Gyroscopic Investing

As it happened, section 936 became increasingly unpopular throughout the early 1990s, as many saw it as a way for large corporations to avoid taxes. Ultimately, in 1996, President Clinton signed legislation that phased out section 936 over a ten year period, leaving it to be fully repealed at the beginning of 2006. Without section 936, Puerto Rican subsidiaries of U.S. businesses were subject to the same worldwide corporate income tax as other foreign subsidiary.

Not coincidentally, 2006 also marked the beginning of a deep recession for Puerto Rico, which has lasted until today. Puerto Rico’s high corporate taxes on domestic corporations along with low taxes on U.S. subsidiaries had skewed the Puerto Rican economy toward foreign investment from the U.S. When section 936 was repealed in 2006, foreign investment began to flee. Without a strong domestic corporate presence to fill the void, the economy began to contract, along with tax revenues.

Since then, Puerto Rico’s economy has shrunk nearly every year, with unemployment at 12% and fewer than half of civilians in the labor force. Economists from the Federal Reserve and the private financial sector have pointed to the repeal of section 936 as a major cause of Puerto Rico’s current recession.

http://taxfoundation.org/blog/tax-polic ... cal-crisis