Friday, May 3, 2013

The Advantages And Disadvantages Of Puerto Rico Reduced Taxes For The Rich

By Wanda Vaughn


The Commonwealth of Puerto Rico reduced taxes to attract high net worth individuals and companies. The gambit appears to encourage those who want to maintain their U. S. Citizenship. News must have reached Government leaders that wealthy Americans are chafing at their rising tax bill. A tax haven nearby that allows them to retain nationality offers a special appeal.

The mainstream media has widely covered the new law passed in the island that offers new residents pay zero tax liability on income derived from local businesses and from capital gains. The offered rate is stipulated to last through 2035. But to enjoy its benefit, individuals must become residents first.

To qualify as a resident, one needs to only stay on the island for at least 183 days each year. Income and gains derived before residency was established, but which has not been taxed yet is subject to the regular 10 percent rate. Investments prior to 2035;but after a decade of residence, will be taxed at 5 percent.

It has been pointed out this a move to the island may not be a wise proposition. The billionaire hedge fund manager John Paulson who had first announced he was considering this option has later changed his mind. Skeptics are saying he has had second thought because of the viability of this promise. There has also been discussion of the fact that this new law may have negative repercussions, such as raising the ire of the federal government.

This matters as the island relies heavily on federal government aid and subsidies that constitute around a quarter of its GDP. Right now U. S. Territories have favorable tax rules, and the Commonwealth has the most favorable treatment. Some in Congress have indicated this new action has raised the profile of the island on their radar. They have indicated they will keep the rules in mind when there is action to undertake comprehensive tax reform. Harmonizing the taxes of the territories could become a factor when this is undertaken.

There remains the possibility the United States government could withhold funds to make the Commonwealth harmonize its tax code or in the alternative give it statehood and accomplish the same by default. This is an actual possibility. Current residents have voted to become in a non-binding referendum conducted in November 2012. The President has stated he supports admission into the union. All that is in the way is for Congress to vote on its admission. Hypothetically, this may take place at any moment.

At the moment partisan politics are the only roadblock. Republicans are not keen to allow a new state whose voters would favor the Democratic Party. But, they have been discussing the necessity of becoming more appealing to Latinos to avoid being cast into the wilderness because of changing demographics and the aging of their dominant white vote base. With Florida home to many Puerto Ricans the Republicans may change their mind. This is because the party is talking up Marco Rubio, the Florida Senator as a potential 2016 Presidential candidate. Their calculations may look upon the union more favorably in this respect. Rather than a political liability, this prospect could be perceived as an asset in the next Presidential election.

Some observers have said the term required for resident status maybe too onerous for sophisticated tastes. Other have pointed out that, rising poverty caused by a reduction in manufacturing subsidies and the financial crisis have led to growing activity in drug trade and associated violence. The lure of Puerto Rico reduced taxes may not be sufficient for some.




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