An attorney for the very wealthy expresses outrage at the idea of penalizing his clients for leaving America.
When Eduardo Saverin, one of the founders of Facebook, announced that he was renouncing his U.S. citizenship, many believed he was doing so to reduce his tax burden. Despite his denials, New York Senator Chuck Schumer was soon touting a proposed law called The Ex-Patriot Act to punish people like him. I covered the controversy here. And this week, I received an interesting response from David Lesperance, "a private client lawyer who for over 20 years has specialized in assisting high net worth individuals efficiently organize themselves internationally."
A large majority of my clients are expatriating Americans such as Mr. Saverin. In an upcoming book that I am co-authoring with a London School of Economics Professor Emeritus, we have labelled this client group, "The Golden Geese". Today is my first day in the office after three successful weeks of speaking with European countries about bringing my American Golden Geese clients to their shores. During my trip the whole Ex-Patriot Act controversy erupted. Following up on last weeks surge of calls, I am responding to emails and setting up calls all this week with past, present and future Golden Geese clients who are in an uproar about the Ex-Patriot Act proposals.
Since the US has a progressive tax system, where the top 1% account for well over a third of the total tax revenue, the views of the Golden Geese on this topic are important to the US. The two senators proposing this bill talked in their press conference about what a small number of people that this would affect. However, the point they missed is "quality (i.e. whether these individuals are 1% super tax contributors) is much more important than "quantity". If this proposal prompts even a small number of American Golden Geese to decide to leave, then it will have a large asymmetric negative effect on local, state and federal tax revenue. As has been previously pointed out, what happens to this group in a positive or negative way has an immediate and profound impact on government tax revenues.
I thought that you might be interested in what the reaction of the Golden Geese has been to Senators Schumer and Casey 's initiative. In quick summary here are some of the points that my Golden Geese clients are making:
- With the exception of currently only North Korea, the US is the only country that taxes based on citizenship. Every other developed country operates on the "If you are resident here (day count and/or connections) then we tax you". The fairness of this tax basis is questioned by many Americans and by most wealthy people around the world.
- During his press conference, Senator Schumer outlined why he thought that individuals like Mr. Saverin owed all their success to the U.S., and could not contemplate any situation where anyone would be justified in expatriations. Apparently, he was unaware (or ignoring the fact) that there are millions of people around the world who acquired their US citizenship by having one US parent. They never lived in the US; were never educated in the US; never made their wealth through the US; or often never even applied for a US passport. Many live and pay taxes in high tax countries like Canada. As a result of the new FATCA rules and a vast increase in sharing of banking information, these people are suddenly becoming aware of this unique basis for a previously unknown US tax burden. While they will update their filing and pay any US tax owed (rather than face the wrath of the IRS), they have no interest in continuing to do so in the future. This group already and will continue to account for a large number of expatriation. The justifications given for the Ex-Patriot Act ring very hollow for this group;
- Even expatriating Americans who were born or became naturalized (like Mr. Saverin) in the US will pay on the capital gains they made while US citizens. Just like any other US taxpayer. However, they have the added burden of a "deemed disposition" which makes that tax obligation immediate upon expatriation and not at a time when there is an actual sale. At the time of his expatriation (January 2011), Mr. Saverin held shares in a non-public company. He therefore was forced to calculate (and pay!) his capital gains based upon a reasonable valuation of those shares at that time. He had no assurance that those shares would ever go public or if it did, what the value of those shares would be when actually sold. Whether the valuation that the US government required him to place on those shares in January 2011 is higher or lower than what the value of those shares will be in the future is dependent on the market. Senators Schumer and Casey pulled numbers out of the air based on the value of those shares in the first hours of trading and conveniently failed to mention that Mr. Saverin had already paid enormous capital gains taxes as a result of US rules and might never see the values that they based their complaints upon.