A few weeks ago, I read that Britain’s richest man – Sir Jim Ratcliffe – was relocating to Monaco. Moving to Monaco, which imposes no personal income tax, will save Ratcliffe up to £4 billion in British taxes.
The popular reaction was predictable but disappointing. Speaking to the Guardian, Robert Palmer, executive director of the left-wing Tax Justice UK, said it was “sad” that Ratcliffe had “put his own greed ahead of contributing to this country.” John McDonnell, the Labour Party’s shadow chancellor, told the UK’s Metro News, “The greed of these super-rich tax avoiders seems to have no bounds.”
This came to mind as I read about the recent proposal by Alexandria Ocasio-Cortez (D-New York) to raise income taxes on wealthy Americans up to 70%. Meanwhile, Senator Elizabeth Warren (D-Massachusetts), a 2020 presidential candidate, has proposed a 2% annual tax on assets of households with a net wealth of $50 million or more. The tax would increase to 3% for billionaires.
Warren’s policy team estimates the wealth tax would raise an astonishing $2.75 trillion over the next decade. She posits the tax as a good way to start paying for proposals such as “Medicare for All.”
What’s not to like about these ideas? As Nobel Prize-winning economist Dr. Paul Krugman puts it:
[W]hen taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue … A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want. And that’s something we can estimate, given evidence on how responsive the pre-tax income of the wealthy actually is to tax rates.
Krugman cites the work of another Nobel Prize-winning economist, Dr. Peter Diamond, who estimates that the optimal tax rate for the ultra-rich is 73%. Dr. Christina Romer, former head of President Obama’s Council of Economic Advisors, thinks the top rate should be at least 80%, perhaps higher.
When it comes to Senator Warren’s idea for a wealth tax, Krugman says it’s an “impressive proposal.” He asks:
How much would entrepreneurs be deterred by the prospect that, if their big ideas pan out, they’d have to pay additional taxes on their second $50 million?
Krugman and his fellow tax-increase apologists are forgetting just one thing, a concept I first learned about in Ayn Rand’s Atlas Shrugged.
When you soak the rich, they eventually get tired of being soaked.
For proof, look no further than Sir Jim Ratcliffe. He’s leaving Britain, where the top income tax rate is only 45% (not 70%) and where there is no wealth tax. He would pay far less in taxes than Democrats want the wealthy to pay, and he’s relocating to avoid taxation.
Sir Jim Ratcliffe is not that unusual. A case in point is Feodor Ingvar Kamprad, the Swedish citizen who founded retail giant IKEA. After Kamprad became a billionaire through his entrepreneurial efforts, he moved most of his assets into offshore foundations. He also relocated to Switzerland in 1976 to take advantage of that country’s lump-sum tax regime.
Unfortunately, it’s not as easy for American billionaires to reduce their tax payments or legally avoid a wealth tax by moving to a low-tax jurisdiction like Monaco. They must literally give up their US citizenship (“expatriate”) to free themselves from US tax obligations.
And that’s not cheap. To discourage wealthy Americans from expatriating, in 2008, Congress enacted an “exit tax” on the value of any unrealized gains in their worldwide estate, less a $600,000 exclusion. Adjusted for inflation, that exclusion has now increased to $725,000.
One high-profile American billionaire expatriate is Facebook co-founder Eduardo Saverin, who gave up his US citizenship in 2011. And it quickly led to a political witch hunt.
Senator Charles Schumer (D-New York) responded with a proposal he called the Ex-PATRIOT Act. The law would permanently bar wealthy expatriates like Saverin from ever returning to the US, even for a visit. “Eduardo Saverin wants to de-friend the United States of America just to avoid paying taxes,” Schumer fumed. “We aren’t going to let him get away with it.”
Oh, yeah? When Saverin expatriated, he had to pay the exit tax on the increase in the value of his Facebook stock. Even accounting for the then $636,000 exemption that applied, I estimate he paid an exit tax of more than $350 million just on the value of these shares.
Does that sound like tax avoidance to you? If that was Saverin’s intent, he did a poor job of it. It’s true the appreciation of his Facebook shares after expatriation wouldn’t be subject to US tax, assuming he didn’t have to sell them to pay the tax.
The US is drowning in debt, its infrastructure is crumbling, and tens of millions of Americans are living below the poverty line. But the answer to these problems isn’t to raise tax rates on the ultra-rich to 70% or higher or impose a wealth tax.
After all, when you soak the rich…
