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Executive Summary

The Treasury Dept.'s figure for 1980 employment in Puerto Rico due to Sec. 936 corporations could underestimate the number of jobs attributable to possessions firms by as many as 153,000, according to a report prepared by Institute for Research on the Economics of Taxation President Norman Ture, PhD. "Aggregate" employment attributable to Sec. 936 companies ranged from nearly 163,000 to about 225,000, the report concludes. "If one assumes that as few as 5% of the 621,363 persons employed in jobs not directly or indirectly associated with possessions corporations . . . were engaged in jobs created in response to these demands, the aggregate employment attributable to Sec. 936 in 1980 was 162,705," Ture says. If the figure is as high as 15%, the number of jobs totaled 224,841. Basing its estimate solely on corporate payrolls, Treasury calculated Sec. 936 related employment at 72,000 in 1980. Ture also estimated that employment due to firms doing business with possessions corporations was 59,221 in 1980. Based on that figure, the report said, "total direct and indirect employment in 1980 involved in Sec. 936 companies' activities was 131,637." Ture's report, and a study prepared for the Puerto Rico-U.S.A. Foundation by another consulting firm, Robert R. Nathan Associates, were released the week of May 13. The Nathan Associates' report discussed the growth in non-labor intensive industries that has taken place under Sec. 936 ("The Pink Sheet" May 20, p. 4). The tax institute's paper was funded by PMA. Ture, who founded the Institute for Research on the Economics of Taxation in 1977, served as Undersecty. of Treasury (tax & economic affairs) from March 1981-June 1982. With the Administration's tax reform plan headed for Congress the week of May 28, both reports will help fuel industry lobbying efforts on Capitol Hill to preserve the current Sec. 936 tax provisions. Ture criticizes the Treasury job figures, contending they measure employment effects "merely by reference to the number of persons on possessions corporations' payrolls." To support his numbers, he argues that, "at the very least, the estimate of employment gains should include the increase in jobs in those industries supplying goods and services to possessions corporations." In addition, Ture contends that Treasury measures tax revenue effects "on the assumption that, with minor adjustments, the amount of federal tax liability for which Sec. 936 tax credits are provided would be the same as if Sec. 936 (and its predecessor provision, Sec. 931) had never existed." He asserts that "the result is a gross underestimate of employment gains attributable to the response to Sec. 936 and a gross overestimate of the revenue cost to the federal govt." With respect to the effects of Sec. 936 on federal tax revenue, Ture maintains that "a correct measure of the revenue cost of the possessions corporations provisions requires estimation of the amount of capital and other production inputs which would have been allocated to the production of income taxable by the federal govt. instead of to the tax-exempt activities of possessions corporations in Puerto Rico, had the operation of these tax provisions not been triggered by Operation Bootstrap." Ture continued: "If it were, improperly, assumed that in the absence of the possessions corporations tax provisions all of the investment in possessions corporations would have been committed to capital used on the U.S. mainland, the revenue cost of these provisions would be correctly estimated as the amount of taxes that would have been paid on the income that would have been produced by that capital in its mainland uses. In fact, the investment in possessions corporations in Puerto Rico did not involve an equal reduction of investment in taxable mainland companies. On the contrary, by far the largest amount of the investment in possessions corporations must have represented net increases in total investment, rather than displacement of U.S. mainland capital formation." Ture Estimates Tax Loss Per Employee Is $5,484 to $7,578; Treasury Figure Is $17,026 Per Job According to Ture's estimates of revenue loss to the Treasury attributable to Sec. 936, foregone taxes per job range from $5,484 if aggregate employment is 224,841 to $7,578, if aggregate employment is 162,705. The report declares "these estimates are a far cry from that of the Treasury which shows $17,026 in lost revenue for each of the persons on Sec. 936 corporations' payrolls in 1980." "If as little as one-third of the investment in possessions corporations irl Puerto Rico represents net additional investment, then the Treasury's revenue loss estimate for 1980 becomes $822 mil.," rather than Treasury's estimate of $1.2 bil., the report continues. Ture says that "on this basis, the cost of Sec. 936 per additional job varies from a low of $3,656 to a high of $5,052." Considering the question as to how much revenue would be gained from repeal of Sec. 936, Ture says "the Treasury estimate far exceeds any realistic assessment of the gain in revenue which would actually be realized. These estimates assume that despite the loss of the Sec. 936 tax credit and the full exposure of the results of their operations to federal income tax, possessions corporations would continue those operations unchanged." Indeed, Ture comments, Treasury's fourth report implies that "possessions corporations would expand their operations, not merely maintain them, if Sec. 936 were repealed.

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