In Praise Of Eduardo Saverin's Tax Avoidance
Competition is good for companies because it forces them to provide the best product or service at the lowest possible price, or lose customers if they don’t. Competition is also good for government tax schemes — whether federal, state or local — because it forces governments to provide the best services for the lowest possible tax, or see their citizens move elsewhere.
But don’t hold your breath waiting for the tax-aholic politicians in Washington to agree. They think it’s everyone’s duty to pay whatever taxes they impose on the public, however outrageous. Unless, of course, it’s liberal hypocrites who are dodging the very taxes they impose, whether illegally (e.g., former Senate Majority Leader Tom Daschle, current Treasury Secretary Timothy Geithner, and former House Ways and Means Chairman Charlie Rangel) or legally (e.g., Massachusetts Senator John Kerry, who avoided an estimated $500,000 in taxes by docking his foreign-built yacht in Rhode Island rather than Massachusetts).
So when Facebook co-founder Eduardo Saverin decided to give up his U.S. citizenship, and by so doing avoided paying millions of dollars in U.S. taxes, New York Senator Chuck Schumer attacked him for “selling out the country. ” I can’t recall Schumer being equally critical, or critical at all for that matter, of his above-mentioned congressional colleagues.
In his own defense, Saverin denies that he left the U.S. to avoid paying taxes and stresses that he paid all applicable taxes at the time, including an “exit tax.” He points out that he moved to low-tax Singapore in 2009 and filed to give up his U.S. citizenship in January of 2011, which became official last September. But even if he didn’t intend to avoid the bigger tax bill that would come after the Facebook IPO, he did, and that’s what has Schumer and Pennsylvania Senator Bob Casey — and maybe even House Speaker John Boehner — so upset. Who’s gonna pay for all those stimulus bills and spending sprees?
And so Schumer and Casey have proposed the Ex-PATRIOT Act (“Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” Act) that would impose a capital gains tax of 30 percent on those the IRS deemed as having renounced their U.S. citizenship in order to avoid paying U.S. taxes. And it would deny offenders the ability to reenter the country until they paid up.
The first and most basic question to ask is why we should care if someone wants to move and become a citizen of another country. In a free country, isn’t that their right and choice, for whatever reason? Besides, there are millions of would-be foreign Saverins who would give anything to come to the U.S. in his place.
Of course, if there were a mass exodus of wealthy people, it would likely be the result of bad government policies. And so the appropriate solution should be to fix the bad policies, not make it harder for people to escape.
During the cold war, the old saying was that free countries had to build barriers to keep others out while the Soviet Union built barriers, like the Berlin Wall, to keep its people in. Schumer and Casey want to build walls to penalize those who want to escape; that effort must be resisted.
Tax competition is one of the best good-government principles in existence, and those who are hell bent on constantly raising taxes don’t like it one bit. For them, a lack of tax competition means they can impose taxes with impunity.
As of April, the U.S. has the dubious distinction of having the highest corporate tax rate in the developed world, and loyal U.S.-based companies must make financial decisions based on that rate. Tom Giovanetti, president of the Institute for Policy Innovation (with which I am associated), likes to point out that the reason the merger between two major car manufacturers became DaimlerChrysler rather than ChryslerDaimler was that the German corporate tax system was more favorable.
In addition, prominent U.S.-based multinational companies have an estimated $1 trillion or more sitting in foreign bank accounts because the U.S. forces them to pay additional taxes — taxes that no other major industrialized country forces corporations to pay — if they bring that money home.
The solution, of course, is to make the U.S. tax rate more competitive by lowering it. Instead, President Obama and many Democrats choose to harangue and demonize those companies — even though they themselves no doubt take advantage of all appropriate options to keep their own taxes as low as possible.
And the haranguing isn’t limited to Washington. When Ireland decided to lower its corporate tax rate to 12.5 percent several large corporations set up shop there creating an economic boom. When the financial crisis hit, European countries were willing to loan the country money, but they wanted it to raise its tax rates so as to quit attracting companies trying to escape the higher tax rates in Europe.
Back in the U.S., financial basket-case California, led by Governor Jerry Brown and the Democrat-controlled state legislature, wants to raise state taxes on the rich even higher. If successful, the Golden State will see an even greater exodus of its most prosperous people and companies — in essence, renouncing their California citizenship — as they move to lower-tax states.
If Eduardo Saverin did renounce his U.S. citizenship to avoid higher taxes, he should be praised, not criticized. He has only done what millions of Americans do when they move to low-tax states. That potential for outmigration should force politicians to keep taxes low and competitive. And voters can decide if they want to retain those who, like Schumer and Casey, resort to building walls.