Looking around at a
number of different trends and events, one
conclusion we have made is that people and
businesses are still determined to distance
themselves from dysfunctional government and
foolish central banking economic policies more so
now than ever in 2016. We posited many years
ago in our Trading Places article that this would
be a trend to watch and the truth is, it is still
being played out in a variety of ways in
2016. In addition and unfortunately, the
politicians still do not get it. They want
to blame some of the economic woes (government
revenue issues mainly) on the solvent individual
citizens and business that are leaving (for not
paying their fair share of taxes). But this
expatriation trend is simply cause and
effect. They are leaving because governments
are forcing them to leave, not by word but rather
by deeds. It is not only a tax protest of
sorts, but also a vote of confidence lost in the
ruling political class and their magical economic
minions at the nation's central bank.
You Can't Blame Someone For Leaving
If You Never Gave Them A Reason To Stay
Sometimes A Political Divorce Is The Only Option
Interestingly enough, do not think for one moment this is just about corporations trying to escape taxation or so-called wealthy citizens as well (you would be surprised how many middle class people are doing this, never mind the mega billionaires). The recent BREXIT vote clearly tells us there is a desire to exit and distance oneself (or in this case an entire country) from a government – political arrangement that is not working. An arrangement, a relationship that many people feel is primarily one sided and not entirely beneficial to the governed. And this leads us to ask the question: On it's simplest level, what is the relationship between citizen and government? Are the supposed benefits and responsibilities one way? It would seem so for many in the political class.
Former US President John F. Kennedy suggested that citizens should ask not what your country can do for you, but what you can do for your country. All well and good when government is properly fulfilling it's role and responsibility to it's citizenry, and perhaps one can argue it should be a two way street (citizens should pay their fair share of tax responsibility). But what about when government falls down on the job? Citizens are of course expected to obey the local laws and economically pay their fair share of economic support (taxes), but what is the recourse when governments fail to fulfill their role or mandate as sane, logical, equitable and honest trustee? Sometimes a divorce is the only option.
Politicians are really national trustees elected by the citizenry charged with the fiduciary responsibility of managing the economic, moral and legal framework of the nation. A perhaps unrelated but very telling example of such abuse or dereliction of duties is the recent news story regarding the government paid salary of French President Francois Hollande’s barber (or hair stylist as is the preferred term), who earns MORE than a member of the European Parliament. At 9,895 Euros per month (which is the equivalent of US$10,958 monthly), working for the French government as a follicle engineer seemingly pays quite well indeed (http://www.bloomberg.com/news/articles/2016-07-13/hollande-coiffeur-paid-10-958-a-month-by-the-french-state). But what does it say when government politicians think they are entitled to these kinds of benefits from the tax paying citizenry and what are they responsible to give back in return? Something as simple and unassuming as a barber on the government payroll earning the salary of a computer programmer I think says it all. And the sad part about it, this is not just a French disease.
US Government Responds: More Taxes, Fees !
In regards to this trend of US citizens renouncing citizenship, we have of course reported previously that 2015 was another record year with 4,279 people doing this, which represented a 20 percent increase over 2014. However, the new twist or surprise to this is also the number of permanent residents in the US (green card holders) also exiting stage left. But, there seems to be a general bigger theme here as US corporations have been looking to leave as well, either via expatriation directly or so-called inversions (an inversion is when a US company allows a foreign company to buy them out, often as a tax strategy, forcing the re-domicile to the foreign nation). But one would think someone somewhere should be asking why and perhaps make an attempt to solve the real problem rather than blame the act itself. But alas, that is not the way politicians think.
In an effort to stem the tide of individual citizens leaving, in their perverted wisdom, the US government had increased the fee to escape in 2014 from US$450 up to US$2,350 (think of this as the antithesis to the get out of jail free card in the monopoly game). Regardless of the cost increase, it has not slowed down the tide of would be escapees. However, it has increased the revenue haul resulting in US$10 Million in total fees from the renouncement applicants in 2015 and over US$2.5 Million for the US citizens that have voted to leave (with their feet) in 2016 so far.
There is also of course the dreaded so-called expatriation or exit tax in the US for those citizens making for the gangway, but there are certain provisions in order to be eligible (to be fleeced). In order to be liable for an additional pocket picking by the US Federal Government, the applicant would need to have had an average tax liability for the preceding five years of US$161,000 and a net worth of US$2 Million or more. If such a person qualifies then they would calculate a tax for theoretical value of all assets above US$700,000. However, what most people do not realize is that applies to foreigners with greed cards that are considered long term permanent residents, defined as having held this status for the last 8 of the preceding 15 years.
To stem of the tide of US corporations, we have the recent section 7874 of the Internal Revenue Code, enacted to clamp down on so-called inversions. Interestingly enough, while the number of actual corporate inversions has decreased, the number of US corporations expatriating has not. And not to go off on a tangent, but Ireland has been the main beneficiary of US companies looking for a new home. The luck of the Irish seems to have come back as the GDP in Ireland has grown an incredible 25 percent last year (the prediction was for a positive 7 percent GDP number) and foreign company relocations and investment are credited with the reason.
To be sure, taxes and FATCA are behind the motivations of many businesses and individuals to expatriate, but it is not the only reason. Many people of retirement age are leaving because the asset inflation, rental inflation and general cost of living (fueled by Central Bank inflation aiding policies) leave them no other choice. In a February 8, 2016 article appearing in Fortune Magazine, the conclusion they come to regarding US citizens leaving is taxation as the primary motivator (http://fortune.com/2016/02/08/renounce-us-citizenship/). A BBC article dated February 9, 2016 offers up the same conclusion as well in terms of those very same US citizenship renouncements (http://www.bbc.com/news/35383435). But we would opine that while it is politically convenient to highlight the tax issue, there is much more to it. The high cost of living in the US and Europe especially brought about by insane central bankers that are determined to bring us back to double digit inflation (or worse) is just one of many things worrying expatriates.
Places 3.0: Generations Clash
Looking at statics for the US (although this somewhat is common across the developed world) there are and estimated 10,000 people PER DAY retiring in the US which translates into more than 3 Million people per year. And looking at the expatriation trends, as of the figures from 2013 published by the US Social Security Administration there are 375,000 US citizens receiving their Social Security checks overseas. In other words, more and more older people nearing or already retired are looking to expatriate as solution for economic survival in retirement. And it is cheaper to live in the Philippines, Ecuador, the Dominican Republic plus a long list of other emerging or developing countries. The benefit for these nations is a gain of new solvent residents (and citizens should they decide to become naturalized) that have an independent income to spend and are a group not competing with the local population for employment. The downside for the developed nations is they loose these people and they are funding their retirements via government social welfare pension programs that is in fact being funneled into the economy of another country. The baby boom generation did work and pay into these various government schemes, so they do feel entitled now that they have reached retirement age. So, you cannot blame them either.
In terms of the leave vote in the UK, but also across the board in general in most of the so-called developed western nations, the younger generation feels they have gotten shafted by the older generation. After all, today's university graduates find themselves saddled with student loan debt (at least in the US), bleak employment prospects and a world drowning in sovereign debt that they will be saddled with paying off in the future. In addition, unfunded social welfare programs, including pension programs such as Social Security, translates into higher taxes for these young people to pay for as well. So, one can clearly understand the angst. However, it is not necessarily the older generation at blame but rather mismanagement of government finances and now foolish central banking policies that created and worsened this situation. Yes it is true that very same baby boom generation was in charge previously, but we would argue it was the specific group of politicians and not the entire generation at large. Of course I do realize the current politicians want to blame ALL the citizenry that is leaving (both the corporate kind and the individual kind) in terms of not having enough funds coming in from tax revenues. However, the truth of the matter is, budget deficits and sovereign debt continue an upward spiral unabated. If these government would get their respective finances in order, then and only then can the country be put back on a sensible path economically. But, they do not want to do so and the result, in our opinion, will be a continued exodus of the solvent.