Chart 2: Puerto Rico GDP – constant 2010 US$.
Source: World Bank Unemployment Rate: U.S. Bureau of Labor Statistics
The Revenue Act of 1921 provided a tax exemption to all U.S. corporations receiving income from U.S. possessions or territories; however, at the time, Puerto Rico’s local income taxes essentially nullified the federal tax incentives. Puerto Rico started to make inroads as an industrialized territory during World War II. After seeing the benefits of moving to an industrialized society, Puerto Rico’s legislature passed the Industrial Incentives Act of 1948, also known as “Operation Bootstrap,” which exempted U.S. corporations from most Puerto Rican taxes, thus enabling U.S. corporations to take advantage of the Revenue Act of 1921. The U.S. supported this effort, viewing Puerto Rico as a vital capitalist outpost in the Caribbean.7
As demonstrated in Chart 2, the economy of Puerto Rico, as well as the SPREDD region, has expanded and contracted to a significant extent based on similar expansions and erosions of incentives. Key components of plans for economic growth and resiliency, as well as this CEDS focus on growing industries able to flourish in the region absent of incentives. For example, during the 30 years when Section 936 was in place in some capacity, the unemployment rate was never lower than 10%. Decreases in the unemployment rate during 2018 and 2019 are attributed to decreases in the labor force, as opposed to new job creation.
8Reuters, December 20, 2016: How dependence on corporate tax breaks corroded Puerto Rico’s economy