Eduardo Saverin, Not The U.S. Government, Is Entitled To The Wealth He Earned

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Facebook is going public and a number of people are going to get very rich.  But one of them, Eduardo Saverin, will no longer be an American citizen.

The Brazilian-born Saverin—who moved to America in 1992 and became a citizen in 1998—originally owned a third of Facebook’s shares, but was squeezed out of the company.  His apparent betrayal by Mark Zuckerberg was dramatized in the movie “The Social Network.”

Still, Saverin didn’t do badly.  He ended up owning around ten percent of the enterprise, some portion of which he sold off to help finance a variety of start-ups in America and a lavish lifestyle in Singapore, where he moved in 2009.  Now he stands to make $2 billion to $4 billion, depending on how many shares he still owns.

He also was among the 1780 Americans who renounced their U.S. citizenship last year.  That compares to just 235 in 2008.  Timothy Burns, a tax lawyer in Hong Kong, explained:  “Fifteen or 20 years ago there was a big rush to make sure your kids became U.S. citizens, for access to U.S. schools for example.  Now we’re seeing just the opposite.”

Saverin’s spokesman, Tom Goodman, blandly explained:  “Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time.”  But that only explains why Saverin lives in Singapore, not why he dropped his American citizenship.  The reason for his renunciation likely is taxes.  Although Washington still hits up departing citizens for a tax on any unrealized capital gains—my Cato Institute colleague Dan Mitchell unkindly compared this to the “exit tax” imposed by German Nazis and Soviet Communists on departing Jews—the estimated value of his holding pre-public offering was significantly less than what he is about to realize.

Fewer people also might be seeking U.S. citizenship.  International tax attorney Andrew Mitchel said:  “My advice to, say, a small-businessman abroad would be to think twice about acquiring U.S. citizenship.”  In his view the benefits might not be worth the hassle:  “Many of these people do not realize what that means for their businesses until they start dealing with the IRS.”

Of course, most people are going to think long and hard before abandoning American citizenship.  As my friend Bruce Bartlett points out, such a decision is complex, and “while there is no doubt that some people do migrate solely because of taxes, the number is small even when it doesn’t involve a loss of citizenship.”  Indeed, the number of Americans renouncing their citizenship fell from 2005 to 2008 before rising dramatically.  A number of studies dismiss tax rates as a decisive factor in causing people to move.

However, economist Arthur Laffer and Wall Street Journal writer Stephen Moore looked at migration among American states and concluded:  “Dozens of academic studies—old and new—have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.”  Moreover, Mitchell observed, there’s “a lot of evidence of taxpayers escaping countries controlled by politicians who get too greedy.”  In fact, France’s new president, Francois Hollande, has proposed pushing the top tax rate up to 75 percent, sparking interest among high earners in moving elsewhere in Europe, including to Great Britain.  Ironically, a few years ago Britain’s top tax rate of 50 percent, since reduced, pushed wealthy entrepreneurs to France, as well as the Chanel Islands, which acted as tax havens.

The wealthier people are, the greater the role that economic incentives play in encouraging them to move abroad.  Observed Richard Weisman, head of Baker & McKenzie’s tax practice, “The tax cost, complexity and the traps for the unwary are among the considerations.”

For instance, the U.S. is the only country which taxes worldwide compensation.  Other nations limit their claim to a share of money earned within their borders.  America’s corporate tax rate also is the world’s highest.  Tax rates on income, dividends, and capital gains will rise next year if the Bush-era reductions are not extended.  And if Congresses and Presidents continue today’s borrow-and-spend policies, big future tax hikes are inevitable.

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