Brad Setser has a really interesting post on Puerto Rico’s balance of payments – unlike states, the territory keeps track of exports and imports both to the U.S. mainland and the rest of the world. As it happens, his analysis bears pretty much directly on Howard Gleckman’s critique of Kevin Hassett’s disgraceful performance at the Tax Policy Center.
As Setser notes, Puerto Rico used to be a major tax haven for manufacturing corporations. Much of this tax advantage has now ended, but its legacy is still visible in trade statistics. Specifically, PR runs, on paper, a huge trade surplus in pharmaceuticals – $30 billion a year, almost half the island’s GNP. Yes, “N” not “D” – very important in this case, as in Ireland.
But the pharma surplus is basically a phantom, driven by transfer pricing: pharma subsidiaries in Ireland charge themselves low prices on inputs they buy from their overseas subsidiaries, package them, then charge themselves high prices on the medicine they sell to, yes, their overseas subsidiaries. The result is that measured profits pop up in Puerto Rico – profits that are then paid out in investment income to non-PR residents. So this trade surplus does nothing for PR jobs or income.
What does this have to do with Hassett? Well, he told TPC – while insulting the institution and impugning its integrity – that transfer pricing driven by high nominal US corporate taxes is responsible for half the U.S. trade deficit, and that cutting these taxes would therefore be a big job creator. Never mind whether his estimate is right: even if it were, as Gleckman says, changing the transfer pricing would affect the accounting, but nothing real. It would be exactly like Puerto Rico’s pharma surplus: a phantom improvement, statistically impressive to the uninformed but signifying nothing.