Since I spend considerable time defending tax competition, fiscal sovereignty, and financial privacy, people sometimes think I can give competent advice on how best to protect one’s income from the IRS.
Hardly. Like most people in Washington, I’m all theory and no practice.
Besides, when people ask me about the ideal tax haven for an American citizen, I generally don’t have good news.
I explain that they are already living in a very successful tax haven, but then given them the bad news that only nonresident foreigners can take advantage of America’s tax haven policies. Though we should still be happy about being a haven since the favorable tax rules for foreigners have attracted lots of investment.
With the erosion of financial privacy, the IRS has considerable ability to track your money around the world, so moving your money to an overseas tax haven may not work. Even Switzerland, for example, has been bullied into weakening its human rights laws so that they no longer protect the privacy of nonresident investors.
Physically moving (your body and your money) to a foreign fiscal paradise such as Bermuda, Monaco, or the Cayman Islands doesn’t provide much value since the United States has the world’s most aggressive and punitive worldwide tax system. You’re basically treated by the IRS like you’re living stateside.
You can join thousands of other people and give up your American passport. But even that step has big downsides since the IRS imposes very nasty exit taxes, notwithstanding the fact that the United States is a signatory to international agreements that supposedly protect the right to emigrate without undue hassle.
But there is still one legal and effective way of dramatically reducing your federal tax burden.
Here are some details from a Bloomberg report on the relatively unknown tax haven of Puerto Rico.
Struggling to emerge from an almost decade-long economic slump, the Puerto Rican government signed a law in early 2012 that creates a tax haven for U.S. citizens. If they live on the island for at least 183 days a year, they pay minimal or no taxes, and unlike Singapore or Bermuda, Americans don’t have to turn in their passports. ……Under Puerto Rico’s new rules, an individual who moves to the island pays no local or federal capital-gains tax — capital gains are charged based on your tax home rather than where you earn them — and no local taxes on dividend or interest income for 20 years. …Moving to the island won’t kill all taxes: U.S. citizens still have to pay federal taxes on dividend or interest income from stateside companies.
And there are even some tax benefits for companies.
The government gives a tax break for businesses that move to Puerto Rico and provide services outside the country, perfect for a hedge fund with clients in New York and London. These firms pay only a 4 percent corporate tax, compared with 35 percent on the mainland. About 270 companies have applied for this incentive, according to officials.
Here are some real-world examples of rich people engaging in fiscal self defense.
About 200 traders, private-equity moguls and entrepreneurs have already moved or committed to moving, according to Puerto Rico’s Department of Economic Development and Commerce, and billionaire John Paulson is spearheading a drive to entice others to join them. …Schiff, who runs Westport, Connecticut-based brokerage Euro Pacific Capital Inc., relocated his $900 million asset management arm from Newport Beach, California, to San Juan in 2013. He plans to move to the island within the next several years. But the savings can be extraordinary, especially given the effects of compounding, says Alex Daley, chief technology investment strategist at Casey Research, a firm that publishes reports for investors. Late last year, Daley moved from Stowe, Vermont, to Palmas del Mar, about 45 minutes from San Juan. …Robb Rill, 43, managing director of private-equity firm Strategic Group PR, relocated with his wife to Puerto Rico from Florida in February 2013. He started the 20/22 Act Society, named for the tax laws designed to encourage people and businesses to set up shop here, to help educate fellow expatriates and serve as a networking group.
So what’s the catch? Well, it depends on your lifestyle preferences. Some people are willing to pay extra so they can live in a big metropolis like New York City. Others are willing to cough up a lot of their money to enjoy California’s climate.
But the folks in Puerto Rico say they have a lot to offer besides big reductions in federal taxation.
The real challenge, she says, is convincing people they can replicate their life. Will they have well-traveled, well-educated friends? Are there decent schools for their kids? Are there charities that wives can join? Is crime an issue? She takes her clients to dinner at outdoor cafes to show them it’s safe at night, and she organizes luncheons to introduce newcomers to native Puerto Ricans. …Puerto Rico isn’t just about low taxes. It has white-sand beaches and temperatures in the 80s year-round. There’s an art museum with a world-renowned pre-Raphaelite collection. It has luxury apartment buildings, over-the-top resorts such as Dorado Beach, and a handful of private international schools that send their graduates to Ivy League colleges. It has restaurants with award-winning chefs. It’s a four-hour flight to New York. And the island operates under U.S. law.
I don’t have money, so it’s not an issue for me. But if I did, my first questions would be about the prevalence of fast food and softball leagues.
But I admit that I’m a bit of a rube.
Anyhow, the New York Times also has figured out that rich people can escape class-warfare taxes by moving to Puerto Rico.
After a slow start, Puerto Rico’s status as a tax haven is beginning to catch on, and some are betting big bucks that the trickle of buyers moving there will soon become a stream. …“I take at least five calls a day from new people considering moving here,” said Gabriel Hernandez, a tax partner with the San Juan office of BDO Puerto Rico. When the law was first passed, Mr. Hernandez advised two people who relocated to Puerto Rico from the mainland United States; last year that number rose to about 15, and so far this year, he has helped more than 80 people make the move and is advising another 60 who are considering it. …As of July, 115 people — nearly all of them United States citizens — have applied and been granted the tax exemption, with another 135 forecast to make the move before the end of the year, according to Puerto Rico’s Department of Economic Development and Commerce. Last year, 151 people were granted the tax-exempt status.
The real reason to share the NYT story, though, is a particularly laughable excerpt.
The reporter wants us to believe that escaping high taxes is “distasteful.”
While there is much to recommend Puerto Rico as a tax haven — it has better beaches than Switzerland, no immigration hassles like Ireland and is a lot closer than Singapore — there are the undeniably distasteful politics of fleeing New York to save on taxes.
If escaping high taxes in New York is “distasteful,” then lots of people with lots of money already have decided to be distasteful.
P.S. If you’re a rich person, but you don’t want to move to Puerto Rico, there are some relatively simple and fully legal steps you can take to deprive the politicians of tax revenue.
P.P.S. In other words, politicians can impose high tax rates, but that doesn’t necessarily mean high tax revenue. Which is why I’m still hoping President Obama reads what I wrote for him on the Laffer Curve.
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All very interesting… is there an inherent acceptance by government that lower taxes actually promote economic growth?
[…] Actually, the best place for an American taxpayer to live is Puerto Rico since it’s a legal tax […]
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[…] P.P.S. By the way, because of our awful worldwide tax system, American citizens can’t move to Antigua and Barbuda and benefit from that nation’s good tax policy. But there is a Caribbean island where you can legally slash your tax burden. […]
[…] P.P.S. By the way, because of our awful worldwide tax system, American citizens can’t move to Antigua and Barbuda and benefit from that nation’s good tax policy. But there is a Caribbean island where you can legally slash your tax burden. […]
[…] Likewise, not that many rich Americans have taken advantage of Puerto Rico’s status as a completely legal tax haven. […]
[…] At least Puerto Rico is still a good tax haven for American […]
[…] At least Puerto Rico is still a good tax haven for American […]
[…] find out that Americans can dramatically reduce their tax bills by moving to Puerto Rico, which is a completely legal tax haven for U.S. […]
[…] Don’t forget that Puerto Rico is a secret tax haven for American citizens, particularly when considering federal taxes, so it deserves honorary first place […]
Reblogged this on Apprentice Millionaire Portfolio.
[…] That is, if you can get past the exit taxes… […]
How about all Americans and businesses pay one equal flat tax without loopholes, credits, of refunds? All money is subject regardless where it’s made or how it’s made, earned and unearned. No need for tax havens
The US Virgin Islands have a similar program, just google edc.
[…] DAN MITCHELL: What’s The Best Tax Haven For American Citizens? […]
The downside of PR in a nutshell (as I recall): The country has an immense deficit, and has just gotten done chasing a large number of Pharm. plants away, making unemployment soar. They are going to go looking for money to tax really soon, and a nice big pile of greenbacks within their reach is a tempting target.
For even more taste, move to Cuba.
And the most beautiful women in the world may be in Puerto Rico.
I hope the idea that we ultimately want to make the world a better place is not lost here. It should be stressed that the moral reason for depriving politicians of revenue is because they are abusing the power that it gives them. Libertarians need to shift their focus away from the “holding onto what is mine” mindset. The real way to dis-empower the evil ruling class is to use our resources to help others empower their lives. The government is failing so miserably right now that the world is ripe for successful business people to engage the poor and poorly educated among us. People are starting to wake up to the lies they have been taught in school. Provide a better path forward for them, which won’t take much, and we can turn the tide against the corruption in our current system. Of course we all agree here on the benefits of free markets. If we add to our free markets a genuine desire to empower others, we can easily prove to the world that our way is the best way. Does any wealthy American really want to make a difference? Here’s an idea: build a homeless shelter for veterans, get them the help they really need to overcome their trauma, teach them the economic skills they never got in school. Do all this with the goal in mind of educating the world how on how caring individuals are doing more good than government bureaucrats. Bonus points for building all this up in an alternative economy using decentralized digital assets. After all, the politicians get more of their power from printing money than they do from tax revenues. The best way to dis-empower their corruption is to simply stop using dollars altogether. We have better alternatives to dollars now anyway, like Bitcoin and NXT. It is time to learn how to use digital assets and begin avoiding dollars.