Private city in Honduras will have minimal taxes, government

No taxes and land along the coast? What's not to like? (AP)

Small government and free-market capitalism are about to get put to the test in Honduras, where the government has agreed to let an investment group build an experimental city with no taxes on income, capital gains or sales.

Proponents say the tiny, as-yet unnamed town will become a Central American beacon of job creation and investment, by combining secure property rights with minimal government interference.

“Once we provide a sound legal system within which to do business, the whole job creation machine – the miracle of capitalism – will get going,” Michael Strong,  CEO of the MKG Group, which will build the city and set its laws, told FoxNews.com.

Strong said that the agreement with the Honduran government states that the only tax will be on property.

“Our goal is to be the most economically free entity on Earth,” Strong said.

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Honduran leaders hope that the city will lead to an economic boom for the poverty-stricken country south of Mexico. The average income in Honduras is $4,400 a year.

“[It] will bring a lot of investment into the country [and be] a center for many employment opportunities for our people,” Honduran President Porfirio Lobo Sosa has said.

The laws in the city will be separate from those in the rest of Honduras. Strong said that the default law that will be enforced in the city will actually be based on Texas state law, which has relatively few regulations.

“It will be Texas law with more freedom of contract. Texas scores well on state economic freedom rankings,” he explained.

“Texas law is also very familiar to American business people, and it is very familiar to Hondurans, because a lot of Hondurans have gone there or have family there.”

Investors who think the city will do well will also be able to buy land there.

“There will be a free market in land,” Strong said.

The rules for immigrating to the city have yet to be finalized, but are expected to be loose.

“It will be designed to be very welcoming to those with a minimum threshold of skills or capital,” Strong said. However, businesses in the city will be required to employ a minimum proportion of native Hondurans – a requirement imposed at the outset by the Honduran government to ensure that the city’s benefits largely go to Hondurans.

To insure the city against political change, the Honduran Legislature has agreed that a two-thirds majority will be required to interfere with the city.

MKG will invest $15 million to begin building basic infrastructure for the first model city near Puerto Castilla on the Caribbean coast, said Juan Hernandez, president of the Honduran Congress. That first city would create 5,000 jobs over the next six months and up to 200,000 jobs in the future, Hernandez said.

Strong said construction could begin in months.

“First, we will build the critical infrastructure -- roads, water, power, sewers," Strong said. "In collaboration with the [Honduran] government, we will then create the city’s government system and the security, and 3 to 6 months after that we will build the first factories.”

The MKG Group city is the first to get approval, but Honduras plans to create other “free cities” as well.

The bill to allow the creation of such cities passed the Honduran Legislature nearly unanimously, by a vote of 126 to 1. But not everyone is on board with the project. Left-wing Hondurans have filed a complaint before the Honduran Supreme Court, arguing that the free cities project violates their constitution and treats “national territory as a commodity.”

The indigenous Garifuna people in Honduras also have protested the creation of free cities, saying that they are worried the cities will be built on their land.

Strong said that they need not worry.

“The media reports are full of inaccuracies. We're not even remotely close to [the Garifuna]. We're literally hundreds of miles away,” he said.

Additionally, the new city will be built on unoccupied land.

“We will be selecting unoccupied land so that everyone will be opting in by choice,” Strong said.

But some oppose the project being built anywhere in Honduras.

“I can't help but suspect that the promise of plenty of jobs is nothing but a Trojan horse,” Teofilo Colon Jr., who runs the Garifuna cultural group Being Garifuna, told FoxNews.com.

“The prospect of setting up a charter city, with its own laws, [that] is sovereign to itself and doesn't have to pay taxes, is a dubious one at best. It'd be tantamount to inviting pirates to come in and have free reign to essentially raid the country's resources/riches.”

The MKG Group says its plan, however, is not to take advantage of natural resources, but rather to attract entrepreneurs using good laws and low taxes.

Strong cited Hong Kong as a city that prospered under that model.

“Hong Kong’s poverty once was roughly on the level of Africa. Today it is one of the wealthiest places.”

Strong says that the same could happen in Honduras.

“We'll see Hondurans having more jobs, higher income, and more security than they've ever had.”