Editor’s Note: We have in the past discussed how, for certain people, Puerto Rico represents an interesting option to reduce one’s tax burden. To provide a full range of views on the issue, we are bringing you this article from Jeff Thomas, who takes a different perspective.
In recent years, Puerto Rico has been heralded by some as an answer to Americans who are seeking to internationalise themselves, but are fearful of making the major leap of actually leaving U.S. soil. Puerto Rico at present offers tax advantages unlike those available in the continental U.S., with the extra attraction of being a sunny spot in the Caribbean in which to live.
A number of Americans are making the move for these reasons. And, on the surface, Puerto Rico can easily be perceived as a positive move. However, looking deeper, there may be significant downsides. The first of these is its ownership by the U.S. Seen by some to be a way to leave U.S. control behind whilst still remaining in the U.S., the “half in, half out” nature of the arrangement does not achieve the objective of internationalisation.
Americans are regarded by the rest of the world as being somewhat insulated. Perhaps the belief that they come from the world’s most powerful country makes them feel less safe when they’re beyond its borders. (We Britons were certainly guilty of this, back in the days when we were the world’s foremost empire.) Americans may see Puerto Rico as a jurisdiction that represents an escape from the increasing oppressiveness of U.S. laws and taxation policies, but to those of us outside the U.S., Puerto Rico is more a low-tax theme park within the U.S. than a true haven from taxation.
Whilst it is quite true that Puerto Rico has sufficient autonomy from Washington that it can write tax laws that exempt U.S. citizens from tax, and can conceivably gain the requisite cooperation and approval from Washington, there is absolutely no certainty that this relationship will be a permanent condition.
First, the U.S. is quite within its legal framework to allow this sort of tax agreement for a time (say, until the optimum number of Americans seeking tax freedom have signed on in Puerto Rico), then pull the plug on the programme. Since the U.S.owns Puerto Rico, it would then have all the escapees in one place, where they would be easy pickings (as opposed to being spread all around the world, in a foreign countries, where they would have actual rights of protection against the U.S.).
Second, Puerto Rico is not without its problems. Those who discuss Puerto Rico as a tax haven for Americans invariably fail to mention that, in the Caribbean, Puerto Rico has been known for its generations of corrupt politics – politicians who are said to be for sale to the highest bidder. Puerto Rico has, as a result, undergone dramatic changes from one administration to another, lacking the continuity of governmental policies that are essential to the internationalist. Additionally, Puerto Rico’s economic dependence on the U.S. has led to a pronounced entitlement consciousness amongst Puerto Ricans. The assumption is that, whatever the problem at hand, the U.S. government has the responsibility of bailing them out (which it has done for generations).
As is customarily the case in such unstable jurisdictions, Puerto Rico has devolved into a dollar-induced dependency on the U.S. and, in a pinch, will cave to whatever new set of rules may be dictated by the U.S. Along the way, it has also amassed an unusually high level of debt ($28 billion at present). By mid-2016, Puerto Rico will exhaust its liquidity and we may expect to see it in crisis.
Not long ago, Wolfgang Schäuble, former German Federal Minister of the Interior, jokingly suggested to Jack Lew, US Secretary of the Treasury, that he trade Puerto Rico for Greece. It would be a bargain with no winners.
Although Puerto Rico hasn’t received the media attention that Greece has, in many ways, it serves as the same type of threat to the U.S. as Greece does to the EU. But there are differences. Puerto Rico cannot choose to exit the U.S. as Greece can exit the EU. Further, it cannot produce its own currency. And, should the U.S. impose austerity, as the EU has with Greece, the austerity promises to be much more dramatic.
In addition to the massive debt load, only 40% of Puerto Ricans are in the workforce and pensions are unfunded to the tune of $37 billion (as of 2013).
“Solutions” under consideration include a salary freeze for government employees, freezing of new hires, the closing of schools, cutting of pensions, and greater aggression in tax collection. Also on the table is a proposal to cut debt at the expense of bondholders.
Worse, Governor Alejandro García Padilla acknowledges that “The plan itself will not get us out of the hole we find ourselves in. It’s time that creditors come to the table and share in the sacrifice.”
Shades of Greece. The political leadership of Puerto Rico, in full “entitlement” consciousness, sees itself not as failed managers, but as victims and, as such, is angry and adamant that those who have invested in Puerto Rico pick up the tab.
And so, what we see is a U.S. colony that has offered tax breaks to U.S. citizens if they move there. This will, of course, cause a revenue loss for the U.S. government, which is already on the economic ropes and has created programmes to track down U.S. citizens internationally for better collection.
Puerto Rico is about to go, cap in hand, to the U.S. and beg for a bailout. This would suggest that the tax advantages being offered by Puerto Rico are tenuous at best.
As to the title of this article, it may well be that “the next Greece” is right in the backyard of the U.S. and is an American possession, replete with all the dependence and liability associated with a colony.
The EU was an ill-conceived attempt to join all of Europe’s disparate cultures and governmental structures into one conglomerate, to be ruled by an unelected government, under a single currency. That was an extremely unlikely proposition at best and, today, Greece may well become the straw that will break the EU’s back – an unapologetic, unrepentant jurisdiction that demands unending largesse from an already insolvent EU.
Those in the Western Hemisphere tend to watch the Greek drama unfold as if it were a mere play – one that cannot become a reality for the West. However, the U.S. is not by any means immune to a similar fate. Following World War II, it was by far the most powerful, most economically productive country in the world. Then, in 1971, it broke its promise to the world to back its currency with gold. It then deteriorated from the world’s foremost creditor nation to the world’s foremost debtor nation – with a level of debt far in excess of anything the world has ever seen.
The U.S. will undoubtedly experience an economic crash of biblical proportions. That much is already baked in the cake. However, if the U.S. were to find that it had its own “Greece,” the date for that collapse would most certainly be moved up. It would be unlikely in the extreme that the U.S. will want to bail out its wayward child, but if it doesn’t, it’s in a bit of a jam. Already the U.S. is internationally castigated for attempting to be the world’s policeman. If it cannot even look after its own colonies, its position of world’s policeman will look evermore like “world’s foremost international bully.”
In the very near future, we might expect to see Puerto Rico emerge not only as a major economic liability for the U.S., but, in addition, a major embarrassment to what U.S. leaders term “American exceptionalism.” Like Greece, it will likely prove to be an unapologetic, unrepentant jurisdiction that demands unending largesse from an already insolvent U.S.
This will not turn out well. But those who are pursuing internationalisation need not concern themselves with the details of the outcome. If they’re wise, they’ll ponder whether Puerto Rico is really a viable option for residency and investment.
Of one thing they can be sure – the promises being made to them are unlikely to be kept. Above all, those seeking to internationalise desire as much certainty as possible – the knowledge that their residency and investments will be secure for the longest period possible. In those terms, Puerto Rico is quite a dodgy bet.