Why the Ex-Patriot Act Is a Creepy Law

Two U.S. Senators are trying to pass legislation that targets a specific individual whose legal behavior they found offensive.

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Whether Facebook co-founder Eduardo Saverin withdrew his U.S. citizenship to save on taxes, as many in the media have speculated, or to facilitate his decision to permanently live and work in Singapore, as he claims, is impossible to determine. Either way, Democratic Senators Charles Schumer of New York and Bob Casey of Pennsylvania are showing themselves to be irresponsible legislators by introducing a bill that they explicitly conceived in order to punish him.

Called the Ex-Patriot Act, it would impose a 30 percent capital gains tax on the investments of people who renounce their citizenship for tax purposes and ban Saverin (and others like him) from ever gain setting foot in America.

Tech Crunch has details:

Any ex-pat with either a net worth of over $2 million, or an average income tax liability of at least $148,000 over the last five years, "will be presumed to have renounced their citizenship for tax avoidance purposes." The ex-pat will have to demonstrate to the IRS that this is not the case if it is not. If there is a "legitimate reason" for that person living outside the U.S. no penalties will apply. But if the IRS finds that someone gave up their passport for tax purposes, they will impose a tax on that individual's investment gains "no matter where he or she resides."

The rate of that capital gains tax will be 30 percent -- the same that non-resident aliens currently pay on dividends and interest earnings.The tax detailed this act, if approved, will backdate for 10 years after its approval.

Said Senator Schumer: "Eduardo Saverin wants to de-friend the United States of America. Sen. Casey and I have a status update for him: Pay your taxes in full or don't ever try to visit the U.S. again. This is a small, narrow group. And they deserve to get the treatment we're giving them."

There are two significant problems with this logic.

1) Whatever Eduardo Saverin deserves, it is imprudent to impulsively introduce legislation in order to target a specific high profile individual who happens to be making news, especially when doing so punishes him in a way he couldn't have anticipated for doing something that was legal. Anyone who doesn't grok that much philosophy of law doesn't deserve to be in Congress.

2) Is it really so clear what sort of treatment Saverin deserves, or what he owes the United States? Born in Brazil and raised in Miami, the company he helped start has created billions in value, and he has paid millions in taxes to the Treasury. Unless he is one day rescued from a terrorist hideout by Army Rangers his contribution to public coffers is orders of magnitude bigger than the services he has used, and America is certainly better off economically for the fruits of his intellectual labor. Finally, as Will Wilkinson points out, existing law is such that Saverin is likely to pay a roughly $500 million exit tax on his Facebook holdings after this week's IPO.


Mr Saverin is actually taking a bit of a gamble. This is a bet that his post-IPO shares will be worth more than his pre-IPO shares. There's a good chance that he's getting a discount relative to the prospective, immediately post-IPO valuation of his Facebook shares, due to the potential difficulty of offloading privately-held stock. But stocks go down as well as up. Should the value of his Facebook stock decline below the amount at which it has been valued for exit-tax purposes, Mr Saverin may end up having donated handsomely to the Treasury.  

Given all that, the notion that Saverin is self-evidently deserving of punishment for his behavior is dubious at best. And barring him from the United States is just silly. What's the worry here, that he'll return, create billions more in value within our borders, and then leave again for Singapore? Do we want to prevent that from happening? As far as I'm concerned, America should roll out the red carpet for every proven innovator in the world who wants to come invent things here, pay the taxes they owe under the law, and then depart to reside elsewhere for awhile.

Even if you disagree with some of that analysis, the most disturbing part about this is that two Senators are targeting a specific individual with legislation, and attempting to punish him for legal behavior because they find it personally offensive. It's an affront to the rule of law (as is putting the burden of proof on individuals rather than the state), and telling that of all the Wall Street crooks who've gotten away with actual illegal behavior in the last several years, the guy two U.S. Senators are singling out is a Facebook co-founder who has done nothing but benefit this country.