For those of you that follow the stock market, you certainly are aware that Facebook went public yesterday at $38 per share giving the company a valuation of approximately $100B or about 100x earnings.
Imagine if you were to buy a local small business – like a car repair shop. This shop earns about $100k per year. If you were to pay a Facebook-like valuation, the business would cost you $10M!
Using 100% of your profits, it would take 100 years to pay for itself. Does that sound like a good business decision? Companies like Google trade at less than 20x earnings and Apple at less than 15x earnings. Which of those 3 companies has more earning capacity?
These Facebook related articles are flooding the financial news, but what isn’t so widely distributed is the news of Facebook founder Eduardo Saverin renouncing his US citizenship to presumably save 10′s of millions of dollars in taxes. With a 4% stake in the company, Saverin stands to make about $4B with his shares so the savings would clearly be tremendous.
Saverin was born in 1982 in Sao Paulo, Brazil and grew up mostly in Miami, Florida. Being born in Brazil he holds Brazilian citizenship and a passport. Once his family came to the US, they naturalized as US citizens making Saverin a dual American/Brazilian citizen.
Since 2009 however, Saverin has been living in Singapore. In 2011 Saverin renounced his US citizenship and is now a Brazilian citizen and permanent Singapore resident. Sounds like Saverin really understands the meaning of Geo-arbitrage.
While the press on this is relatively light, what is out there is attempting to eat him alive. He is being labeled as un-patriotic, a tax cheat (he stands to save 10′s of millions of dollars in taxes since Singapore has no tax on capital gains), and generally an immoral human being for robbing the US of taxes due.
I could likely write a book about this topic (maybe I will…), but for sake of time and space let’s leave out the concept of immorality with regards to income taxation.
The US is the only developed nation in the world that still taxes its citizens and permanent residents based on their citizenship, not residency. Every other country in the world only taxes its people when they live in the country while the US taxes its people no matter where they live in the world.
This is an absurd concept. If a German citizen moves to Australia he no longer files a German tax return or pay German tax. He would only be subject to Australian tax since that is where he lives.
As an American, if you move to Australia, you would still file a US tax return and pay taxes in both the US and Australia.
Of course there are some complicated tax treaties and the US earned income exclusion, but if you have investment income or are a high earner, you will owe tax in both places even though you are only consuming the public resources in your country of residence.
From my perspective, Saverin should not have been paying any US taxes since he moved to Singapore in 2009. Why would he? He isn’t using the public services in the US. It just doesn’t make any sense.
Like any smart businessperson, he made an intelligent business decision – he renounced his US citizenship and gave up the most expensive passport in the world.
In the business world there is a profit motive and the free trade of goods and services for money. Businesses compete with other businesses for quality people to employ in their work force. It is only rational. They provide competitive salaries, benefits and perks to attract the smartest and most productive employees.
If their competitor offers higher salaries, bigger bonuses or better benefits, the company must adjust in order to be competitive in the global marketplace.
Countries are no different in this regard. They must offer the best deal to attract the most productive citizens and residents. They compete on a multitude of factors like infrastructure, safety, education, economic activity and taxes.
Many countries around the world are taking advantage of the larger western countries’ unwillingness to change with the times by offering very low tax rates. Singapore has no capital gains tax. Estonia has a flat 21% with no tax on interest or dividend income. Bulgaria has a flat 10% tax. Even Russia has a flat 13% tax with no capital gains.
The US is strangely going the other direction attempting to grab more tax revenue with higher income taxes for the most productive, increases in capital gains, increased taxes on expats, revoking your passport if you have tax debt (see article “Senate Amendment Allows IRS to Revoke Passports”), and generally discouraging entrepreneurship and investment with every new piece of legislation.
This is arrogance at its finest. American politicians think they can continue to remove your incentive to be productive but you will continue to slave away to support their idiotic policies with your tax dollars.
In 2011 there were about 1700 people who renounced US citizenship (according to the State Department). That is about 8x the number of people who renounced in 2007.
While you may think that is a small number, my guess is those 1700 people were not your average earners. They were entrepreneurs and investors with above average incomes and net worth. They were highly educated business people who have voted with their feet like Saverin. They have moved on to greener pastures.
And just when I thought politicians couldn’t get any dumber…
Senator Chuck Schumer, D-NY, put his Facebook status update as, “Eduardo Saverin: Stop attempting to dodge your taxes by renouncing your US citizenship or never come back to the US again.”
Really? So instead of thinking of ways to attract people like Severin, this moron berates him publicly then threatens him for making a smart business decision. Does anyone believe that Schumer doesn’t take every possible tax break possible to minimize his own tax burden? Or maybe it’s ok since Schumer is a politician or maybe it is only immoral over a certainly dollar amount.
To retaliate, Senators Schumer and Bob Casey (yes, we have the same name but no we are not related), D-PA, are unveiling the “Ex-Patriot” Act, or Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy.
The idea is to re-impose taxes on expatriates like Severin even after they leave the US and take up residency in another country. The proposal would impose a mandatory 30% tax on capital gains of anyone who renounces their US citizenship. It would also bar people like Severin from ever re-entering the US.
Reading this stuff is hard for my mind to process. How could these politicians be so damn arrogant and stupid. Do they really think they are creating incentives for people to come to America? Do they really think in this global economy these protectionist barriers actually increase economic productivity?
In reality, this just pushes the productive people out. People like you just say, “Forget this, I will find a country that wants me there and is willing to provide competitive advantages for citizenship and residency.”
Just like when you change jobs because the other company has higher pay or better benefits, citizens will flock to where they are treated best. It is really a dark time and shameful to see America fall so far so fast.
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