It’s 2 a.m. at La Factoria in Puerto Rico’s Old San Juan, a hipster joint with a sagging couch, tile floors and Christmas lights that wouldn’t be out of place in Brooklyn’s Williamsburg. While “Get Lucky” plays, tipsy couples slink out the doors onto the colonial city’s cobblestone streets into this warm April night.
At the bar, a 28-year-old hedge fund trader -- the type of person who posts his SAT results on his LinkedIn page -- is ranting about the tax code. He’s obsessed with it, complaining that the U.S. is the only major country taxing citizens on their worldwide income, no matter where they reside. That’s why he moved here.
Struggling to emerge from an almost decade-long economic slump, the Puerto Rican government signed a law 18 months ago 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. 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.
Puerto Rico’s low-tax welcome mat comes as some of the wealthiest Americans grow more anxious about tax increases and rhetoric directed at the rich. Tax bills have risen after a 10- year break under President George W. Bush that disproportionately favored the rich. The 2008 global financial crisis and the recession that followed also unleashed movements such as Occupy Wall Street that focused attention on growing inequality and the responsibility of large financial institutions in helping to create the mess.
Protesters Marching
In October 2011, protesters marched by the homes of Manhattan’s billionaires, including Paulson’s. A little more than a year later, President Barack Obama beat Mitt Romney in an election that highlighted the latter’s wealth and private-equity background.
“I’m worried about the shifting mentality among the electorate, people blaming problems on the rich, on business and on capitalism,” says Peter Schiff, a onetime candidate for the U.S. Senate from Connecticut and a former economic adviser to libertarian presidential hopeful Ron Paul. “I’m afraid that the tax rates that are already high will get higher in the years ahead,” maybe up to 60 percent or 70 percent, he adds.
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. For now, a son from a first marriage is keeping him in Connecticut.
New Rules
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. Even someone working for a mainland company who is a resident of the island would be exempt from paying U.S. federal taxes on his salary.