistic possibility, and for the island to restore a competitive economic environment, drastic tax cuts are necessary.

Puerto Rico is ranked 135 out of 190 economies by the World Bank for tax structure competitiveness. Adding federal taxes to this already mired system would further destroy jobs and hurt lives.

According to the nonpartisan Tax Foundation, only two U.S. states, California and Maine, have a personal income tax rate higher than 9.9 percent, and seven states have no personal income tax at all. Similarly, only one state has a corporate income tax that creeps into double-digits, with Iowa posting a whopping 12 percent burden. Five states — Nevada, South Dakota, Texas, Washington and Wyoming — levy neither personal nor corporate income tax. Puerto Rico would be wise to join these states.

The status debate has its importance for a number of social reasons, but what must be made clear is that the problems plaguing Puerto Rico’s economy will not be solved through a change of status. They will be solved only by a change of mindset and a full embrace of free market reforms.

As long as our economy is guided by a framework of centrally planned cronyism with undertones of socialism, we will not flourish. Examples of stunning success exist globally from across the status spectrum — from Texas as a state, Cayman Islands or Hong Kong as colonies, and Switzerland as a sovereign nation. What makes the difference is embracing free enterprise as the path to reaching full potential.

When we decide to claim economic freedom as our birthright, and lead the rest of the nation by insisting that they too live up to the American promise of liberty, then Puerto Rico’s political status will resolve itself.

Joseph lives in San Juan where he is the executive vice president of Fundación Libertad Puerto Rico and a Think Freely Latino contributing writer.

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