As you’ve probably seen on Bloomberg or elsewhere by now, billionaire investor John Paulson is reportedly considering a move from New York to Puerto Rico in order to save on taxes. As Business Insider helpfully summarises, unlike U.S. persons abroad not only will he be able to avoid U.S. federal taxes entirely, but Puerto Rico will not charge him any local income tax on his investment gains either — making Puerto Rico the only place in the Solar System where a U.S. citizen can move and owe no tax whatsoever.
Puerto Ricans deflect the criticism of their plucky little island’s unique tax status by claiming that they have to pay U.S. federal taxes on income from the mainland. But, as Business Insider fails to make clear, “income from the mainland” is determined under the rules of 26 CFR 1.937-2(f) — which means that a U.S. citizen who has lived in Puerto Rico for 10 years and sells the stock of a mainland corporation is deemed to have “income from sources within a possession” and not from within the mainland United States — and thus thanks to 26 USC § 933, owes no U.S. federal capital gains tax. (See IRS Publication 1321 if you’d like an official non-legalese summary of the regulations.) This is a far better deal than the so-called “foreign earned income loophole” that Americans abroad get, which only allows exclusion of wage income — not investments, pensions, local unemployment benefits, nor childrens’ disability benefits.
The other common excuse given by Puerto Ricans for their enormous tax breaks is that they get far less benefit from U.S. federal spending than any of the fifty states — for example, with regards to Medicaid or educational funding. Of course, Americans abroad pay both U.S. and foreign taxes on all our income with more complicated forms than any Homelander or Puerto Rican has ever seen, and we get squat from Medicaid or Medicare or U.S. educational funding — instead we get those “great embassy services” and a vague promise that the U.S. Navy will come save us when we get into trouble. Apparently Puerto Rico has no puertos at which the Navy can dock in the event of a disaster, unlike landlocked Paraguay.