Eduardo Saverin Made the Right Decision Concerning His U.S. Citizenship

For most of us, the closest we will ever get to knowing the real story of the creation of Facebook is the 2010 movie, The Social Network. With the company about to go public, its past is probably less important than its future, but it is not without interest.

Eduardo Saverin, founder Mark Zuckerberg’s friend and the company’s first CFO, was depicted as the out-of-touch traditionalist who thought it important to try to make some money to fund the company’s development by selling advertising. Napster co-founder Sean Parker did not agree and gained Zuckerberg’s ear when the company moved to California while Saverin stayed in New York. In an early round of angel funding, Saverin’s ownership interest in Facebook was sharply diluted from 34% to 0.03% while the others maintained their relative ownership positions. Thanks to the intervention of Marilyn Delpy, one of Zuckerberg’s junior defense lawyers, a settlement was reached, and Saverin appears likely to come away with about $3.5 billion later this week.

Despite considerable competition, I found this the most compelling vignette in the film. I simply could not understand how something Saverin owned could be taken away from him without his consent. I have since learned that I am the same kind of ad-selling traditionalist that he is and that my notions of legality do not apply in the world of angel investing, venture capital and IPOs.

Saverin made just a little bit of news the other day when he gave up his American citizenship to become a citizen of Singapore, where he lives and manages his investments. Jingoists are likely to decry this decision unless he successfully stays out of the limelight. Interestingly, he will be required to pay an exit tax to hand in his passport though presumably it will be less than the amount he would have paid had he stayed.

Did you know we had an exit tax? It seems a little like the Berlin Wall in that it impedes our ability to make decisions we might otherwise freely make. It is also an attempt to preserve a relationship between the govern-ors and the govern-ees that long ago disappeared because of geographic mobility.

The Magna Carta came into being in 1215 at least in part because it was then impossible to gather up your assets and move somewhere else if you did not like your king. Then, your assets consisted of farmland, forests, and streams that could not readily be rolled up and carried off to the continent.  Today, financial assets consist of ones and zeros on computer servers and they can be transferred in a flash to a more hospitable locale. If losing your taxpayers seems undesirable to those who govern, the easy answer is to create an exit tax though the right answer is to create conditions under which they do not want to leave in the first place.

On Sunday, April 15, the day on which taxes loomed larger than they do a month later, Harvard Economics Professor, N. Gregory Mankiw, had an article in the New York Times entitled “Competition Is Healthy For Governments, Too.” There was a clever graphic showing perspiring states with tiny stick figure arms and legs racing each other around the track.

Here is the crux of Mankiw’s argument.

“For much the same reason, competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet."

The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can — and often do — move to places offering a better mix of taxes and services.

While conservatives embrace governmental competition, liberals have good reason to worry about it. The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources. In the words of President Obama, they want to "spread the wealth around."

Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals. If you are going to take from Peter to pay Paul, Peter may well decide to leave. It is perhaps no surprise that state and local tax systems are less progressive than the federal one.”

Though Professor Mankiw makes his point about states, it is no less applicable to countries. If an individual finds a better value for money in one country over another, it is sound economic decision making to move to the better one. Of course, one of the factors to be considered is whether your new country is more or less likely to be overcome by unpleasant invaders than your old one, but unpleasant invaders appear to be less of a problem today than in times past.

I understand and support the decision taken by Eduardo Saverin though I’m sorry his considerable resources and talent will be focused elsewhere. Having experienced the dilution of his interest at the hands of fellow investors, he might be understandably skeptical of entrusting those interests to an even-more-powerful government.

Fool me once shame on you, fool me twice shame on me.