Working Paper: NBER ID: w23681
Authors: Zadia M. Feliciano; Andrew Green
Abstract: Puerto Rico, the Commonwealth Island and unincorporated territory of the United States, was placed under a fiscal Oversight Board by the U.S. Congress in 2016. Unable to pay $72 billion it owes to bond holders, Puerto Rico’s Government and the Oversight Board filed for court proceedings under Title III of the Puerto Rico Oversight, Management and Economic Stability Act, similar to Chapter 9 of the US Bankruptcy code. The origins of the crisis in Puerto Rico have been attributed in part to the phase out of the IRS Section 936 tax exemption program for U.S. corporations from 1995 to 2005 and its elimination in January 2006. Using industry panel data, compiled from the IRS Statistics of Income for U.S. Possessions Corporations, the U.S. Economic Census for Outlying Areas, and the mainland U.S. Economic Census, we analyze the effects of the phase out and elimination of Section 936 on the number of establishments, value added, employment, and wages in Puerto Rico’s manufacturing. Our results show the elimination of Section 936 had the effect of decreasing average manufacturing wages by 16.7%, and decreasing the number of manufacturing establishments by 18.7% to 28.0%
Keywords: Puerto Rico; Section 936; Tax Exemption; US Corporations; Manufacturing
JEL Codes: F21; F23; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elimination of Section 936 (H26) | decrease in average manufacturing wages in Puerto Rico (J39) |
| elimination of Section 936 (H26) | reduction of between 187 to 280 manufacturing establishments in Puerto Rico (L69) |