Copyright 2012 by John T. Reed

Facebook co-founder Eduardo Saverin drew a fire storm of criticism for renouncing his U.S. citizenship last September. He was born in Brazil and went to Harvard with Facebook CEO Mark Zuckerberg. He became a U.S. citizen in 1998. He became a multi-billionaire as a result of owning Facebook stock.

Apparently, he renounced his U.S. citizenship to avoid capital gains tax on appreciation in his stock after the day before his renunciation and to avoid future U.S. estate and gift taxes. Neither I nor anyone else believes Saverin’s denial that U.S. income tax law has anything to do with his renunciation. Normally, you do not have to pay capital gains taxes until you sell the asset in question. But when you renounce your citizenship, the U.S. treats your capital gains as if you sold all your assets on the last day you were a citizen. That is what happened to Saverin. He did not make much more on 5/18/12, the day of Facebook’s IPO, than he would have made selling on his last day as a U.S. citizen is September 2011. The Wall Street Journal estimates Mr. Saverin saved about $80 million in capital gains taxes by renouncing his citizenship when he did. If you believe that $80 billion would have been well spent by the U.S. government, keep your U.S. citizenship and pay it, and possibly be committed to a mental institution.

U.S. law bars anyone who renounces his citizenship for tax reasons from ever entering the U.S. again.

Saverin says he has paid and will pay all taxes he owes to the U.S. I have seen no reason to doubt him.

1. Every American either renounced his citizenship or is descended from someone who did, including Senator Chuck Schumer (D-NY), who threw the biggest hissy fit about it. Here is what Wikipedia says about his ancestry:

Schumer was born in Brooklyn, the son of Selma (née Rosen) and Abraham Schumer. His family was Jewish, descended from immigrants from Russia, Poland, and Austria.

Schumer’s ancestors renounced their citizenships of Russia, Poland, and Austria.

Even American Indians’ ancestors renounced their citizenship of Russia, albeit less formally, thousands of years ago when they walked to North America across the Bering Strait ice.

Of late, America has allowed U.S. citizens to simultaneously be citizens of other countries so you no longer have to renounce your non-U.S. citizenship to become a U.S. citizen. So recently, there are some American citizens with so-called “dual-citizenship” who did not renounce prior citizenship to come here. But, fundamentally, we are truly a nation of immigrants and whatever smiley face we put on that here, it implies renunciation of prior citizenship back in the old country.

Schumer denounces Saverin as an “ex-patriot.” Schumer’s parents or grandparents were “ex-patriots” of Russia, Poland, and Austria.

2. People who come into money, should meet with attorneys and accountants with expertise on rearranging their lives to maximize after-tax income and net worth. If those lawyers do not advise the persons in question of the pros and cons of renouncing one’s U.S. citizenship—a uniquely costly passport on this planet—they have committed malpractice.

If Saverin had not renounced his U.S. citizenship in light of his new billionaire status, he arguably could have had a guardian appointed to take charge of his financial affairs. The tiny nations of St. Kitts and Nevis sell passports for $250,000. U.S. passports cost a lot more if you are rich, in addition to other requirements. (St. Kitts and Nevis have no other requirements.)

The anti-rich laws passed by Congress in the past and pending for the future provide strong incentives against the rich becoming U.S. citizens and strong incentives for existing U.S. citizens to renounce that citizenship. They did not get rich by being stupid and paying hundreds of thousands or millions of dollars in unnecessary taxes. I again refer readers to my article on IF laws.

The U.S. should be encouraging the world’s ethical rich to come here and stay here. We are doing the opposite. Could we please amend the Constitution to remove the control of government from demagogues, a.k.a. elected officials?

3. I do not think there is any question that American citizens should have more than one passport if they can do it cost-effectively. It used to be, U.S. citizens could not have more than one passport, that is, be a citizen of more than one country. Now you can, apparently because of a court decision (Afroyim v. Rusk), not a change of heart by the politicians.

I know of no disadvantage of having citizenship of another country if you are a U.S. citizen. Someone told me you cannot be a U.S. military officer if you have dual citizenship. I was a U.S. military officer. You would not be missing much. If the U.S. military were not a dishonest, inept, office-politics mess, I would not feel that way.

Getting another passport is often quite difficult. A typical partial requirement is to live permanently in the country in question for five years. And you don’t get to just go there to do that. You typically have to have a visa that lets you stay that long. Singapore only requires two years residency.

4. One reason to have a second citizenship is that if and when you wanted to renounce your U.S. citizenship, you could do so immediately without waiting until you were granted citizenship in another country.

I am not an expert on dual citizenship. I am not sure anyone is. It is a field of the laws of over 200 nations and international law that is constantly changing. There is such a thing as a stateless person, and they often have priority for being granted citizenship, but many of them are also called refugees and often suffer greatly for that.

The First Law of Wing Walking is don’t let go of anything unil you have hold of something else.

5. There is generally no reason to renounce the citizenship of any country other than the U.S. In other words, the U.S. has brought this stupid situation upon itself with really stupid laws. The reason you would renounce U.S. citizenship in that the U.S., almost alone among nations, imposes some of the highest taxes in the world on its citizens, regardless of whether they live or work in the U.S., for both income and bequest/gifts. Almost every other country exempts their citizens from paying home country taxes for periods when the person is outside of the home country. (There is an exemption on the first approximately $100,000 of foreign tax you have to pay, but above that, you have to pay both the taxes levied on the income by the foreign country and by the U.S.)

Also, in many cases, the non-U.S. country has the same types of taxes as the U.S., but they have lower rates. For example, Singapore, the country of which Eduardo Saverin is now a citizen, taxes long-term capital gains at a 0% rate. The U.S. taxes such gains at 15% or 28% and proposes to tax them at 30% if the person in question is wealthy. Mr. Saverin’s Facebook billions are long-term capital gains.

U.S. income tax top rates are now 35%; scheduled to go to 39.6% on 1/1/13. Singapore’s top tax rate is 20%.

The standard U.S. capital gains rate is scheduled to go up to 20% in 2013. The 28% rate will still apply to precious metals, collectibles, and depreciation recapture. also on 1/1/ 13, U.S. tax rates on estate and gift taxes are scheduled to rise from 35% to 55% and a 3.8% higher income tax rate on wealthy people is scheduled to start applying in 2013.

All wealthy or high income Americans will get a free “Kick me” sign from Schumer’s office on 1/1/13. Actually, I made that up. You have to make your own “Kick me” sign.

6. There is no guarantee that pertinent U.S. law will remain the same. It is currently changing for the worse. It could also get better.

There is also no guarantee that your new country of citizenship will not change their laws in ways that make them less attractive. For example, Ireland used to exempt the income of writers and other creative people from income tax. In 2011, they limited that to 40,000 euros ($51,000 in May 2012). Some famous creative Irish citizens were really pissed about that.

7. FBAR and FATCA U.S. laws are turning U.S. citizens into pariahs who cannot get bank accounts in many foreign countries. Renouncing citizenship and leaving the U.S. ends your need to comply with those laws and more importantly from your foreign banks having to comply with them.

8. If enough successful Americans renounce their citizenship because of America’s uniquely high tax rates and application of those rates to the broadest range of wealthy people, pressure will mount to end these suicidal policies.

9. A reader told me about the “Five-flag Theory” which led me to references to “perpetual travelers.” The Five-Flags Theory says there are five types of taxes and that you should have relationships with five different countries so that you get the best of each nation tax wise, e.g., earn your income in a country with low or no income tax, be a citizen of a country which does not tax citizens abroad, etc. The Five-Flag Theory is a two-flag addition to Harry Schultz’s original, similar Three-Flag Theory. The author of the additional two flags is reportedly W.G. Hill, which is apparently the nom de plume of Bill Tycoon Greene. He was one of my fellow San Francisco area real estate investment gurus. He went to prison for U.S. income tax evasion, reportedly escaped while on emergency leave and started publishing books on being one of these perpetual travelers. I knew him. He autographed my copy of his book. He was at my apartment for a cocktail party once. He and I spoke at successive meetings of the San Francisco Mensa group.

I have written about a within-the-U.S. “Five States Theory” that is being used by full-time residents of recreational vehicles. They typically claim residence in Texas (no income tax), buy the RV in a state like Oregon (no sales tax), live in Southern California (rarely any bad weather), buy their medicines in Canada or Mexico, and so on.

The Five-Flag Theory sort of does not work if one of the flags in the U.S. because of the above-mentioned application of U.S. tax law to its citizens no matter where they live.

Perpetual travelers, as the name implies, are in countries where they are not citizens. What is their status in those countries? They are tourists. Generally, you can stay in a country for about there to five months without getting a visa other than the tourist visa you get just for going there without some nefarious purpose. So, if you travel as a tourist to four countries a year, then revisit the same countries again the following year, moving before you exceed your tourist visa time limit, you are never illegal, nor are you ever in the country where you are a citizen.

You do legally avoid some U.S. obligations by doing that, like Social Security contributions.

I see this as a possible temporary life style for myself and my wife if we get hyperinflation in the U.S. That would not be related to U.S. tax law so much as an inability to lead a normal, healthy life in a hyperinflated country. You should consider it as well.

10. The Reed Amendment. The law that bans rich guys who renounce their U.S. citizenship to avoid paying taxes from ever setting foot on U.S. soil again was called the Reed Amendment. Is it named after me? No, but I know the guy it is named after. See my article, Yes, I am a West Point graduate airborne Ranger named Jack Reed but no, I'm not that Jack Reed.

Reed, the Senator, seems generally like a good guy, but this is a stupid law. First, it violates a sentiment voiced in an ancient U.S. Supreme Court decision. Here is the pertinent quote:

U.S. Appeals Court Judge Learned Hand famously wrote in Helvering v. Gregory, 69 F.2d 809 (1934) that,

[A]nyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.

Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions.

To demand more in the name of morals is mere cant.

So, Senator Reed, who is a Harvard Law School graduate, needs to introduce a bill to repeal the law. I am not aware that he is or will. Plus, Senator Schumer’s hissy fit among other things, seeks to strengthen the ban on rich guys who use citizenship renunciation to avoid taxes from setting foot in the U.S.

Let me point out that there already is a group of people who are, as a practical matter, banned from ever setting foot in the U.S.: people who are or might be the target of civil litigation or criminal prosecution.

Now let me make what I think is a profound statement about the unintended consequences of the Reed Amendment and its proposed Schumer turbocharging.

If you treat law-abiding citizens the same way you treat law-breaking citizens, you abolish all practical motives for abiding by the law.

Saverin has and will spend much time speaking to U.S. officials to make sure he is doing the legal thing sand paying all his taxes. Given the Reed Amendment and Schumer supplement to it, why not just leave?

When I was in Vietnam, we would sometimes express fear of getting into trouble with the brass for one thing or another. And someone would always pipe up, “So what’re they going to do? Send us to Vietnam?”

Similarly, why bother to renounce your citizenship for legal tax-avoidance purposes if doing so will get you banned from America forever. If you just leave, worst case is you cannot ever return to the U.S. But since they are going to impose that on you anyway if you do every thing legally, including renouncing your citizenship, why go to the trouble?

Actually, just leaving without worrying about any legal details makes more sense than renouncing your citizenship. By retaining your U.S. citizenship, but not paying U.S. income taxes while you are away, you still have the option of returning to the U.S. and paying your back taxes. They also seem to announce amnesties for such people periodically.

If you become poor or relatively poor overseas, then return to the U.S., still a U.S. citizen, you may owe back taxes, but if you are old and unable to work to earn money, what’re they gonna do? Send you to Vietnam? Lock you up in a federal minimum security prison where you get three hots and a cot and medical care?

Behaving as if you had renounced your U.S. citizenship when you had not is probably the most sensible option: It simply leaves you with another option: that of returning to the U.S. if it ever makes overall sense to do so.

There would be some practical problems, like you might have to avoid countries with tax-extradition treaties with the U.S. Now, I’m a very law-abiding, West Point graduate, etc. But like I say, what is the point of all that if the U.S. government is going to ban you for life from the U.S. whether you abide by the law or not?

Is there a moral obligation to pay taxes when you plan on leaving the country and never coming back? Whence does it come if you believe there is one? While here, Saverin got U.S. military protection and paid taxes. He also paid into Social Security, Medicare, etc. that he will never get. If there is a moral obligation to pay U.S. taxes, it is certainly a one-way street. The U.S. government is the Congress and the President and those guys could not care less about morality. They have spent all the taxpayers money and all the taxpayers credit buying votes to keep themselves in office. They have bankrupted the country. Hell, even the people who do not renouce their citizenship will not get Social Security and Medicare and the other entitlements because the bond market will eventually stop lending us the money to pay for them at which time we will get hyperinflation for a while, then pink slips instead of entitlement benefits. The government long ago renounced its obligation to keep its entitlement and other promises to you.

Under those circumstances, and comparing with the rest of the world, is a U.S. citizen who pays taxes his whole life without taking advantage of legal ways to minimze them moral or just a chump?

He’s a chump.

I think the Reed Amendment, and Schumer’s addition to it, is probably unconstitutional. It is a legal punishment for behaving in a way that the U.S. Supreme Court says it legal. There is no authority in the Constitution for punishing law-abiding people. It violates the due process clause of the Fifth Amendment:

No person shall be …deprived of life, liberty, or property, without due process of law

It says “person,” not “citizen.” The ability to travel within the U.S. comes under “liberty.” Process of law means that you have to allege the person broke a law then prove it and let the accused have a full opportunity to defend himself.

And consider all the other people who can travel freely around the U.S. and live here: ex-convicts, sex offenders, illegal aliens (because the politicians refuse to enforce laws against Latinos for fear it will cost them Latino votes), foreign diplomats who are scofflaws (Bill Greene was famously the San Francisco Counsel General of some obscure African country and had the license plates to prove it), criminals on probation or whose punishment did not imprison them per se, persons whose illegal alien moms came to the U.S. just for the purpose of having a baby here and thereby getting him or her U.S. citizenship.

The Reed Amendment is nothing by class envy spite and its existence harms the U.S. for the reasons listed above.

11. Chuck Schumer focuses on the amount of tax Saverin is avoiding by renouncing his citizenship. Let us focus for a moment on the amount Saverin paid. And the amount Chuck Schumer has paid.

Saverin reportedly made $2 billion on Facebook, probably most of it before he renounced his citizenship. The 15% long-term capital gains tax on $2 billion is $300,000,000. Presumably, Saverin paid other taxes from his other activties since he became a U.S. resident and/or citizen since he moved to the U.S. in 1992.

Chuck Schumer never had a private-sector job in his life. He ran for and was elected to public office right after law school and has been in public office ever since. Although he fills out an annual tax return, all the money he uses to pay his taxes comes from the taxpayers paying his salary. I have long advocated making government employees salaries tax-free, after lowering them an appropriate amount. Why? Because it is unnecessary and costly to send the money they pay in taxes on a round trip. The U.S. government pays Schumer his senate salary of $174,000 then he sends $35,000 or so back to the government depending upon his itemized deductions. Why not just cut his salary down to $140,000 and make it tax-free, thereby avoiding the cost of the round trip?

However you slice it, it will take Schumer a long time at $35,000 a year to match Saverin’s $300,000,000 in one year. If Schumer pays federal income taxes for 50 years at $35,000 a year, the total he pays is $1,750,000. He will also get a Senate pension, Social Security, federal health care, etc., etc. [A West Point classmate of mine renounced his U.S. citizenship. He is now a Canadian citizen. I just talked to him on the phone in July 2012. He lives in Portugal, often visits the U.S., and gets U.S. Social Security (reduced by a flat withholding tax of, I believe, 30%). He says every time he enters the U.S. and they scan his Canadian passport, the U.S. border guys look at their computer screen and slowy shake their head disapprovingly apparently when they see that he renounced his U.S. citizenship. I find this odd. I doubt other countries treat their former citizens that way. We are a “Nation of Immigrants,” but since when does that mean there is something wrong with emigrating out of the U.S.? Is teh U.S. some sort of citizenship Roach Motel. “You can immigrate in but you can’t emigrate out.]

Schumer’s prior claim to fame was causing a run on Indymac which casued that bank to fail and be taken over by U.S.taxpayers. The LA Times said this at the time:

Sen. Charles E. Schumer publicly taunted bank regulators last week about IndyMac Bancorp's financial condition, which helped trigger a sudden outflow of deposits from the Pasadena thrift. Now the New York Democrat is getting some harsh blowback from one current and one former regulator.

Their message, distilled: Zip it, Chuck.

Better America should tell Schumer to take a hike and encourage Saverin to come back any time. If he earns money here in the future, he will owe U.S. tax on it, regardless of the fact that he is a Singapore citizen.

By the way, I am not impressed with either Saverin or Zuckerberg. Facebook has no patent or copyright. Anyone who wants can replicate Facebook. Some will say so why haven’t they? You tell me. They are not stopped by any law. Facebook has 900 million users, but Netscape and had a lot of users once upon a time, too. Facebook”s busines model is to violate your privacy and sell private info about you. An excellent articles in the 5/21/ Wall Street Journal has a couple of pithy quotes:

Why did Facebook go public? They couldn’t figure out the privacy settings either.

If you’re not paying for something, then you’re not the customer—you’re the product being sold.

From Facebook’s prospectus identifies this “risk fator:” changes mandated by legislation, regulatory authorities or litigation, including settlements and consent decrees, some of which may have a disproporitonate effect on us.

Ya think?

Facebook has, and will continue to, piss its users off trying to moneitize us to justify their $104 billion stock value.

The content of Facebook is entirely provided by users for free to Facebook. It is a Wiki but unlike other Wiki’s like Wikipedia, they are not trying to get $100 billion for providing a free service.

I think Zuckerberg and Saverin are smart enough to get into Harvard, but I do not recommend your hiring them to, say, turn around a poorly performing candy store. Their success is about 99.9% luck and their company is a house of cards. But even the mere fact that Saverin has more than a billion dollars means excluding him from the U.S. would probably exclude the U.S. from benefitting from his spending or investisg some of that money in the future. Even though he is nothing but a kid smart enough to get into Harvard and lucky enough to win the IPO lottery, he is still far more of an asset to America than the likes of Chuck Schumer.

John T. Reed