Sen. Sanders attempts to buy AFL-CIO votes with flawed wealth tax logic
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Sen. Bernie Sanders, pandering to the Vermont AFL-CIO annual convention on Saturday, used the opportunity to trot out the old socialist vote-getting scam of a “wealth tax.” As reported by the Washington Times, “Sanders, a self-described socialist, called for a progressive estate tax on multi-millionaires and billionaires.”

By calling for a wealth tax, Sanders completely ignores the fact that never in this planet’s history have such taxes had the desired effect.

Well in actuality, wealth taxes have often had the effect desired by those calling for such a tax. But that effect is not the effect that proponents claim. So let me correct the last part of the statement in the previous paragraph.

Wealth taxes have never increased overall tax revenue. But they have had the effect intended by the person calling for them. That’s because the real, un-stated intent was not to increase tax revenue, as they claim, but rather, to get the votes of those too naive to know that wealth taxes just drive wealth to other nations and thus increase the tax load on the poor and middle class, who remain.

Wealth taxes have been tried in many forms, over the years, and not only have they all failed to increase tax revenue, but overall tax revenue ended up being down significantly, as a direct result of a wealth tax.

In George W. Bush’s infamous betrayal of his “No new taxes” oath, was a 10% Luxury Tax (a type of wealth tax). Proponents of the tax “claimed” that it would raise tax revenue. On October 26, 1990 the Joint Committee on Taxation issued a report titled, “Budget Reconciliation (H.R. 5835) – Revenue Provisions as Reported by the Conferees”, in which the the committee projected that the Luxury Tax provisions of the budget bill would generate $25 million in 1991 (found at the bottom of page 2 in the linked report). In 1992, we learned that it had, in fact, only generated $16.6 million in 1991. Oops!

But that’s not the worst of it. As a direct result of the luxury tax, more than 9,000 jobs in the USA were lost in the yacht, aircraft, and jewelry industries. Those job losses cost the government $24.2 million in unemployment benefits and lost income tax revenue in 1991. So the net effect of the luxury tax was a $7.6 million in lost revenue in 1991, alone.

The luxury tax was repealed in 1993. But by that time it was too late. The formerly booming U.S. yacht industry, which represented 7,600 of those lost jobs, had already moved offshore and that industry has remained largely offshore since that time.

Then look at the French wealth tax. In a paper titled, “The Economic Consequences of the French Wealth Tax“, the renowned French professor of economics and finance, Eric Pichet states, “The ISF (‘Solidarity Wealth Tax,’ the French wealth tax) causes an annual fiscal shortfall of €7 billion, or about twice what it yields; The ISF wealth tax has probably reduced GDP growth by 0.2% per annum, or around 3.5 billion (roughly the same as it yields); In an open world, the ISF wealth tax impoverishes France, shifting the tax burden from wealthy taxpayers leaving the country onto other taxpayers.”

These are just two recent examples of wealth tax failures. In fact, every attempt at employing a wealth tax has not only failed to increase tax revenue, but has significantly reduced overall gross revenue, largely due to the flight of wealthy taxpayers, to more wealth-friendly jurisdictions.

Some people reading this may be thinking, “That can’t happen here. The luxury tax failure was a fluke. This is the USA. Where would the wealthy go?” But the evidence shows that it’s already happening here. Since Barack Obama assumed office and embarked on his “Soak the Rich” agenda, the rate of wealthy U.S. citizens who formally renounce their citizenship each year, as recorded in the Federal Register, has increased by 1300% and renunciations this year indicate that it will be even higher in 2014.

Taxpat Chart for 2013
Hover over image to view at full size.
Renunciation History (This frame may be scrolled if it doesn’t fit your browser window.)

In the entire history of the planet, wealth taxes and other attacks on success have never resulted in increasing tax revenue.

But wealth taxes almost always achieve what its proponents secretly intend. It convinces naive and uninformed voters to vote for the person calling for a wealth tax.

In all likelihood, Sen. Sanders knows full well that a wealth tax will significantly hurt middle and lower class working people. But he also knows that if he plays it up long enough, it will convince many naive and unsophisticated voters to vote for him. In that case, the wealth tax will do exactly what he intends – get him votes at the expense of poor and middle class voters.

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Renunciations of U.S. citizenship in first half of 2014 approaches total for Bush’s entire last term
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Taxpat Chart for Q1 of 2014
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Renunciation of U.S. Citizenships continue to climb (This frame may be scrolled if it doesn’t fit your browser window.)

The federal government just released its quarterly list of the names of those wealthy U.S. citizens who formally renounced their citizenship in the most recent quarter – that being Q2 of 2014 – and once again, it paints a bleak picture.

In the second quarter of 2014, the number of “rich” U.S. citizens who formally renounced their citizenship, in favor of a citizenship from another nation, was 576. This brings the total of renunciations for the first six months of 2014 to 1,577. If the next six months is as bad – and the trend is that it will be far worse – then Obama is primed to set yet another record for expatriations of the wealthy, in a single year.

Each quarter, in accordance with IRC section 6039G of the Health Insurance Portability and Accountability Act (HIPPA) of 1996, the IRS publishes a report naming every “rich” U.S. citizen who renounced his citizenship in the previous quarter. I should emphasize that the numbers cited here are not just some estimate, but a count of the names of expatriates on each quarterly list.

Those in Congress, who advocated for these lists, called them the “Name and Shame Lists.” But most of those congressmen, being career politicians who had no record of success in the private sector and therefore had no idea of what it takes to succeed, mistakenly thought that by publishing the names of wealthy expats, they could shame them into not renouncing. But as with every other attempt by governments around the world to control wealth, it hasn’t exactly worked out that way. In fact, many expats now look at having their name on one of those Lists, not as a reason to be ashamed, but as a badge of honor, signifying that they were smart enough to leave ahead of the rush. Many of those earlier wealthy expats now point to the recent dramatic rise in renunciations, expressed in the above chart, as evidence that the “rush” appears to have begun.

Moreover, the compilation of these lists, that some naive members of Congress called the “Name and Shame Lists,” has become more commonly known as the “Taxpat Lists.” The reason for that term is based upon the fact that everyone whose name appears on any of these quarterly lists is considered, by the U.S. government, to be “rich.” Furthermore, the government incorrectly assumes that the only reason why a rich U.S. citizen would renounce his citizenship would be to end or reduce his U.S. income tax liability. Put those two government assumptions together and suddenly wealthy expatriates become “taxpatriates” – a term, by the way, that has been embraced my many former U.S. citizens and those considering expatriation.

Most expatriate’s names do not appear on the Taxpat Lists. In fact, the government has a special term that they use to identify these people. The term is covered expatriate.” In order to qualify as a covered expatriate and have your name appear on one of the lists for 2014, an individual expat must have either a net worth of more than $2,000,000 on the day prior to expatriation or have had an average annual net income tax liability of $157,000 for the 5 years ending before the date of expatriation. That means that every name on those lists are in the top one percent (1%) of income earners or the income group that pays 68% of all federal personal income tax collected. That income group is precisely the group that we can least afford to lose.

Obama’s “Soak the Rich” agenda is driving away the very small one percent of people whose taxes support almost 70% of our government. In fact, these are the people who drive the engine of our entire economy. For the most part, they are the job-creators and the risk-takers. Even those who are not job creators are big spenders, which creates the demand for jobs. They might be billionaires or just frugal investors.

Some of them may be fabulously rich people, like songwriter Denise Rich (ex-wife of billionaire, Marc Rich, who was pardoned by Bill Clinton, for tax evasion). When she renounced, she stated in no uncertain terms, that it was for tax purposes, so she could leave what she had earned to her children, without the IRS taking a huge chunk of it. But most of those wealthy expats are just ordinary business people. It might be the guy who owns two or three restaurants or a building contractor, either of which employing around 100 people. The guy who owns a night club that’s packed every night, probably earns more than enough to make the List. Even some independent internet marketers could make that List. That last group doesn’t directly create jobs, but they spend lots of money, which leads to job demand. The point here is that these people are not all billionaires. But they are job-creators and they pay more than 68% of all federal personal income tax.

Some people who have never created a job might say, “Well, when those people leave, someone else will step in to create those jobs.” But just ask yourself, “When was the last time you heard of someone getting a job from a poor person?” People who succeed make their own opportunities. They don’t wait for some other successful person to step out of the way. Sure, others might try to fill the shoes of those who left. But most will fail, because if they were capable of running a successful business, they would already be doing so. That means that when we lose these job-creators, we lose most the jobs that they create.

But it’s really far worse than these numbers would suggest. On July 1 of 2012, the Foreign Account Tax Compliance Act (FATCA), which was a part of the HIRE Act of 2010 (H.R. 2847), went into effect and it has been driving expatriations even higher for a number of months. Due to FATCA, U.S. citizens who live and work offshore have been finding it increasingly increasingly difficult to do ordinary banking in their country of residence. Foreign banks are telling U.S. citizens that their money isn’t welcome in their banks any longer. Of course, without a bank account in your country of residence, you can’t pay your rent, electric bill, or a dozen other every-day cost of living expenses. This leaves U.S. citizens working abroad only two alternatives. They can either give up their lucrative offshore job and return to the USA or give up their U.S. citizenship, which is causing them so much trouble. Many have been taking that second option.

However, more than a few expats have put off taking action until absolutely necessary. This has left many expats scrambling to get a foreign passport, so they can renounce their U.S. citizenship. But that takes time – usually several months. As those passports are issued, in the coming months, we’ll probably see even more renunciations of U.S. citizenship, than we saw leading up to FATCA implementation. What we’ve seen up to now is only the beginning. It’s going to get a lot worse.

Barack Obama inherited the lowest renunciation rate since the government began reporting expatriations, in 1996. But renunciations spiked 320% the year he took office and formal expatriations of wealthy U.S. citizens have repeatedly reached new heights since that time. It’s clear that Obama’s policies have been the primary factor forcing these renunciations.

Instead of passing punitive legislation like FATCA, Obama and both parties in Congress should be focusing on laws that reward success and encourage foreign investment. The FairTax would go a long way toward turning around this critical transfer of wealth out of the USA. Instead of jobs leaving the USA, massive growth in the job market would be seen at all levels of employment, as foreign investors rushed to be among the first to invest in a more productive USA.

Instead of pushing ill-conceived schemes like FATCA, that do nothing but drive more wealth out of the USA, Obama should be doing everything that he can to encourage more successful investors from offshore, to move themselves and their money into the USA, where that wealth will create jobs. But I suppose that we shouldn’t be too critical of Obama’s tax policy. After all, it’s easy to understand how he could be completely unaware of the damage that his tax policy is doing. All that playing golf in Hawaii and holding fund-raisers is sure to be very exhausting.

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