Puerto Rico, a tax haven for the rich or a tax burden for the middle class?

Millionaires are coming to Puerto Rico to create a "new Puerto Rico" at the expense of the native Puerto Ricans- who apparently are not invited to this novelty.

 

A new Puerto Rico? That’s what Prouty stated investors should expect when moving to the island. The speech that Nicholas gave in the Puerto Rico Summit 2014, sounded lovely….but now in 2015, I ask my fellow friends and family who live in Puerto Rico, and they have no idea what is the new Puerto Rico that Prouty was talking about; maybe that's because they weren't included in it? Just recently, I read in Forbes the header "Puerto Rico Expands Tax Haven Deal for Americans to its Own Emigrants" and thought to myself: "well this might be the new Puerto Rico they were referring to in 2014". As I skimmed through various articles, I couldn't avoid but feeling somewhat deceived by these millioners who say they come to Puerto Rico to help, but in reality they just come to avoid paying taxes and expand their revenue at any cost. If they really cared about our island, they would be proposing projects that seek not only to atract the upper class, but as well the middle class- which seems to be carrying most of Puerto Rico's economic burden.

 

The millions of Puerto Ricans that are leaving for the states are not the upper class but those hard workers from the middle class who need to leave that burden behind. Why do I bring this middle class argument? Well, because now the Puerto Rican government is looking to pass IVA, a 14% "consumption" tax (which could potentially include medicines and other commodities/normal goods); This is going to directly affect small businesses and the middle class. The lower class gets coupons and all sorts of government benefits to pay for their commodity/normal goods so they don't have much to worry about- but what about the middle class? They are not eligible for most of these governmnet benefits, neither for tax cuts or welfare benefits. This is why your middle class (the working class) is leaving...and with measures like the IVA 14% "consumption" tax they will only continue to seek shelter elsewhere. If the government needs revenue why not look into the richman's pocket? Those are the ones who have no burdens and have an excess of capital. Keep the IVU and create a 10-14% IVA on luxury goods. There's where the real money is-; 14% of a milk carton (around $6) will only generate you around 0.84 cents per gallon. Meanwhile, let's say you apply that same IVA to a Ferragamo shoe which is worth around $500 would generate a total of $70 which would be the same as if you generate 14% out of around 84 gallons of milk at around $6 each. Some will say, correct but how many people buy Ferragamo shoes in comparison to milk? Yes, precisely why you cannot increase the price of commodity/normal goods because it is a necessity. If people are not able to afford milk, they will flee the island- but if I can't afford a pair of Ferragamos or high brand products I won't flee the island, I will just look for options that are around my budget. The economic repercussions an IVA tax could have in Puerto Rico could be disastrous.

 

So now back to my argument...does the "new Puerto Rico" Prouty was referring to include the middle class? It does not seem like it. Let's continue to increase taxes for our citizens but create a tax haven for investment/hedge fund managers and high net worth investors (upper class). Yes, I am aware that the upper class are the ones with the money- but tax havens don't always work...specially when there are so many loopholes in tax law; the rich can afford to hire an accountant or lawyer to find those loopholes and give them the recipe for legal tax avoidance and self-enrichment. Acording to Forbes here is a brief description of what these new tax haven measure entail:

 

1) "Act 20, the Export Services Act, offers incentives to certain service businesses, including investment and hedge fund managers, to relocate to Puerto Rico and export their services. It does so by taxing their corporate profits at a flat 4%, while making the dividends paid from profits on exported services 100% tax exempt to individual recipients."

 

2) "Act 22, the Individual Investors Act, was designed to primarily attract high net worth investors to Puerto Rico by providing complete tax exceptions on dividends, interest and capital gains, so long as the individual is present for at least 183 days a year (half the year) in Puerto Rico."

 

To qualify for Act 20 and 1020 incentives, a company has to employ only three people. That sounds like a lot of infrastructure and jobs are going to be created in Puerto Rico (pardon my sarcasm). Don't be fooled by these millionaires, they could honestly care less about the Puerto Rican economy. Tax Havens are not always the route to follow. There's been documentaries and articles written on how big multinational companies have utilized tax haven countries such as Switzerland, Grand Cayman, between others, and promised them infrastructure and more jobs for the economy- but their headquarters (located in the tax haven) is one office with only one person. The rest of the work is done in it's true headquarters. So where's the capital and most of these multinational's gains going to? And how can the government even account for revenue in a situation like this?

Here's another point I'd like to bring up- mentioned in the Forbes article: "due to Puerto Rico's unique status Americans don't have to renounce their citizenship or pay an exit tax of 23.8% on unrealized capital gains when they move to Puerto Rico". This sounds wonderful for them, but for Puerto Rico it seems as if it requires less commitment from these investors; in other words, easier to come and go from Puerto Rico as they wish- specially when things go bad. Puerto Rico needs money, but more than money we need accountability from all the participants of our economy. Instead of creating new tax systems, we should look into restructuring the current loopholes we have, as mentioned by Puerto Rican Congressman Pedro Pierluisi. Puerto Rico can continue to implement taxes on our citizens, but if we don't have a transparent operational system to account for the revenues obtained from these tax initiatives we will continue in an economic slump with continued government mismanagement. Government continues to look for revenue, not acknowledging that if they fix their fiscal budget by restructuring government programs, agencies, municipalities, between many others they will gain revenue and accountability. The source of the problem and what should be our focus is the idea of restructuring the government, its laws and its complex systems- creating a resilient/transparent economy.

Sources:
http://www.forbes.com/sites/janetnovack/2015/01/27/puerto-rico-expands-tax-haven-deal-for-americans-to-its-own-emigrants/
http://www.huffingtonpost.com/2013/06/03/apple-tax-havens_n_3378935.html
http://www.caribbeanbusiness.pr/news/prouty-the-real-story-of-pr-is-positive-96174.html
http://www.indicepr.com/noticias/2015/01/29/news/35808/temen-impacto-del-iva/
http://www.noticel.com/noticia/171731/saca-pecho-zaragoza-sobre-informe-kpmg-tras-silencio-del-tribunal.html#.VM_mk8aBtQ0.mailto
http://elvocero.com/pierluisi-reitera-oposicion-al-iva-2/
http://www.economist.com/news/leaders/21571873-how-stop-companies-and-people-dodging-tax-delaware-well-grand-cayman-missing-20
http://www.globalissues.org/print/article/54
http://www.taxjustice.net/
http://www.irs.gov/Individuals/International-Taxpayers/Expatriation-Tax