TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, March 11, 2013

John Paulson May Join Exodus to Puerto Rico for 0% Capital Gains Tax Rate

Puerto Rico FlagBloomberg:  Paulson Said to Explore Puerto Rico as Home With Low Tax:

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% on ordinary income. ...

Paulson executives, too, have already taken steps that may allow them to pay lower taxes. Last year, they put about $450 million into a new Bermuda reinsurance company that in turn invested all of its assets in Paulson & Co. funds. The structure positions them to defer any taxes on investment income from the funds for years, and to pay only the lower capital gains rate when they do. 

(Hat Tip: Bill Turnier.)

Update: Bloomberg, How Puerto Rico Beyond IRS Attracts Paulson-Sized Riches

Celebrity Tax Lore, Tax | Permalink

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The weather and beaches are nice too. And the food is good. And you can get U.S.-level healthcare, paid for by medicare.

It's a great place to retire.

Posted by: Anon | Mar 12, 2013 5:31:13 AM

Maybe the Anglos moving there will take jobs that no one wants.

Posted by: Woody | Mar 12, 2013 5:47:33 PM

It is now reported that John Paulson has said that he is not planning to change his tax residence to PR, but it is worth looking at the ramifications if someone like him did actually move.

Whether you think it fair or not, a natural outcome of a "progressive" (i.e. accelerated) tax system is that the top 1% of tax payers contribute over a third of all tax revenues collected. This means that there is a tremendous overdependence on a small number of people for a HUGE portion of tax revenues. Therefore it is worth looking more closely at this group of "Golden Geese".

Contrary to Occupy Wall Street rhetoric, this group is hardly homogeneous. Remember that both Michael Moore and the head of Goldman Sachs are not only in the top 1% but most certainly part of the top 0.1%. They are certainly not alike in political outlook, attitude towards taxation or methods of accumulating wealth. About the only real common factor is that as a result of globalization, the Golden Geese are no longer bound to the tax home of their birth to make and maintain their wealth. In business terms, the Golden Geese are not "sticky".

Combine overdependence with lack of stickiness and you have a recipe for financial disaster. To put this in better perspective, it is worth noting that the top 400 taxpayers in the US in 2008 (the last year I have done the calculations) contributed 1.9% of ALL OF THE US TAX REVENUE COLLECTED. In 2007, it was 2.05%. Assuming that with increased concentrations of wealth that this number is stable (probably increasing), this means that if even 1/4 of these taxpayers (Note: Paulson is certainly one of them) leave the US tax system, this will have a drop of 0.5% in all future US tax revenues. This would make the sequester cuts look like a rounding error.

Is this group leaving? Unfortunately the measuring methods are retrospective and so you don't know they are gone, until long after their departure. However, given that Paulson was supposed to be the 11th (not the first) US taxpayer to move to PR AND that US expatriations (where the taxpayer leaves the US system completely) have been increasing dramatically and expodentially in the last few years, one would be foolish to ignore this trend.

Posted by: DavidSLesperance | Mar 19, 2013 5:03:26 AM