It’s all the rage to talk about the “Fiscal Cliff”. Both Republicans and Democrats are talking about it and with good reason. It’s a serious issue.
But that fiscal cliff is closer than any of the politicians or pundits are telling us. They’re either missing or ignoring a critical set of facts – facts that point to a problem that could not only move us closer to that fiscal cliff, but multiply its already predicted disastrous effects. The problem of which I speak is that the people who will be expected to pay the taxes to keep us from going over that cliff are leaving in alarming and growing numbers.
Since Barack Obama took office, formal expatriations have spiked almost 8-fold, from a record low in 2008 to a record high in 2011. As part of the 1996 Health Insurance Portability and Accountability Act, the federal government has been required to publish in the Federal Register the names of every US citizen who formally renounces his US citizenship. A count of the names on those lists reveals that in 2008, only 231 US citizens renounced their citizenship. But in 2011, the number of expatriates reached 1,782. But those are just the very few people who “formally” renounced their citizenship.
For every citizen who formally expatriates, many more citizens just drop out, becoming informal expatriates. In fact, this informal expatriation has become so common that those who take this route have developed their own term for it. They call themselves “PTs”. The term “PT “is a catch-all term that has a variety of similar meanings, including “Practically Transparent”, “Privacy Trained”, “Prior Thrall”, and “Permanent Tourist”. It is the nature of these definitions that tell us that PTs tend to be somewhat secretive. Therefore, it’s very difficult to accurately measure their numbers.
But the respected polling firm Zogby International figured out how to do it. Count them before they leave. In 2008, Zogby published a press release, in which they reported the result of seven polls that they had recently concluded. In that press release, they stated:
1.6 million U.S. households had already determined to relocate abroad; an additional 1.8 million households were seriously considering such a move, while 7.7 million more were ‘somewhat seriously’ contemplating it.
Overall, Zogby determined that “by a modest estimate”, more then 3 million US Citizens a year are relocating offshore. But that’s not to suggest that all of those people will become permanent expats. In fact, historically, only a little more than half of US citizens who relocate their home to another country will never return. So that means that whether by intention or circumstance, about 1.5 million will become permanent expats. But keep in mind, that was in 2008 – the same year that official renunciations were at a record low.
The question that we have to ask is: “While formal expatriations have been skyrocketing for the last three years, what’s been happening to those informal expatriations?”
Unlike formal renunciations, we don’t have factual numbers on the increase in informal expatriations. But we do have a set of facts that should give us a pretty good idea of where those numbers are headed. Let’s look at those facts.
1) When Obama took office, he promised to soak the rich; and it’s one of his few promises that he’s really trying to keep. The rich see this as punishment for success.
2) Formal expatriations spiked the next year and have climbed sharply each year since.
3) Successful people are the ones who can best afford to live wherever they choose.
4) Successful people don’t let problems get in their way. If it becomes difficult to succeed in one place, they’ll simply go to a more success-friendly jurisdiction.
5) Nobody wants to be constantly told that they are bad people, especially successful people. But that’s what Obama is doing.
Based on these facts, it would be reasonable to assume that those who have both the motivation and the wherewithal to live somewhere else would at least give serious consideration to moving to a more success-friendly jurisdiction. Therefore, it’s quite likely that informal expatriations have been climbing, too.
However, since we don’t know exactly how much that rate is climbing, let’s ignore it for now and just use that 1.5 million number that we can confirm.
The reason why this issue is so crucial is because most of those people who are leaving are rich – the people who create the jobs and who pay the lion’s share of our taxes. They’re the investors, the risk-takers, and the producers. In other words, they’re the people who we can least afford to lose. Of course, many of you may be asking just how many of those people really are rich. But the better question is: “How many of those people do YOU think are poor?”
Having traveled abroad on business and having lived abroad for some time, I would say that, as a general rule, it would take either a minimum income of $100,000 a year or retirement assets from that level of income in order to be able to move offshore and maintain a somewhat similar quality of life to what the individual or family had here. As it turns out, the IRS reports that in 2009, the income floor to be in the top 10% of taxpayers was very close to that number, at $112,124. Now certainly, many people won’t consider that rich. But the important thing to consider about that group is that they’re the people who pay 70% of all federal personal income tax collected by the IRS.
So it’s reasonable to assume that the vast majority of those who are leaving are in that group of taxpayers who pay 70% of the personal income tax load. So, if just 90% of those who are leaving are in that top 10%, that’s 1.35 million expats a year, from the group that pays 70% of all federal personal income tax.
So why should we be worried about this? Well in 2009, there were 13.8 million taxpayers in that top 10%. If we’re losing just 1.35 million of those people every year, how long would it take to lose most of that top 10%? Do the math. If that rate remains steady, it would take about ten years. But it’s not staying steady. It’s climbing rapidly.
Do you begin to see how this will seriously shorten the time that it will take us to reach that fiscal cliff? If we were to lose just half of that top 10% of taxpayers, it would still mean a tax increase for the rest of us, in the range of more than 50%. If most of that top 10% were to leave, everyone else’s taxes would have to more than triple to make up the difference.
Of course, with fewer and fewer successful people left in the USA, there wouldn’t be enough taxable income left to pay down the debt… ever. The deficit and the debt would continue to rise until our creditors realize that we don’t have enough high-income taxpayers left who are capable of ever paying off that debt. With every successful taxpayer who leaves, that fiscal cliff gets closer. But instead of trying to keep our successful taxpayers here and encouraging more to locate here, Barack Obama’s “soak the rich” agenda is driving them off faster.
As more of the wealthy leave, the weight will fall heavier on those who remain, and more of them will decide to take the same step. This in turn will multiply the pressure on those who remain, and the cycle repeats.
“Soak the Rich” is not the solution. In fact, it’s a very big part of the problem.
For more on this subject, read “The Rich Don’t Pay Tax! …Or Do They?” by John Gaver. It’s available in print, Kindle, and Nook formats through Amazon, Barnes and Noble, and other booksellers or at http://TheRichDontPayTax.com.
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