I'm no expert on these matters, but it's the internet so I have an opinion. These territories face a catch-22: to the extent they raise taxes they become less attractive to the Super Rich (well outside investment in general). You might also end up with a race to the bottom scenario, where taxes go to zero, labor laws go to heck. You actually see all of these issues and more in practice so it is not just theoretical. It is a difficult quandary to escape from. You basically need an engine for real organic growth that doesn't rely on tax gimmicks. Finally, I think Puerto Rico itself also suffers from an artificial handicap with respect to the Jones Act.
> Finally, I think Puerto Rico itself also suffers from an artificial handicap with respect to the Jones Act.
The Jones Act has prevented Puerto Rico from ever building a solid, stable economy of its own. It's the reason Puerto Rico's economy was in shambles long before Hurricane Maria hit. As long as the Jones Act is in place, Puerto Rico doesn't have an economic future.
They've experienced a massive brain drain over the last few decades, because everyone on the island can relocate to the mainland, where everything is cheaper (due to the Jones Act) and there are more lucrative jobs. This creates a vicious cycle which is still ongoing.
The economic problems of Puerto Rico go way beyond the Jones Act. As long as your item is lightweight, you can turn a reasonable profit here - all the Viagra made for the North American market is made here, and other pharma companies have strong representations. CooperVision sells something like 3 billion pairs of contact lenses a year, made in their plant in Juana Diaz.
So it's a disadvantage - and one that has absolutely no relevance to the issues of the twenty-first century and that should long since have been retired (and arguably never passed, or had exemptions made for American islands) - but it's not a showstopper.
No, the real bar to a solid, stable local economy has simply been the ready availability of mainland capital. Anything you see the hedge funds doing in the Midwest was prototyped here first. The entire development strategy of offering tax rebates to relocate manufacturing was invented by Puerto Rico - the idea was that those manufacturing centers would lead to local management and a robust secondary technical and supply economy. This never happened - the mainland companies brought their own managers and continued buying from their established suppliers on the mainland. Puerto Rico was a convenient source of well-trained but very inexpensive labor.
There's a lot of detail. I can't claim to have done more than scratched the surface. But mere abolition of the Jones Act wouldn't be enough, sadly. Not that it will happen regardless.
> But mere abolition of the Jones Act wouldn't be enough, sadly.
I never said that the abolition of the Jones Act would be sufficient. But I am saying it's necessary; as long as the Jones Act is in full force, Puerto Rico has no hope at a stable economic future.
This is true, you didn't say that and I apologize. But I live here in Puerto Rico, and the notion that our stable economic future has to be a handout from the United States rankles a bit.
After all, Hawaii's economic stability doesn't seem to be questioned very often, and they're even more susceptible to Jones Act problems than we are - after all, the Act only regulates shipping between American ports. Plenty of non-American ports just hours away by ship. We don't have to ship everything by barge on the four American-owned, American-flagged, American-built, and American-crewed shipping lines that service the island, two of which are embroiled in a price-fixing lawsuit and the third of which somehow managed to go bankrupt.
> But I live here in Puerto Rico, and the notion that our stable economic future has to be a handout from the United States rankles a bit.
I'm not sure what you're referring to as a "handout". The Jones Act itself is, if anything, outright theft by the federal government. Eliminating it isn't a handout.
I guess it's uncomfortable to say that the fate of Puerto Rico is in the hands of the US government, but on the other hand... that's exactly what colonialism is. The US has colonized and pillaged Puerto Rico for decades, and it's an ugly truth, yes, but it's the truth nevertheless. As long as that systemic exploitation continues, it doesn't really matter what Puerto Rico itself does.
> After all, Hawaii's economic stability doesn't seem to be questioned very often, and they're even more susceptible to Jones Act problems than we are
Well, that's not true - Hawaii suffers immensely from the Jones Act as well, and if you talk to people from Hawaii (people who've grown up there and spent their entire lives there, not transplants), they'll be able to tell you these Jones Act horror stories firsthand. Hawaii is overall in a better state that Puerto Rico, yes, but that's due to other factors which mitigate the effects of the Jones Act; it doesn't mean the Jones Act isn't still a crushing burden for them.
What you do is you hide a land mine inside the law. In this case, I think it's probably the bit about having no significant ties with the mainland. Maybe the number of days on the island, or something to do with the "one minute" rule.
So you let them move in, thinking they legally owe no taxes, and meanwhile, you gather the evidence related to your land mine and then wait. You sit on it. For years. Then you blow up the mine and demand a heaping pile of back taxes. You can then settle for less than the amount you are demanding, so nobody goes to court and no precedents are set, but you still get the cash.
The mistake people make is in thinking they can use the law to put on over on the government, when the government makes and enforces the laws. All those people in the article were getting the best tax deal an American can even dream of, and some were still openly discussing ways in which they could cheat the requirements! It seems like all you might have to do to catch a cheater is just watch someone for a day or two, or record them during a few minutes of bragging.
They say you can't cheat an honest man, but you sure can con a cheater.
This isn't a great idea and there are things wrong with it at a couple of levels.
1) We do not want the government to be in an adversarial relationship with rich people. Most rich people maintain their riches by adding tremendous value to society. While they may be reticent to pay taxes, they are not enemies.
2) We do not want the government rules-lawyering the law. I'll risk being opinionated and say that the law is not meant to contain random gotchas, it is supposed to codify usual and expected behaviour.
The law is meant primarily to be followed, not broken and enforced.
3) As sibling posts mention, people who change jurisdiction to avoid taxes are going to get an actual legal opinion and have sufficient influence to get the law changed. It'd never work in practice.
> "They say you can't cheat an honest man, but you sure can con a cheater."
Reminds me of the three felonies a day business [1]. We want less of that thinking, there are enough problems caused by unclear regulations without adding more on purpose.
There is clear evidence of intent to cheat right there in the article.
1. The government already is an adversarial relationship. The theoretical purpose of it is to act as a cartel enforcer, to shift individual actors away from their selfish Nash equilibrium to a global-optimum that benefits all members in aggregate, albeit less than they might be able to achieve acting independently. I do not accept your premise that most rich people get richer by adding value to society. That stopped being even remotely plausible in the 1980s. While the existence of rich people can add value to a society, it does not necessarily follow--the rich person has to choose to add value. One in the article explicitly declares a moral imperative to pay the lowest amount of tax possible. Without any mention of charity or philanthropy, that person is not adding any value beyond what he spends directly.
2. The law is already rules-lawyering itself. It could simply say that any person who genuinely becomes a Puerto Rico person shall pay nothing for those four categories of tax. All those additional requirements are there because otherwise people would just declare on paper and reap the benefit without providing the actual stimulus the law sought to provide. Just as you don't write a contract expecting that all parties will always honor all their obligations, and you don't write code expecting that there will be no unexpected inputs, you can't write a law that pretends no one will break it. This particular law already has a lot of gotchas, because it is targeted specifically to a group with a known-high proportion of people who believe "little rules are for little people"--people with lawyers who explicitly advise them on how to make the rules not apply to them. A law that cannot be enforced when broken is no law at all.
3. Just because rich people are out of control does not mean it is useless to try to control them. If they change jurisdiction to avoid contributing to the society I participate in, they can sod right off and not come back. If they buy off my government, for their own benefit and to my detriment, they will eventually provoke backlash. Of all the crap we have seen in the last 2 years, the Trump tax cut is what made me angriest, and most willing to throw someone into the surf at the peak of high tide with a flotation device and a pair of flippers, and to erect a guillotine on the beach. We should never accede to government corruption just because humans are fallible, and corruption will always be possible.
The three felonies problem is essentially a matter of code cruft. The law has bloated up to uncountable millions of lines, and the technical debt in it is so overwhelming that refactoring isn't even possible any more. It's full of bugs, though generally referred to as loopholes within the domain. This makes it possible to sometimes defy the spirit of the law by following it to the letter. And this becomes an arms race whereby one loophole gets patched and creates multiple new loopholes in the process. People with a specific interest can always locate and exploit the loopholes can always find the new ones and use them before they get patched. Those who do follow the spirit of the law often don't even see the loopholes until they see someone else abusing one. Simply put, the laws are written for the cheaters. The cooperators already know how to cooperate.
You're not hiding anything from rich people. They have lawyers. Or if you want to take a more cynical tack, rich people are the driving force behind these laws in the first place; they were written to specification.
Their lawyers can only advise them to follow the law to the letter, and try to mitigate the fallout when they inevitably just do whatever they want to do, with the expectation that they won't get caught.
These in Puerto Rico aren't the Davos-level or Bilderberg-level rich people. These are the ones who can maybe buy one congressperson, rather than all of them. They are rich enough to fleece a little, but not rich enough to hit back very hard.
I'm not sure why you believe this. Every discussion of PR's tax scheme, the issue of 183 days comes up. Even people with a passing interest are aware of this requirement. Sure, you can lie about it and hope you're not audited, but knowingly lying on your taxes is already broadly known to be a dangerous game.
When they were invented, they did what they were supposed to - in 1943, nobody had ever done this. In 1943, the mean annual income on the island was $142. The economic boom that followed on the tax incentive plan made Puerto Rico's mean income the highest in Latin America, built was was, in 1972, one of the finest electric grids in the world, and led among other things to an automobile-per-capita rate that's even higher than the rest of the United States.
Unfortunately, the heirs of the architects of those policies had no idea why they worked. So as world economic conditions changed, they just doubled down on the cargo cult, and stagnation followed. Then Congress decided it wasn't fair to prop up large businesses who were taking advantage of cheap labor, and yanked the rug out from under the whole scheme in 2006.
Do you honestly hold that opinion, or did you think you were on reddit?
Cities in California (re)assess property values just like they do everywhere else. Go buy a house there and tell me that your assessed value is about right for a house in 1958.
"Perhaps most perversely, Proposition 13 has made it harder, not easier, to become a homeowner. California has one of the lowest rates of homeownership (55%) in the nation, second only to New York and nine percentage points below the national average.
The pernicious incentives that led to these outcomes are obvious in hindsight. With property taxes near frozen, local governments began to see residential development as a liability and commercial development as an income stream. For 40 years, that perspective shaped which new projects cities approved. Homeowners, meanwhile, had a disincentive to move if they had a low property tax bill locked in. Finally, these relatively low property taxes made California an attractive place to undertake speculative real estate investments and leave valuable parcels of land undeveloped."
One thing I'd add, is that Prop 13 also discourages any kind of mobility. For instance, my Mom often talked about moving to a different town, but she didn't, because her property taxes were so darn low. She's lived in the same home for over 40 years and if she relocated, her cost-of-living would go through the roof, due to higher property taxes.
Here's a property for sale in Saratoga, currently on the market for $20M -- paying property taxes of $6k/year (a rate of 0.03%). Tell me more about how California assesses property like everyone else. Happy to subsidize the obscenely wealthy.
The U.S. is a popular tax haven for people in other countries, and the City of London is the center of a whole network of tax havens. It's not just remote islands looking for a way to scrape by.
A great book on how it all works is Treasure Islands by Nicholas Shaxson.
