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As middle class flees, Puerto Rico tries luring rich people

Published:Wednesday | February 11, 2015 | 12:00 AM
In this January 28, 2015 photo, street signs provide directions to Old San Juan, Puerto Rico. Several hundred wealthy U.S. citizens have taken up residence in Puerto Rico, lured by incentives that allow them to pay minimal taxes on investment income in what critics say is a misguided effort to reverse a decade of economic decline that has prompted a middle-class exodus. (AP Photo/Ricardo Arduengo)

Bond trader Ben Eiler swapped life in suburban Georgia for an island in the Caribbean, and he didn't even have to apply for a visa.

The towering 38-year-old native of Arkansas is one of at least 250 people who have accepted Puerto Rico's invitation to well-heeled US citizens to move to the island and enjoy life without taxes on capital gains, an enticing offer for those whose income is derived from investments.

Eiler lives in a gated community on Puerto Rico's south-eastern shore, making a commute of less than five minutes from house to office across manicured greens, with an expansive ocean view.

"Driving to work in your flip-flops and golf cart is not bad," he says with a quick laugh.

This semi-autonomous US territory sets its own tax policy, and its residents pay no federal tax on income derived locally. Mired in a recession for almost a decade and with an unemployment rate stuck above 13 per cent, more than double the US rate overall, it decided in 2012 to try to lure wealthy investors who would be likely to buy expensive real estate, establish businesses and create jobs.

Act 22, the legislation that set up the programme, exempts people from taxes on any capital gains accrued after they move, and it provides an exemption from local taxes on dividends and interests if they take up permanent residence, among other conditions. A government brochure sums it up as "Sun, Sand and Zero Taxes."

"Frankly, for Americans, it's sort of an unprecedented thing," said Alex Daley, a technology investment strategist who moved from Vermont with his wife in December 2013.

Daley said he felt the US mainland had become a more hostile tax environment under President Barack Obama.

"They try to hold the people with the most mobility and the most wealth captive," Daley said of the US government. "People are getting angry about that."

The law is sparking some controversy in Puerto Rico, however, particularly among economically beleaguered middle-class workers who pay island taxes on non-investment income. Others say the strategy helps erode the US federal

government's tax base by diverting revenue from the mainland.

Economists also say the new residents will not do enough to rescue the island from its deep economic woes. A smarter stra-tegy would be to focus on broadening the tax base, said Barry Bosworth, an economist with the Brookings Institution in Washington.

"Instead, Puerto Rico spends a lot of time and effort to attract a sub-population that wants special treatment and is seeking to avoid paying taxes on the mainland," he said. "It gives the appearance of being for sale."

A recent report from Standard & Poor's issued another warning: "If Puerto Rico becomes too successful at marketing itself as a tax haven, the US Congress, in our view, would likely enact restrictions."

 

familiar environment

 

So far, however, at least 500 people have applied and been approved, half of whom have made the move like Eiler. He had only briefly visited Puerto Rico before settling here with his family, but he finds the environment familiar.

"We have a Walmart and Costco and P.F. Chang's," he said.

Such familiarity and the ability to move while staying within US jurisdiction is a draw not offered by The Bahamas and other Caribbean destinations that have created tax incentives to lure investors.

Lawyers and tax experts in Puerto Rico say they get calls daily from people seeking to move, including managers of hedge funds or private equity funds who make most of their money from capital gains. In the US, long-term capital gains are taxed at 23.8 per cent.

The tax refugees must not have lived in Puerto Rico for six years prior to when the law was approved in order to qualify.

Their arrival bucks a trend in the other direction. From 2010 to 2014, Puerto Rico's population dropped 5 per cent to 3.5 million, according to the US Census Bureau.

While Puerto Ricans do not pay US income taxes, except for Social Security and Medicare, they do pay the equivalent of state income taxes. The highest bracket, for those with incomes above US$62,000, is 33 per cent.

Act 22 has generated more than US$200 million in local real estate sales, said Juan Carlos Suarez at the Department of Economic Development and Commerce.

- AP