The income of Puerto Rican affiliates of U.S. corporations is essentially untaxed by either Puerto Rico or the U.S. This lowers the tax penalty on real investment there, and also makes it attractive to shift reported taxable income from the U.S. parent corporation to the Puerto Rican affiliate....

The income of Puerto Rican affiliates of U.S. corporations is essentially untaxed by either Puerto Rico or the U.S. This lowers the tax penalty on real investment there, and also makes it attractive to shift reported taxable income from the U.S. parent corporation to the Puerto Rican affiliate....

It is argued that taxation causes three kinds of deadweight losses and two types of direct costs. The deadweight losses arise from substitution, evasion, and avoidance activities while the direct costs are administrative and compliance costs. Some of these social costs tend to be discontinuous...