Rep. Michele Bachmann (R-Minn.) isn't the only person to renounce citizenship this week. Eduardo Saverin, the billionaire who co-founded Facebook with Mark Zuckerberg renounced his U.S. citizenship for tax purposes. By doing so, Saverin can pay less in taxes related to the upcoming $100 billion Facebook IPO and dodge capital gains taxes on future investment income.
Policymakers in Washington should pay attention since Saverin's decision highlights problems with our country's federal tax policy, and shows that taxes really do matter as they influence people to change their behavior.
Capital is mobile, and people and businesses will balance their tax burden with their demand for government services. That's why Saverin's story proves that the U.S. has a business climate that is hostile to investment. As a result, Saverin will invest much of the money he will earn from the Facebook IPO in foreign companies that are entering Asian markets. Although his future investment activity will be great for the global economy, it won't directly benefit the U.S.
Some may dismiss the importance of Saverin's action by saying that he is just one person, or that he is an outlier because he is unusually wealthy. But Saverin is not an isolated case, he is one of a growing number of people giving up U.S. citizenship because they fear that politicians will hike taxes on the wealthy in the near future. Last year, 1,780 people gave up their U.S. citizenship. This a record-breaking number as only 235 people did so in 2008.
Benjamin Franklin said that death and taxes were the only two things that are certain in life. Saverin may know this all too well as even though he will be able to dodge some taxes on his income from the Facebook IPO, he can't cut his tax bill all the way to zero. That's because the U.S. levies an expatriation tax on people who renounce their citizenship.
This has public policy implications. The U.S government should enact policies that are attractive to investment and entrepreneurs like Saverin, not push them away. Instead, the federal government imposes excessive regulations that strangle job growth and discourage people from starting businesses. Broadening the tax base and lowering rates would be a step in the right direction. Cutting red tape and reducing occupational licensing requirements are other solutions.