Congress’s Berlin Wall strategy

Posted by Marc Hodak on May 29, 2008 under Collectivist instinct | Comments are off for this article

The philosophy behind the Berlin Wall was straight-forward: Your person and your property belong to the state. Couldn’t happen here, right?

Well, Congress has just passed a law that goes half way–you can leave if you want, but we’ll tax everything on your way out, even if you haven’t realized the gain, even if that gain occurred in a foreign bank while you were living and working outside of the U.S., even if you have spent most of your life in another country–perhaps your birthplace–where you are also a citizen, from which you have filed a U.S. tax return because ours is virtually the only country on earth that taxes its citizens no matter where they earn their money.

Now, the only way to escape U.S. taxes is to leave the country and renounce your U.S. citizenship. The U.S. then refers to you, who gifted us with a lifetime of talent, hard-work, and tax payments as a “tax traitor,” bans you from re-entering the U.S., and claims tax on your future income, or all your assets upon death at a 45 percent rate, for the next ten years. What is about to change is that silly “next ten years” loophole. Congress no longer wants to wait; they intend to tax all unrealized gains immediately, and will tax your American children on your gifts at the 45 percent rate whenever you die.

OK, so it’s not like risking getting shot for leaving, but how aggressively collectivist is this stance? Only North Korea, Egypt and the Phillipines also tax the worldwide income of its citizens. (China doesn’t. Cuba doesn’t.) But none of their tax agencies have anywhere near the determination and reach that the IRS has. And only one of them prevents your from leaving (can you say “Dear Leader?”).

Congress is resorting to these ever more insistent money grabs to make up for the fact that the U.S. is no longer the most obvious place for wealthy, productive people to reside. They prefer to brand these people as “selfish” and “traitors” in order to take more of their money by taxing them without representation, so to speak.

Of course, this policy will have consequences, as have similar policies in the past. The intended effect will be modest; the U.S. will slightly stem the current net outflow of wealthy Americans, at least until their lawyers figure out the next loophole, as they have for every similar law passed so far. The unintended effect will be to keep the most skilled, highest earning non-Americans away from the U.S. in droves. It’s not like a budding billionaire from Europe or Asia or the Middle East doesn’t have abundant options for high living outside of the U.S. Plus, since they are not expats, they can visit here any time they want.

Here’s the math: The average high-earner will pay on the order of about $1 million per year in federal and state income and sales taxes per year, not to mention create a multitude of jobs and other economic opportunities in the U.S. for Americans. They can do it in Dubai instead, or Hong Kong, or any of a dozen other fine places that are now or fast becoming competitive with the U.S.. For every three or four of these people who in the past would have decided to become U.S. citizens, but no longer find that option attractive, we will trap one person here in order to tax their retirement income, and whatever part of their estate they were unable to legally shelter. Needless to say, the biggest penalty will be born by our non-wealthy citizens, who will never know what jobs were not created or taxes not collected.