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Archive for May 11th, 2012

It is very sad that America’s tax system is so onerous that some rich people feel they have no choice but to give up U.S. citizenship in order to protect their family finances.

I’ve written about this issue before, particularly in the context of Obama’s class-warfare policies leading to an increase in the number of Americans “voting with their feet” for places with less punitive tax regimes.

We now have a very high-profile tax expatriate. One of the founders of Facebook is escaping for Singapore. Here are some relevant passages in a Bloomberg article.

Escaping to Singapore, where success is encouraged rather than penalized

Eduardo Saverin, the billionaire co- founder of Facebook Inc. (FB), renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill. …Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion. …Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO. “Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement. …Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there. …Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Avi-Yonah. “Once it’s public you can’t fool around with the value.” …Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, according to government records. …“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

What makes this story amusing, from a personal perspective, is that Saverin’s expatriation takes place just a couple of days after my wayward friend Bruce Bartlett wrote a piece for the New York Times, in which he said that people like me are exaggerating the impact of taxes on migration.

Here are some key excerpts from Bruce’s column.

In recent years, the number of Americans renouncing their citizenship has increased. …the number of Americans renouncing their citizenship rose to 1,781 in 2011 from 231 in 2008. This led William McGurn of The Wall Street Journal to warn that the tax code is turning American citizens living abroad into “economic lepers.” The sharply rising numbers of Americans renouncing their citizenship “are canaries in the coal mine,” he wrote. The economist Dan Mitchell of the libertarian Cato Institute was more explicit in a 2010 column in Forbes, “Rich Americans Voting With Their Feet to Escape Obama Tax Oppression.” …the sharp rise in Americans renouncing their citizenship since 2008 is less pronounced than it appears if one looks at the full range of data available since 1997, when it first was collected. As one can see in the chart, the highest number of Americans renouncing their citizenship came in 1997. …The reality is that taxes are just one factor among many that determine where people choose to live. Factors including climate, proximity to those in similar businesses and the availability of amenities like the arts and cuisine play a much larger role. That’s why places like New York and California are still magnets for the wealthy despite high taxes. And although a few Americans may renounce their citizenship to avoid American taxes, it is obvious that many, many more people continually seek American residency and citizenship.

I actually agree with Bruce. Taxes are just one factor when people make decisions on where to live, work, save, and invest.

But I also think Bruce is drinking too much of the Kool-Aid being served by his new friends on the left. There is a wealth of data on successful people leaving jurisdictions such as California and New York that have confiscatory tax systems.

And there’s also lots of evidence of taxpayers escaping countries controlled by politicians who get too greedy. Mr. Saverin is just the latest example. And I suspect, based on the overseas Americans I meet, that there are several people who quietly go “off the grid” for every person who officially expatriates.

The statists say these people are “tax traitors” and “economic Benedict Arnolds,” but those views are based on a quasi-totalitarian ideology that assumes government has some sort of permanent claim on people’s economic output.

If people are leaving America because our tax law is onerous, that’s a signal we should reform the tax code. Attacking those who expatriate is the fiscal version of blaming the victim.

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Having written several times about crazy French statism, you will understand why I like this cartoon.

Though, to be fair, France hasn’t gotten to the point where it’s being bailed out (it’s probably just a matter of time).

If you want some good analysis of the situation in Europe, Veronique de Rugy of the Mercatus Center hits the nail on the head in her column in today’s Washington Examiner.

France has yet to cut spending. In fact, to the extent that the French are frustrated with “budget cuts,” it’s only because the increase in future spending won’t be as large as they had planned. The same can be said about the United Kingdom. Spain, Italy and Greece have had no choice to cut some spending. However, in the case of these particular countries, the cuts were implemented alongside large tax increases. …This approach to austerity, also known in the United States as the “balanced approach,” has unfortunately proven a recipe for disaster. In a 2009 paper, Harvard University’s Alberto Alesina and Silvia Ardagna looked at 107 attempts to reduce the ratio of debt to gross domestic product over 30 years in countries in the Organisation for Economic Co-operation and Development. They found fiscal adjustments consisting of both tax increases and spending cuts generally failed to stabilize the debt and were also more likely to cause economic contractions. On the other hand, successful austerity packages resulted from making spending cuts without tax increases. They also found this form of austerity is more likely associated with economic expansion rather than with recession. …While the debate over austerity continues, the evidence seems to point to the conclusion that austerity can be successful, if it isn’t modeled after the “balanced approach.” It’s a lesson for the French and other European countries, as well as for American lawmakers who often seem tempted by the lure of closing budget gaps with higher taxes.

This is similar to my recent analysis, and Veronique also is kind enough to cite my analysis of how the Baltic nations have done the right thing and cut spending.

There are obvious lessons from Europe for the United States. If politicians don’t reform entitlement programs, we’re doomed to have our own fiscal crisis at some point in the not-too-distant future.

Only there won’t be anybody there to bail us out.

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