The Monaco of the West
Carolina Jiménez | Friday, April 22, 2022
In the food chain of countries, Puerto Rico is the lowest of lows, lower than soil. The U.S. territory has a bevy of social and economic problems that appear to be getting worse by the day, making it an inhospitable place for a wealthy individual seeking safety and stability. However, dozens of entrepreneurs, made by new economies — cryptocurrencies, social media, blockchain — head to Puerto Rico annually. They are frantically selling their homes and cars in their home states and establishing residency on this enigmatic Caribbean island in hopes to avoid the IRS on their growing fortunes, which are reaching into the billions of dollars. Now, how did an island with a corrupt government and a crippling, unpayable $72.4 billion debt become a millionaire haven? The island’s own vulnerability. This paper proposes the use of government centralization, tax reforms, better regulation and a universal taxing system.
For more than a year, all these newfound millionaires have been searching for the new Monaco. After Hurricane Maria decimated Puerto Rico’s infrastructure and its economy, they saw an opportunity and felt a sense of urgency. The perfect circumstances came from two tax incentives passed in 2012 — Act 20 and Act 22. Puerto Rico’s government enacted Act 20 — Export Services Act — to provide tax exemptions to companies that promote exportation services. As well, the law “promotes investments on research and development and initiatives from the academic and private sectors by granting credits and exemptions for these activities. As for Act 22, the Puerto Rican government seeks to attract new residents by providing total exemption to taxes on all passive income. Puerto Rico offers an unparalleled tax incentive: no federal personal income taxes, no capital gains tax and favorable business taxes — all without having to renounce the treasured American citizenship. But, at what cost? The Puerto Rican people.
The purpose of these tax exemptions is to cultivate an influx of new immigration into the island, as there is currently a negative correlation between immigration and emigration, favoring emigration. Intentionally, the Puerto Rican government packaged this dream for outside wealthy people as it becomes an investment for future economic growth. However, it has completely lost control with the number of advantages given to the wealthy. As a result, it has become a double policy assault on top of a crippling economy due to corruption subjected to the natives. The thing is that these policies are completely irrelevant to natives because no advantages are given. The law is clear with whom it prioritizes, and the only risks are political. Congress or the Puerto Rican legislature amend their respective tax laws to close down this loophole. But the costs of rolling the dice on politics are minimal for a super affluent taxpayer with a big potential capital gains tax bill — instead natives carry the burden of the freebie given to the rich. What many mainlanders may not realize is that Puerto Rico funds the U.S. government. Puerto Ricans who live on the island aren’t just American citizens — they’re American taxpayers. They pay payroll taxes, business taxes and estate taxes. They helped pay for disaster relief in Texas after Hurricane Harvey and in Florida after Hurricane Irma. So, this skewed view, viewing natives as poor inferiors, of Puerto Ricans allows for this sort of mistreatment from mainlanders, taking the island as an advantageous grab-and-go. A Puerto Rican lawyer specializing in Act 22 compliance decided to step back from his work of relocating these millionaires as people were taking too much advantage. He described the act in an article saying, “I’ll take my private jet and fly down; then I’ll take my boat and go somewhere else. They won’t know.” This refers to the requirement of having to stay 183 days of the year in the island to be eligible. This stems from the desperation of lowering taxes at the extent of anything. So, many millionaires take the advantage without paying the small fee of reinvesting in the island. However, mainlanders aren’t the only to blame. The Puerto Rican legislative branch must be held accountable too, through regulations and tax reforms.
In the same article, the purpose of Act 20 in the government’s eyes can be found in the words, “Let’s try and invite wealthy people. They will hire a few gardeners, create jobs for a few more waiters.” However, they are not. They do not invest back on the island. Instead, they do the bare minimum —“complying” with the 183 days — and invest their day-to-day expenses elsewhere. Most of this wealth is not actually invested in the tax haven islands themselves. The reason is simple: the very things that make the islands good places to stash money also make them dangerous places to do so. They generally have tiny capital markets and loose financial regulations. They are home to regulators, police and judges who are not quite as impervious to back-door influences as First World enforcers. So offshore investors are generally unwilling to trust such places with large amounts of their financial wealth.
The thing is that millionaires are like iguanas. Iguanas have become an invasive species in Puerto Rico due to its introduction for pest control. They were a solution. However, their population has become out of control and a disturbance. Even the government has encouraged consumption as a form of populace control once they got out of control. They were initially quite rare. Indeed, no one noticed iguanas in the early years. But the climate of the island seemed to satisfy them, and soon they began to grow in numbers exponentially, until suddenly iguanas turned up everywhere. The government noticed they had to be exterminated, but by now it was too late. Now, they have become a huge issue that is troublesome to the native population. In the same way, millionaires will soon go from being the solution to the problem.
You can contact Carolina at [email protected]
The views expressed in this column are those of the author and not necessarily those of The Observer.