Legislative attacks upon the wealthiest 1% of Americans could soon wreck our economy
by John Gaver
So, now that we have established that wealthy Americans are being forced to leave the United States in alarming numbers, let's delve a little deeper into the problem. In 1996 two laws that show just how desperate the Federal Government has become were passed by Congress and signed into law by President Clinton. Rather than creating economic incentives for wealthy Americans to stay in the United States, they attempted to punish those who would leave. Any first year political science major can tell you that historically, disincentives almost never work. These two totalitarian pieces of legislation were the Health Insurance Portability & Accountability Act of 1996 (26 USC 877(a)(1)) and Immigration and Nationality Act of 1996 ((INA) sec. 212(A)(10) and 8 USC 1182(a)(10)(E)).
I will just touch on the Immigration and Nationality Act first, since its only purpose was to discourage wealthy Americans from leaving and it's only effect was to scare more wealthy Americans into leaving. The Immigration and Nationality Act of 1996 included a provision that would permanently bar wealthy American expatriates from ever returning to the United States for any reason, if the government "has reason believe" that one of the reasons that the expatriate renounced his US citizenship was to avoid US taxes. There can be only one reason for such a law. The feds are seriously afraid of the consequences that the continued increase in capital flight will bring and they erroneously believed that those wealthy who were considering leaving would ever want to come back to a country that treated them like second class citizens. As I am writing this paragraph, I just returned from a tax haven country, where I talked with several American expats (the popular term for expatriates). I was not surprised to find that among the reasons high on the list of recent expats, for leaving the USA was the Immigration and Nationality Act of 1996.
The Health Insurance Portability & Accountability Act of 1996 has much more ominous Overtones. To begin with, the United States government, through this act, has the audacity to claim the right to tax expatriates for 10 years after they renounce their US citizenship, if the government "has reason to believe" that one of the reasons that the expatriate renounced his US citizenship was to avoid US taxes. United States has long shared with Libya the infamous distinction of being one of only two countries in the world that claims the right to tax the income of its citizens regardless of where in the world that income is earned. But, even Libya is not so tyrannical as to claim the right to tax ex-citizens for ten years after they renounce their citizenship. But then, Libya is not faced with capital flight on a massive scale either. But, the real problem is not the abhorrent nature of this law. It is the effect of it.
When word of the Health Insurance Portability & Accountability Act of 1996 reached the wealthy, they saw this law for what it was - not just another brick in the economic Berlin Wall that our government has been erecting to keep wealthy Americans from leaving with their wealth intact, but in fact, a large section of that wall. Many wealthy Americans who had been hesitant to leave saw this provision in the law as the last straw and began making preparations to leave. The government's claim to the right to tax ex-citizens for 10 years gave them no pause at all. After all, they had a solution.
For many years, when wealthy Americans chose expatriation, they most often left as much of their wealth as practical in some sort of tax sheltered investments in the United States, so capital flight did not represent as serious a threat as it does today. The wealthy would leave, but at least a portion of their investment capital stayed here. And that portion, though somewhat sheltered, still generated a significant amount of taxes and funded many US jobs. But since 1996, wealthy Americans who have chosen to leave, have had no choice but to take ALL of their wealth with them when they leave or risk it being confiscated by the IRS.
Let me emphasize that word. ALL!
Expatriates can no longer afford to leave ANYTHING behind. They sell ALL of their real estate, stocks, bonds,... EVERYTHING! Over a period of time, they move ALL of their wealth into offshore investments. Then, when they leave, there is NOTHING left for the IRS to confiscate. The government, of course, pouts and claims that these expatriates are being very un-American, just because they had the audacity to protect what was rightfully theirs from IRS confiscation. The government fails to realize or at least refuses to accept that it was their own attempts to grab more power, that made it impossible for these wealthy Americans to leave any money in the United States. So, instead of preventing wealthy Americans from leaving, they not only encouraged them to leave at an even higher rate, but they forced them to take ALL of their wealth with them when they leave. And, there is the root of the real problem.
When the wealthy take ALL of their money out of the United States, it has many undesirable effects. The most obvious, as pointed out above, is the loss of tax dollars. But, there is are far more serious consequences that lay beneath the surface. Most of the wealth that we are talking about is what we refer to as investment income. Regardless of whether that money is in a passbook savings account, an IRA, mutual funds or stocks and bonds, it is almost certainly money that is funding business somewhere in the United States. That money effectively represents JOBS in the United States. When that investment capital moves offshore, several things happen. Most notably, JOBS that the capital funds move offshore.
Some of that investment capital will be replaced, it might be argued. In fact, SOME, not ALL of it, will be replaced. But, the source of that new capital that creates yet another problem. When US based capital is not available, businesses look offshore for investment capital. Since US expatriates can no longer safely invest in US businesses, foreigners move in to fill the gap, temporarily. As more and more wealthy Americans are forced to flee the United States, Americans will find that they are increasingly the labor force for wealthy foreigners who, by the way, generally pay tax only on what they earn in the US. But, once the tax rates are forced up, by the lack of wealthy citizens to tax, even that foreign investment capital will dry up.
Add to all of this, the appalling increase in frivolous lawsuits by the greedy and the recent rash of government confiscations (forfeitures) and you discover that increasingly, the wealthy are finding that their only choice is to leave. It's like a snowball rolling down hill. Right now, it's just a little glob of snow. But if we don't create some major incentives to keep American capital in America, it will become an avalanche.
The problem is very complicated and there is no single solution. But, far and away, the most pressing problems surrounding the capital flight issue are those caused by the Internal Revenue Service and the Income Tax. I mentioned earlier that I have interviewed many American expats about their reasons for leaving. The number one reason for leaving, cited by EVERY expat that I have talked with, was the IRS. Not the Income Tax. The IRS. When I asked them to be more specific, they cited IRS abuses, lack of privacy in their financial dealings and, let us not forget, the Health Insurance Portability & Accountability Act of 1996 and the Immigration and Nationality Act of 1996.
Every last expat that I have talked with told me that the "deciding factor" that pushed them over the edge had something to do with the "not to be sufficiently damned IRS." That phrase in quotes, by the way, seems to be common in the expat community. So, if we eliminate the "deciding factor" that is causing these wealthy citizens to expatriate, it would go a long way toward keeping any more wealthy Americans from leaving. Every previous attempt to solve this problem has been aimed at strengthening the power of the IRS. It should now be obvious that any proposed solutions to this problem that leave the IRS intact should be summarily dismissed. The single most important thing that we must do to stop capital flight is ABOLISH THE IRS.
That would mean replacing the Income Tax with some system of taxation that does not require such an organization looking into the personal finances of every individual. The Flat Tax would not work, since it retains the source of the problem, the IRS. There are, in fact, only two tax plans that would fit this requirement - excise taxes on imports and a National Retail Sales Tax. Since broad use of excise taxes have generally been found to have a negative impact upon the economy, they are not a practical solution. On the other hand, the findings of a CATO Institute Policy Analysis on "THE ECONOMIC IMPACT OF REPLACING FEDERAL INCOME TAXES WITH A SALES TAX" predict that the shift in tax structures will raise the stock of US capital by at least 29 percent and potentially by as much as 49 percent. Another recent study found that if the United States were to implement a National Retail Sales Tax, most of the largest foreign corporations would move factories and offices into the USA and many would move their corporate offices here. A National Retail Sales Tax would not only create the incentive for wealthy Americans to keep their assets right here at home, but it would actually have the effect of reversing capital flight and bring a lot of expatriated capital back into the United States.
But, here is the important thing. A National Retail Sales Tax must be implemented soon, before the expatriation snowball picks up too much speed to be stopped. If we wait until the economy begins to react to this capital flight, it will be too late. You saw what happened when the markets reacted to tech stocks being overpriced. Imagine what will happen when the markets take notice of capital flight. Once that slide begins, all that you will be able to do is pick up the pieces.
WE MUST ACT NOW!
Contact your CongressmanTODAY and tell him/her that you want him/her to support the Fair Tax Act of 1999 (H.R. 2525) and the National Retail Sales Tax Act of 1999 (H.R. 2001). Either of these bills will go a long way toward reversing capital flight, eliminating IRS confiscations and getting the IRS out of our personal lives. I urge you to tell your Congressman that it is imperative that one of these two bills MUST be passed this session.
It is no longer simply a matter of equity in taxation. It has now become a matter of the
SURVIVAL OF THE UNITED STATES OF AMERICA.
Support the National Retail Sales Tax
* The number of Americans leaving the USA is derived from a limited amount of information from the US Bureau of Consular Affairs, the IRS and certain foreign consuls. Up to now, each new piece of information has served to further strengthen the previous data. Because of the sources of the current data and his offshore experience, the author is thoroughly convinced of the validity of the numbers, but it is his intention to continue gathering this data until the numbers are totally irrefutable. If you have access to any verifiable data of this nature or know someone who does, please email the author at email@example.com. Your contribution will be appreciated.
See related articles and supporting documents:
Copyright 2000 John Gaver
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