Conclusion: Bulldoze the U.S. Tax Code
Yet history shows, time and again, that punishing the entrepreneurs and businesses that create jobs and capital is a sure route to economic devastation, while lowering taxes—not with one-shot reductions that politicians like, but by substantially cutting rates—is always the best economic stimulus.
—Steve Forbes and Elizabeth Ames, How Capitalism Will Save Us
In May 2012, shortly before Facebook’s IPO, the social networking site’s Brazilian-born co-founder, Eduardo Saverin, renounced his U.S. citizenship and moved to Singapore, hoping, many assumed, to avoid enormous capital gains taxes. Singapore has no capital gains tax.
Saverin was widely denounced for his decision. Senator Charles Schumer was so incensed by the young billionaire’s “despicable” act that he introduced legislation to impose a 30 percent tax on investments of expatriots.1 Schumer’s bill, which was not enacted, also would have banished Saverin from the United States for life. Though it was highly questionable whether Saverin could shield much of his Facebook gains by renouncing his citizenship, the prospect that he might made him a “traitor” in the eyes of politicians and the media. But from a purely economic standpoint, the reduction of his tax bill benefited the U.S. economy. His actions were undeniably good for economic growth.
As I explained in chapter six, when the rich hold onto their wealth, everyone else has access to it. Saverin might place his wealth with J. P. Morgan, Goldman Sachs, or one of the other financial institutions that invest the wealth of the superrich. They earn their fee by putting the money to work, so any bounty from Facebook’s IPO that the taxman didn’t get would quickly reach an existing business eager for growth capital or a new business seeking start-up funds.
But what if Saverin converted his wealth into Singapore dollars? What good would it do the United States then? Such a conversion would require an exchange with an individual or institution that wanted his U.S. dollars. In that case, the buyer of Saverin’s dollars would have to put them to work or in a bank, and the result would be essentially the same as if Singapore’s newest tycoon had banked or invested those dollars himself.
Instead of moving to Singapore, Saverin could have stayed put and written a massive check to the federal government. But then the private economy, where all wealth is created, would have had reduced access to the capital necessary to grow. At a micro-level, average people in need of credit would have had less to draw on.
Some might argue that the federal government could invest the money. Unfortunately, government—regardless of who’s running it—is not in the position to act like a business. In the private sector, businesses face collapse if investors lose faith in their management. Government faces no such discipline. The ceaseless flow of taxpayer dollars into the treasury allows it to continue spending regardless of the results. The judgment of the market is silenced.
An even bigger problem is the talent mismatch. The former senator Trent Lott once obnoxiously observed, “Washington is where the money is. That’s what generally keeps people here.”2 But while staffers, senators, congressmen, and high-level bureaucrats can make fortunes in Washington’s version of the private sector after leaving the government, the real money is made outside of Washington. Anyone who knows how to invest is not working in government. Investment success is hard enough to achieve in the market-disciplined private sector. Moreover, the best capital allocators earn a fortune by directing capital to its highest use. While government work pays well by most standards, and people coming out of government can earn at the “1 percent” level in Washington, the true financial geniuses would never settle for Trent Lott’s mere millions, let alone the relatively meager salaries paid to even the highest level federal employees.
Saverin did the economically reasonable thing by shielding as much of his wealth as he could from the black hole of government. I would go even further, however, and argue that in sacrificing his American citizenship to keep tens of millions of dollars of life-giving capital in the private sector, he acted heroically. We’ll never know how many people owe their jobs—perhaps their whole careers—to his decision, but you can bet that Eduardo Saverin would be a hero to them.
Senator Schumer might be interested in banishing people who think they can make better use of their fortunes than he can, but the United States was founded by men suspicious of government power and the politicians who wield it. The Constitution was not written haphazardly, but conceived by wise men with an eye on constraining the powers of politicians, including the powers of the Founding Fathers themselves. Congress and the president are empowered to protect the individual rights of citizens. Beyond that, the Constitution grants the political class only a few explicitly defined governing powers. Any powers not specifically delegated to the federal government, says the Tenth Amendment, are reserved to the states or the people.
What happened to the Founders’ vision? A federal government exercising limited powers—providing for the common defense, coining money, and other basic functions focused on preserving individual freedoms—would have no need of massive annual collections from the taxpayers. Schumer’s fury at being deprived of Eduardo Saverin’s millions suggests that the federal government has grown well beyond its constitutional limits. That’s why I say that if Saverin succeeded in keeping all those millions out of the hands of a power-hungry political class, he’s one of freedom’s heroes.
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There is no excuse for today’s federal tax system. It obstructs wealth-creation and jobs. The only interests it serves well are those of the political class. When they debate among themselves about the proper level of taxation, it’s clear that they think the federal government can tax at any level they want.
Many people were enraged when it was revealed in May 2013 that the federal government’s taxing authority, the Internal Revenue Service, was playing favorites with tax-exempt organizations. Specifically, groups seen as hostile to big government (and therefore to its feeding mechanism, the IRS) were subjected to heightened scrutiny that amounted to harassment. In some cases, IRS officials leaked confidential information about disfavored groups to their political opponents. In response to this scandal, many have called for the reform of the IRS, but they miss the point. The IRS is politicized no matter which party is in power. No reform will change human nature. The real disgrace is that Americans—whose country was founded on individual freedom—cower before the political creation that is the IRS every April 15. The real disgrace is a tax code that is a monument to social engineering. The tax code rewards some groups for being “non-profit,” some for buying a house with debt, and others for having children.
The reasonable response to the monstrosity that is our tax code is the flat tax that Steve Forbes has so articulately proposed. A flat tax would make the IRS largely irrelevant and would take away the club that lets fallible politicians tell us how to live. A flat tax would abolish the myriad deductions that define the tax system. It would eliminate taxes on capital gains, corporations, dividends, and estates—all of which amount to quadruple taxation of individuals’ earnings.
The downside to a flat tax is that it might work too well. In a country filled with some of the most productive, entrepreneurial people on earth, the stimulation of growth could increase the federal government’s already abundant revenues. All that additional money in the treasury might fuel the government’s uncontrolled growth.
Now, the federal government has a necessary role in protecting citizens from foreign intruders, administering justice, and protecting property rights. It needs revenue, but not nearly as much as it receives. The best tax, therefore, might be a tax on consumption rather than income—what some call the Fair Tax. The first reason for such a tax is that in a free country, citizens should not have to prove their income to the federal government. Adopting a consumption tax and abolishing all other taxes and deductions would end the IRS altogether.
Second, even a flat income tax still puts a price on work. A sensible tax system would make work “free” while taxing consumption. Some will suggest that such a tax would penalize retailers, but people produce in order to consume. The wants of human beings are unlimited, so a light tax on consumption would have a negligible effect on consumption.
Third, even if a consumption tax did have a noticeable effect on spending, society would be better off. To return to my refrain, there are no companies, no start-ups, and no jobs without savings and investment first. If people avoid consumption, their savings will supply the credit to the innovators of tomorrow. All the products we enjoy today are the result of past savings, and a small national tax on consumption would free up enormous amounts of capital to fund the next Steve Jobs.
Fourth, a consumption tax would be blind. It would be hard for politicians to impose a graduated consumption tax with an eye on playing favorites. Instead, we’d all be equal before the tax law, as we should be.
Fifth, and perhaps most critical, a consumption tax is the only way citizens can starve the federal government. Theoretically, a consumption tax, unlike a flat income tax, would give citizens the power to pay the government less some years. This is particularly important when people are unhappy with the federal government, but it’s also important when we citizens are having a difficult year such that we’re consuming less. If we’re struggling, so should the government struggle through reduced revenue intake.
We don’t know for certain why Eduardo Saverin renounced his U.S. citizenship, and really it is none of our business. If he did it with taxes in mind, the problem is not with Saverin but with the tax code that drove such an entrepreneur from our shores. It is time to bulldoze this obnoxious affront to the free society that our Founding Fathers established at such great cost over two centuries ago.