But how would big tax cuts work? We’re soon going to find out in Puerto Rico. Neither an independent country nor a U.S. State, the Isle of Enchantment is a commonwealth. It has suffered high taxes and unemployment for years. Some recent news:

Puerto Rico is a U.S. territory, but its residents do not pay the federal income tax, except on income from sources outside of Puerto Rico. The New York Times reports that taxpayers need only live in Puerto Rico for 183 days out of the year on the island to be a resident.

The island has its own tax system outside of the federal code, but the territory has recently eliminated its taxes on interest and dividend income that used to stand at 33 percent, and has also cut its capital gains tax rate to zero.

It also has great weather — although watch out for hurricanes.

Crime is a problem in some areas. But it’s like that in some areas of California, too. You just have to know what to avoid.

Tax cuts

Casey Research just put up some info on Puerto Rico’s tax cuts:

 The first thing readers should understand is that for Americans, this is truly a unique option and a tremendous opportunity for the right people.

Puerto Rico recently passed what are known as Act 22 and Act 20, or the Individual Investors Act and the Export Services Act.

The Individual Investors Act allows new residents of Puerto Rico to be completely exempted from Puerto Rican taxation on their capital gains, dividend, and interest income. And the Export Services Act provides for a top 4% tax rate on earnings from businesses that perform services—like professional consulting, asset management, research and development, computer programming, and so forth—in Puerto Rico for clients outside of Puerto Rico.

Before Puerto Rico’s new laws, it was immensely difficult for Americans to take advantage of incentives like these. For decades, programs in countries like Panama and Singapore sought to attract investors by providing tax breaks—but Americans couldn’t take advantage of them because US nonresident citizens are taxed on their worldwide income. The only exceptions have been in far smaller jurisdictions—never before in a country with the modern infrastructure and a deep labor pool that Puerto Rico offers….

For non-Americans, the differences are subtle—better infrastructure, more familiar goods from home, but no tax advantages. However, if you’re an American citizen, there’s all the difference in the world. This is because the US is the only country that effectively taxes its nonresident citizens on their income no matter where they live and no matter where they earn their money.

And you thought you lived in a free country.

Commonwealth

This means that while a Canadian could relocate to a place like the Cayman Islands and pay zero tax, an American could not. An American living in the Cayman Islands would still have to pay taxes to Uncle Sam. There was really no escape for Americans… until now….

Yes, that’s exactly right. This is where Puerto Rico comes in. Puerto Rico is an unincorporated territory of the US; it’s not quite a state and not quite a foreign country—it’s a commonwealth, which allows it to have a unique tax situation. Namely, Puerto Rican residents who derive their income from Puerto Rican sources do not pay taxes to the US government—they pay them to the Puerto Rican government. The same is true of the US Virgin Islands.

Combine this commonwealth status with the new tax incentives, and mainland US citizens have a window to legally lower some of the burdens of US taxation. There isn’t another jurisdiction in the world that offers such an opportunity for Americans. It’s like obtaining most of the tax benefits of renunciation without giving up your US passport….

There’s also the issue of Puerto Rico becoming the 51st state or its legal status otherwise changing. This would end the tax incentives. However, this issue has languished for decades; Puerto Ricans themselves are divided—some want statehood, some want the status quo, and others want complete independence. I think it is very unlikely that Puerto Rico’s current commonwealth status will change anytime soon.

How about California switching from being a state to a commonwealth? Then we, too, could avoid the massive U.S. tax ripoff.

We also would lose our U.S. Senators — Boxer and Feinstein — as well as congressional representation. But that would be a blessing for us and the rest of the country.

By John Seiler

The impression seems to be that Latinos want more government, and in particular more taxes. Not the case.

According to the 2013 Index of Economic Freedom, Chile actually has more economic freedom than the United States. Chile also is moving toward more freedom, as the United States slides into socialism.

And Mexico has been advancing economic freedom, including lower taxes, for almost 20 years. New President Enrique Peña Nieto is pushing the opening of Pemex, the gigantic and inefficient national oil company, to foreign investment. Doing so could produce a massive oil boom to create immense wealth for Mexicans.

Now Puerto Rico is cutting taxes. The Commonwealth of Puerto Rico, of course, is not a state. But that means they have brokered a special relationship with the U.S. government in which the island’s residents don’t pay the massive U.S. federal income and capital gains taxes.

Puerto Rico just eliminated all commonwealth capital gains taxes. So the rate is:

U.S. capital gain tax: 0 percent

Puerto Rico capital gains tax: 0 percent

Total capital gains tax: 0 percent.

Not surprisingly, PR is attracting rich people, and other people, eager to enjoy economic freedom. By coming there, they will pay other taxes — such as commonwealth income, sales and property taxes. Bloomberg reported:

“John Paulson, a lifelong New Yorker, is exploring a move to Puerto Rico, where a new law would eliminate taxes on gains from the $9.5 billion he has invested in his own hedge funds, according to four people who have spoken to him about a possible relocation.

“Ten wealthy Americans have already taken advantage of the year-old Puerto Rican law that lets new residents pay no local or U.S. federal taxes on capital gains, according to Alberto Baco Bague, Secretary of Economic Development and Commerce of Puerto Rico. The marginal tax rate for affluent New Yorkers can exceed 50 percent on ordinary income.”

California tax gouging

Let’s compare that tax to the top capital gains tax rate in California:

U.S. capital gains tax: 20 percent

California capital gains tax: 13.3 percent

Total: 33.3 percent.

And remember, the capital gains tax is a double or triple tax. To get money to invest and earn capital gains, you first have to earn the money and pay income taxes on it; and if the money was inherited, then inheritance taxes also have to be paid.

So let’s see how the government could rob you.

You earn $1 million. Let’s first assume there are no taxes on income, estates or capital gains taxes. You invest the $1 million and it goes up 10 percent. So you have $100,000 more which you can re-invest to create more businesses and jobs. The people you hire pay taxes. Alternatively, you might spend the capital gains on a car or house, creating jobs in those industries; those people pay taxes. You’re also now worth $1.1 million.

Next, let’s consider that $1 million taxed at current top marginal tax rates:

Federal top income tax rate: 39.8 percent. California top income tax rate: 13.3 percent. Total income tax rate: 53.1 percent. Amount left after both income taxes: $469,000.

Federal inheritance tax (the death tax): 55 percent (no inheritance tax in California). That 55 percent cut from $469,000 leaves: $211,000.

You invest the $211,000 and it goes up 10 percent. So you made $21,000. The top marginal tax rate is 55 percent, so that leaves $9,450 in capital gains. Add $211,000 and $9,450 and you end up with $220,450.

The comparison: Without taxes, you have $1.1 million. With the massive, current taxes, you’re left with just $220,450. That’s a tax rate of 80 percent.

The 80 percent stolen by government is wasted pork and sky-high pay, perks and pensions for bureaucrats. Whereas if the money had remained in private hands, it would have been productive, creating businesses and jobs.

This massive taxation is what President Obama and Gov. Jerry Brown — themselves both multi-millionaires even though they’ve only held government-sector jobs — call “paying your fair share.”

I hope California’s Latinos look for inspiration not to the state’s high-tax Anglo leadership, especially Brown, but instead to the wise Latinos running Puerto Rico.

Meanwhile, I’m looking into moving there. The rum is perfect and soon Cuba will be rid of Castro and the cigars will begin flowing again.

Rum. Cigars. No taxes. Warm weather. Paradise.