The Economy Bomb
Ticking Down Faster

More proof that legislative attacks upon the wealthiest 1%
of Americans could soon wreck our economy.

John Gaver
February 14, 2008

Publishers note: This article is an expanded version of our popular Tick-Tick-Tick - The Economy Bomb article that has been an annually updated feature of Action America since 2000. Because of the large volume of new data that we uncovered in 2003, we felt that it deserved a new title in 2004, since it constituted a significant rewrite. Unfortunately, this means that the Economy Bomb is now ticking down faster.

Fact:	The top-earning 1% of US taxpayers pay more than one third (39.4%) of all federal individual income taxes collected.
Fact:	The top-earning 1% of US taxpayers earn only one fifth (21.2%) of all federally taxable individual income.
Fact:	The top-earning 1% of US taxpayers pay more than half again (56.0%) more of the total individual income tax load than they did when President Reagan left office (1989 tax year)
Fact:	The top-earning 1% of US taxpayers are facing frivolous lawsuits in phenomenal numbers, simply because our lax tort laws make them easy targets of opportunity.
Fact:	The top-earning 1% of US taxpayers are in more danger of government seizure (forfeiture*) of their private property than ever before in our history, due in part, to the Patriot Act.
Fact:	The top-earning 1% of US taxpayers are Leaving the USA at the highest rate in history.

An insidious, creeping cancer is eating away at our economy. Not only the Income Tax, but other legislative and regulatory attacks on wealth are forcing many of the people who pay the lion's share of taxes, to leave the United States and because of some of that legislation, they are taking their wealth with them, thus, very disproportionately reducing the tax and investment base in the United States.

Let's start by looking closer at some of that IRS data and see how those numbers work out.

• There were roughly 133 million tax returns filed in 2005.
• The IRS collected $934.7 billion in personal income tax in 2005.
• The IRS data shows that the top-earning one percentile of taxpayers (1.3 million taxpayers) earned 21.2% of the income earned in 2005.
• The IRS data shows that the top-earning one percentile of taxpayers (1.3 million taxpayers) accounted for $368.1 billion in income tax paid in 2005.
• Based upon that data, the top-earning one percentile of taxpayers (1.3 million taxpayers) paid over one third (39.38%) of the $934.7 billion in total individual income tax paid into the IRS in 2005. Do the math for yourself ($368.1 billion / $934.7 billion).
• Based upon that data, the top-earning one percentile of taxpayers (1.3 million taxpayers) paid almost double their share of taxes (1.86 times) in relation to their share of income earned. Do the math (39.38% of taxes / 21.2% of income).
• The top-earning one percentile of taxpayers (income over $364,657 in 2005) carried 56.0% more of the tax burden than they did when  President Reagan left office and their share of the tax burden was only 25.24%. Do the math (39.38% / 25.24%).

Since the original publication of "Tick-Tick-Tick - The Economy Bomb", the earlier version of this article, in 2000, more oppressive legislation aimed squarely at the top-earning one percentile has made matters even worse. This is creating a problem for the top-earning one percentile. But, before you start shedding crocodile tears for those poor top income earners, remember that these people are almost all problem solvers. To them, this is only a speed bump. To you and me, however, it's quite a different issue.

You see, it is the wealthy's legitimate and justified response to the problems being created for them by lax US tort laws and a US tax structure that punishes wealth and virtually eliminates privacy that represents a ticking time bomb presenting an even more serious threat to the remaining 99% of taxpayers. If you make less than $364,657 per year, then that's you.

What's wrong with making the wealthy pay more tax?

Many people who look at the above statistics will immediately say, "So, what's wrong with making the people with the most money, pay more tax?" Some seem to think that the wealthy have, in some way, committed some horrible sin, just by being wealthy and such being the case, they should be forced to pay a larger proportional share of the tax burden, as penance. Others are suffering under the misconception (disprroved by the IRS data) that the wealthy don't pay tax.

Such absurd arguments are not only immaterial, but serve to show just how completely uninformed of the real problem now facing the United States, are many people, including many in the halls of government.

The problem of which I am talking is a direct result of the position in which the wealthy now find themselves. The wealthy are being systematically backed into a corner by our government. The wealthy are:

• paying double their share of taxes
• facing frivolous lawsuits by the greedy, in ever growing numbers
• losing any semblance of privacy in their business transactions
• having their business dealings saddled with onerous Patriot Act and Sarbanes-Oxley Act requirements that often take so much time and cost so much money that otherwise profitable deals end up costing money, if they happen at all
• having their property confiscated (forfeited*) by the government, at an ever increasing rate

Everything for which they have worked so hard, is now being threatened by the same government, whose job it is to protect citizens from just those types of abuses. Should we then be surprised if the top-earning one percentile of taxpayers, facing an untenable situation, take the only legal route left open to them, even if such a response threatens the very fabric of the US economy? I think not. Their response is really quite simple.

The wealthy are leaving.

Since most of those who leave, are seeking privacy, they avoid leaving many trails. Therefore, factual data about expatriation is very difficult to come by. Because of that difficulty, in past versions of this annual article (prior to 2004), although we used a number of very reliable sources to come up with the best estimates available, at the time, we only presented the most conservative estimates. As it turns out, factual information that we uncovered in 2004, originating from the US Census Bureau, indicates that we should have been using the most generous estimates and even so, those numbers would have been well below reality.

According to the US Census Bureau, as reported in the "2000 Statistical Yearbook of the Immigration and Naturalization Service" (6.2 MB download), by the Bureau of Citizenship and Immigration Services (BCIS), formerly the Immigration and Naturalization Service (INS), the wealthy are leaving the United States in record numbers.

From that report:
Approximately 300,000 are projected to emigrate annually in the 2000-2005 period. In the longer run, emigration is projected to increase steadily with the growth of the foreign-born population, finally reaching a projected annual level of more than 500,000 in the year 2100.

But, keep in mind that those estimates were made before the passage of the hugely anti-privacy Patriot Act, which indicators show, caused even more wealthy Americans to leave.

It's important to note that those numbers are only estimates. In fact, in that report, they acknowledge that even estimating emigration is very difficult, saying, "In some areas these deficiencies persist because of the inherent difficulty in estimating the numbers, as is the case for emigration and illegal immigration. As a result, no detailed tables on these two categories are included in the Statistical Yearbook."

The reason why it's so difficult to make such estimates is that it is known that the vast majority of expatriates just quietly leave, without notifying any government agency of their destination. Expats often call this leaving "without notifying the jailer". It should also be noted that, among expatriates, the popular term for expatriation is, "escape." If expatriates feel that way about the US government, is it any wonder why they leave quietly?

So, although the real number of expats (the popular term for expatriates) in 2005 may have been less than 300,000, it is likely that it was really much more. But, since there are no more authoritative numbers available, we will stick with 300,000, for our purpose.

Granted, not all of those 300,000 expatriates were rich. But, think about it. How many do you really think were poor?... How many do you think were even middle class? Personally, I think that it would be very conservative to expect that 80 to 90 percent were, at least, somewhat wealthy. But, don't use my estimates. Use your own.

Just keep in mind that poor people come to the United States, mostly with their hand out and bypassing legal immigration channels, because of all the economic benefits that our government offers them, using our tax dollars. Why would the poor leave? In fact, for all of their protestations, even our middle class has it much better here than in any other country. The only class of people who can have it better in another country are those who are at least moderately wealthy - roughly, the top-earning ten percent (those who earned at least $103,912 a year, in 2005).

Furthermore, that INS report indicates that this is the highest expatriation rate ever. Other data, such as records of citizenship and permanent residency applications at key foreign consulates, support these facts and some even indicate that the problem is much worse than suggested by the US Census Bureau. But what's worse, is that this exodus appears to have increased significantly since that report, most notably, since the enactment of the USA Patriot Act. It cannot be denied. The wealthiest Americans are leaving the USA for more wealth friendly climates at the highest rate ever.

"So what? Let'em leave!"

One of the most absurd statements that I have heard, in response to the above facts is, "So what? Let'em leave." In fact, that attitude is actually contributing to the problem and making it much worse.

You see, as a result of one of the laws that I will discuss below, designed to punish the wealthy for leaving, the wealthy are now taking ALL of their investment capital with them, when they leave and therein, lies the true problem.

When the wealthy leave, it creates severe problems for the rest of us, since we are the ones who have to make up the difference in taxes. What really surprises me is that even a few well-meaning conservatives, who realize that the real problem is Native Capital Flight, have fallen into the greed trap, right along with the liberals.

In fact, the most inane argument that I have heard on this issue has come uniformly from both ends of the political spectrum and goes something like, "Well, we just need to pass more laws to keep the wealthy from taking their money out of the country."

Duh?!!!

It is precisely those laws that are some of the primary reasons why Native Capital Flight has become such a severe problem in the first place. To the wealthy, each such law represents yet another brick in an economic Berlin Wall that they see being erected by our government and meant to limit their financial options.

But, remember that the wealthy are largely problem solvers. So, each time the government attempts to limit the financial options of the wealthy, the only effect that it has is to make them take a closer look at options that they had not previously considered viable. They now have to consider the option of leaving and possibly never coming back. But to a problem solver, that’s a small price to pay for economic freedom.

The result of these increasingly oppressive laws is that instead of forcing the wealthy to stay here, along with their money, they are actually forcing the wealthy to move more of their wealth out of the US, while they still can, in preparation for a time when a new round of such laws makes it impractical for them to stay. Although leaving may be far from their first choice, they are beginning to realize that their own government may leave them no other choice. In fact, many have already been forced to make that choice.

Their flight creates serious problems for YOU.

To some, who have not achieved such wealth, the wealthy who are fleeing the US, for more wealth friendly jurisdictions, are "cowards", "unpatriotic" and "quitters", who we don't want around, anyway. Be that as it may, I won't argue those points here. That's because what people think about them is completely immaterial to the problem at hand. Like them or not, when the wealthy leave, it creates serious problems for those who remain in the US.

To understand the threat that this represents, we must look at what this all means for the other 99% of taxpayers (those who make less than $328,049 per year)? Why is the fact that a handful of wealthy people are leaving and taking their money with them, such a problem for you? After all, wouldn't it take a tremendous number of wealthy people leaving, to have a noticeable effect upon our economy?

Actually, no. Until you look at the actual numbers and do the math, it doesn't appear to be a serious issue, but it is. So lets look at the numbers again and this time, let's do the math.

The chart to the right shows in blue, the percentage of individual income tax revenue for which the wealthiest one percentile of taxpayers were responsible, in 2005 and the percentage of tax revenue that the rest of us paid, is shown in red. The full circle represents the amount of personal income tax revenue that must be collected to fund the government for a year. It demonstrates that if only the top-earning 1% of taxpayers were to leave the USA permanently, we would all be in a world of hurt, since those who remain would face an almost two-thirds (65%) tax increase, just to stay even.

Without that 1% of the wealthiest Americans, every remaining taxpayer would have to pay over 60% more in taxes to equal what was lost. Can you afford that?

Those who argue that Americans with the most money should be taxed at a higher rate will find themselves being taxed at a much higher rate, instead. If you are paying $5,000 in income tax today, then imagine paying an additional $3000 in taxes. If you are paying $25,000, then imagine paying an additional $15,000. If you are paying $100,000 - well if you are paying $100,000 in income tax, there's a good chance that you already have your bags packed and your second passport in hand, so you don't need to imagine anything.

Although not all of any particular income group will leave, you must consider that the higher the income group, the greater the motivation. There will always be those whose asset base is tied to the US. Bill Gates, for instance, would have a difficult time leaving, since Microsoft is such a US-centric company. But, who knows? After all, Microsoft has been increasing its offshore programming staff. Beyond the obvious cost savings and tax benefits, offshore outsourcing relieves companies of ties to any single country. So, maybe even Gates is preparing for the worst.

The point is that the higher the income, the greater the financial motivation for leaving. Then consider that as the most wealthy leave, the additional tax burden shifts to the next level down, so lets think about the fact that the top-earning 5% of income earners pay 59.7% of all taxes collected. While the majority of the wealthiest 1% are "escaping", do you think that the top-earning 5% will just be sitting around waiting for a 50% tax increase? Of course not. And, when they leave, your tax bite will far more than double!

Then, of course, there is the top earning 10%. But, I wouldn't worry about them. By that time, the government will have either taken the very unlikely measure of repealing all of the wealth punitive laws and abolishing the Income Tax, in lieu of a National Retail Sales Tax, to encourage the wealthy to return or they will have done what so many other repressive governments have done when faced with native capital flight on a massive scale - they will have closed the borders to keep the remaining wealth in the country.

But then, as shown by every case where that has happened in the past, ranging from Nazi Germany in the 30's to South Africa in the 70's and 80's, to to the more recent case of Malaysia, even closing the borders to capital, only increases native capital flight, albeit on an illegal basis.

So, maybe you should worry about losing the top-earning 10% after all, because if they can manage to get out with their wealth in tact, your taxes would almost triple! Have I got your attention?

Although it's interesting to think about, for other reasons that I will explain, I seriously doubt that it will ever get that far. The problem goes much deeper. But, staying with just the tax issue for now, let's look at the actual numbers.

Here is the math for the top-earning 1%:

100% - 39.4% of taxes lost = 65.0% of taxes left

39.4%	= 65.0% additional tax burden for those remaining
60.6%

Here is the math for the top-earning 5%:

100% - 59.7% of taxes lost = 40.3% of taxes left

59.7%	= 148% additional tax burden for those remaining
40.3%

THAT'S FAR MORE THAN DOUBLE!

Here is the math for the top-earning 10%:

100% - 70.3% of taxes lost = 31.8% of taxes left

70.3%	= 237% additional tax burden for those remaining
29.7%

THAT'S MORE THAN TRIPPLE!

Think about it. If only the top-earning one percentile of taxpayers leave the United States, the remaining taxpayers will find that they will have to pay an additional 65% more in taxes. 1% is not that much. Think about it. Could you tell if there was just one aspirin missing out of a 100-count bottle, without counting them? That's 1%. The point is that we could lose that critical one percentile without knowing that they were gone. Maybe we already have, which would explain a lot of the federal deficit.

In fact, I will clearly demonstrate later, just how quickly we could lose that 1%. Then, consider that if the top-earning five percentile of taxpayers leave the United States, the tax burden for those who remain, will far more than double. And yet, our government is making it more and more difficult for the wealthy to remain in the United States.

Legislative attacks upon people with any significant degree of wealth is a ticking time bomb for our economy and we haven't even touched on the issues of frivolous litigation or government confiscation of private property.

It creeps like a virus.

The legislative issues contributing to this growing exodus have gone largely unnoticed, since the growth in expatriation of the wealthy has taken place over so many years. It really began back in 1968, shortly after the riots at the Democrat National Convention in Chicago. This is not to say that it was a problem at that time. Let's just say that the trickle of expatriates that any country experiences became a barely noticeable flow at that time. If it had stayed at that level, it would not be a problem today. But, indications are that the flow increased slowly, but steadily until the 1980's.

In 1981, the Reagan administration rolled back some of the wealth punitive, anti-privacy laws and tax rates that were contributing to this exodus and indications are that it did have a significant effect. In fact, officially, not a single US citizen renounced his US citizenship the next year. But, such is the nature of the income tax and the lust for ever more power that often infects elective officeholders, that no sooner than President Reagan left office, the attacks on the wealthy resumed and have been increasing since. So has expatriation of the wealthy.

Evidence from key foreign consulates indicates that the number of US citizens requesting application forms for citizenship or permanent residence in those countries, jumped significantly in the months after the Democrats in Congress tricked George Bush (the elder) into a huge tax increase and the numbers have continued to rise, since. Granted, requesting citizenship forms or information on citizenship is not expatriation, but details on the number of citizenships actually granted is far more difficult to come by. It is however, reasonable to assume that as the number of forms requested increases, so does the number of forms submitted.

The point is that the timing of those requests tie back to the motivation. Other jumps occurred just after the Clinton tax increase and again, after the HIPAA legislation (discussed below) was signed into law, in 1996.

Indications are that in the first year of the George W. Bush administration, the expatriations increased much more slowly, as the wealthy seemed to think that maybe Bush (the junior) would relieve some of the pressure on them. But, shortly after the President signed the USA Patriot Act into law, all of the indicators show that expatriations quickly shifted into high gear again.

Just the timing of those increases points even further to the fact that those who are leaving are wealthy, since each of those events represented an attack on wealth. The slower increases in the first year of the Bush administration indicate that the wealthy expected Bush to roll back some of the previous administration's wealth punitive legislation. But, with the passage of the Patriot Act, the wealthy knew that they had figured Bush wrong and expatriation spiked once more.

Again, let's do the math.

As shown above, over 300,000 mostly wealthy Americans chose expatriation in 2005. That rate has been increasing at a rate significantly higher than the growth of wealth in this nation for many years. Even so, for our calculations, we will assume that the number of wealthy Americans that are leaving remains stable, which further assumes that Bush and Congress hold back any more legislation that the wealthy see as detrimental to themselves, their business or their rights. However, now that most of what has been deemed "Patriot II" has been passed in other bills and even more ominous legislation is waiting in the wings, that's a very rosy assumption. But this is, after all, meant to demonstrate a "best case" scenario.

Based upon recent history, currently proposed legislation and other disincentives, it would probably be reasonable to assume a 10-20 percent growth in expatriation every year. But, my purpose is to be as conservative in my projections as possible. So let's just stick with the stable rate assumption. Then, after you see how bad the best case scenario is, we invite you to recalculate, using your own assumptions, to get an idea just how serious a problem we are really facing.

But for now, sticking with the conservative numbers, multiply it out and you will find that if the 2005 rate holds steady through 2010, the number of wealthy Americans that may have left the United States in that time (including 2005) could easily reach over 1.8 million or well over the 1.3 million taxpayers that make up the top 1% of taxpayers (see table).

Note: Numbers expressed in thousands

Year	2005	2006	2007	2008	2009	2010
Annual Expatriation	300	300	300	300	300	300
Total Since 2004	300	600	900	1200	1500	1800

Granted that not all of those expatriates are going to be wealthy. But, ask yourself, how many of those expatriates you really think will be poor or even middle class. Use your own estimates, based on common sense. Just keep in mind that the poor don't leave unless they have to. They can't afford it.

You can see that what appears to be a minor problem today, could turn out to be a catastrophe for the US economy tomorrow. Remember that in 2005, the top-earning 1% amounted to just barely over 1.3 million taxpayers. Depending on how many of those expatriates are wealthy, it's quite possible that a significant portion of our most substantial taxpayers could be gone by the time Bush leaves office. How much longer can this go on?

In fact, since this flight has been going on for some time and it's so difficult to estimate emigration levels, it's anyone's guess just how many wealthy taxpayers have already been forced to leave. So, ask yourself just how much of our current deficit can be attributed to the loss of tax revenue from the wealthy who have already been forced to leave. Think about it...

Our government is making it increasingly expensive and oppressive for the wealthy to stay. Other than the US Census numbers and sparse data from foreign consulates, there is a lot of ancillary data that points to the fact that wealthy Americans are expatriating at phenomenal rates. This ancillary evidence ranges from tell-tale social indicators to more hard numbers.

For example, only a few short years ago, it was very difficult to find the single small bar or restaurant in most foreign countries, where American expatriates would gather. Today, they are more common than car dealerships. It seems that there are now quite a few in every small country.

On the other end of the spectrum is the Forbes Magazine annual lists of "400 Wealthiest Americans" and the "Worlds Billionaires". An analysis of those lists, in recent years, shows that from 1999 to 2005, the number of billionaires in the US climbed by a mere 22%, while during that same time period, the number of billionaires worldwide climbed by a whopping 132% or six times faster. In other words, while the growth in the number of billionaires in the US was just barely ahead of what inflation alone would account for, the growth in the number of billionaires worldwide was moving ahead at a rapid pace, likely as a result of US billionaires moving offshore.

Granted, the Forbes lists probably leave out some billionaires whose asset base is not easy to locate. But, since Forbes has been using the same criteria to build those lists for years, although the actual number of billionaires in each year's list may not be accurate, the percentage of change, from year to year, should be a fairly close approximation of reality.

Then there is the annual Merrill Lynch/Cap Gemini Ernst & Young "2003 World Wealth Report". The headline of the press release for the 2003 report announced "...Number of U.S. Wealthy Individuals Drops — Goes Against Global Trend". According to the report, there were 100,000 fewer millionaires in the US at the end of 2003, than at the end of 2002, while worldwide wealth grew. There is no doubt about it. The wealthy are leaving in large and increasing numbers.

To be fair, the "2004 World Wealth Report" shows that the number of wealthy individuals in the US increased in 2004. But that was due largely to low interest rates and greater growth in world GDP than we have seen in more than 20 years. So, this does not mean that the wealthy are not leaving. In fact, other indicators are just too solid on this point. It simply means that due to exceptional worldwide economic conditions, low interest rates in the US and helped along by rising oil prices and the continued effects of the Tax Relief Act of 2001, more Americans managed to "grow" their wealth here at home. 2004 was just an unusual year, across the entire spectrum.

The question that hangs ominously in the air is, "How long will these new millionaires be willing to take the abuse that our government increasingly heaps upon high net-worth individuals?"

But consider this. Let's just assume that things are not as bad as the picture I have painted. Suppose that the Census numbers are off by a whopping 50% and that the expatriation rate is only half as high as the US Census numbers indicate and not increasing, we still have a serious problem.

Do the math. Then consider that in reality, due the Patriot Act and other wealth-punitive legislation that has been enacted since the 2000 Census, those 2000 Census numbers are probably off in the other direction and that expatriation is, in fact, increasing at an even higher rate than the Census Bureau predicted back in 2000. It might be much worse...

Actions speak louder than words.

Of course, the real evidence of the massive scale of native wealth flight is not in any statistics, but rather in the almost panic reaction of our government. Oh, officials of the Internal Revenue Service and other federal agencies deny that expatriation of the wealthy is a problem. But, the government's own actions belie their words. Consider this.

If the government's claims are true, why did both Republicans and Democrats in Congress suddenly find it necessary to add an amendment to the Health Insurance Portability & Accountability Act of 1996 (HIPAA) (26 USC 877(a)(1)), that claims the right to tax expatriate Americans for 10 years after they renounce their US citizenship and are taxpaying citizens of another country, if the US government thinks that one of their reasons for expatriation was to "legally" avoid US taxes? (Find that hard to believe? Click on the link and read it for yourself.) Actions speak louder than words.

Why did our lawmakers find it necessary to include in that ominous HIPAA legislation, yet another provision (26 USC 6039G(e)(3)) aimed at slowing expatriation by requiring that the names of all who have expatriated during the previous quarter, be published in the Federal Register, as an attempt at intimidating those who might be considering expatriation? (It's in there, too. Click on the link and read it for yourself. Also see "US Taxpatriates" at http://www.ActionAmerica.org/taxecon/taxpats.html, for links to those quarterly lists.) Actions speak louder than words.

Why then, did they follow-up that abominable law with the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA), which modified the Immigration and Nationality Act (8 USC 1182(a)(10)(E)) to allow the government to permanently deny "wealthy" expatriates entry into the United States, if the US government thinks that one of their reasons for expatriation was to "legally" avoid US taxes? In other words, our government now considers the wealthy to be on a par with smugglers, prostitutes, drug dealers and child abusers, who are also denied entry to the USA. (Find that hard to believe? Click on the link and read it for yourself.) Actions speak louder than words.

And, what does the government use, in both of those laws, to determine if tax avoidance was among the reasons for a taxpayer's expatriation? Income and/or net worth. If an expatriate had a net worth of $500,000 (raised to $2,000,000 in 2004) at the time of expatriation or earned more than $100,000 per year (raised to $125,000 in 2004) for the five years immediately preceding expatriation, then he is assumed, by the US government, to have expatriated to avoid US taxes. (It's in those links, in surprisingly easy to understand verbiage. Follow the links and read it for yourself.) Actions speak louder than words.

These laws are clearly aimed at punishing anyone who has the audacity to be rich and leave with their wealth, intact. If the IRS and lawmakers are not very seriously concerned about the number of wealthy taxpayers who are leaving IRS jurisdiction, then what reason would they have to pass such autocratic laws? Think about it... Actions speak louder than words.

If hundreds of thousands of the wealthiest Americans are not now structuring their holdings in preparations for leaving the USA, why did the Senate even considering a bill like the Civil Asset Forfeiture Reform Act of 1999 (S. 1701) that demanded that not only foreign nationals, but US citizens alike, disclose any and all financial information about foreign holdings that the government seeks or lose all future legal right to challenge any property forfeiture in any US court? (Don't take my word for it. Click on the link and read it for yourself.) Actions speak louder than words. Fortunately, that one was narrowly defeated.

But, the point of all these laws and many others not mentioned here, due to space consideration, is that they are clearly aimed at discouraging wealthy Americans from moving their wealth out of the jurisdiction of the IRS and then moving offshore themselves. The words of the federal government on this issue are belied by their actions. Actions do speak louder than words.

In fact, if native capital flight was not a very real and serious threat to our tax revenue, there would be no reason to even propose such draconian laws.

A July 1999 report titled, "Private American Citizens Residing Abroad", compiled by the US Bureau of Consular Affairs, contradicts the claims of the IRS and others who insist that expatriation is not a problem. It shows that an enormous number of American citizens already reside offshore. The following numbers represent only a very small portion of that report (only 10 cities) and only US citizens who have NOT yet renounced their citizenship and further, only those that the Bureau knows about.

• Mexico City, Mexico	441,680
• Toronto, Canada	250,000
• London, England	200,000
• Vancouver, Canada	200,000
• Tijuana, Mexico	196,000
• Frankfurt, Germany	138,815
• Guadalajara, Mexico	111,100
• Calgary, Canada	105,000
• Manila, Philippines	105,000
• Santo Domingo, Dominican Republic	82,000

Just the American expatriates in those 10 cities alone, numbers almost two million and that's only the ones who have notified US authorities of their whereabouts, at that. In fact, there is very good reason to believe that less than one expatriate in 10 ever formally renounces or notifies US authorities of his whereabouts after leaving.

Then consider that we have not even begun to touch the outlying areas in those countries or the hundreds of small island nations and emerging countries, favored by expatriates, like Belize, Bermuda, Caymans, Grenada, Panama and Trinidad and Tobago, that have thousands of US expatriates, each.

As you read the above numbers, you might be tempted to think that many of these people are just working offshore and intend to some day return. Not so. According to Wall Street Journal staff reporter Barry Newman, writing in a December 28, 1998 article titled, "Renouncing U.S. Citizenship Becomes Harder Than Ever", even among the millions of expatriates that the IRS knows about, in 1994, they received just 257,000 returns claiming any special tax breaks for citizens overseas.

The first thing that you learn, when you move offshore is that there is a huge tax break for living offshore. Therefore, if you file your tax return, you will certainly take that exemption. Since only 257,000 returns claimed any such exemption and the government knows of millions of US expats, that can only mean that millions of US expats didn't file at all. There is only one reason why millions of US expatriates would risk the ire of the IRS, by not filing. They don't plan on returning!

In fact, As I write this, I am sitting in my London flat. During my time in London, I have met more than a few US expats (almost all in the upper-income groups), who have expressed to me that they have no intention of ever returning to the USA. The question that you must now be asking is, am I one of those expats who plans not to return? The answer is no. We also maintain a home in the USA and will be moving back to the USA very shortly. The point is that if I can so easily meet so many of these permanent expats, there must be a lot more of them out there.

How many more expatriates are out there who have not renounced and simply dropped off of the government's radar? It can't be denied. Many of the wealthy are already gone and many more are leaving every day.

Intimidation only makes matters worse.

Recent legislative attempts at forcing or intimidating the wealthy into staying have only made matters worse. As mentioned above, in 1996, Congress passed and President Clinton signed into law, two bills aimed at "punishing" those wealthy Americans who had the audacity to leave the United States (rather than creating economic "incentives" for wealthy Americans to stay). Any first year political science major can tell you that historically, disincentives almost never work.

Let's examine the effect of these two pieces of totalitarian legislation.

I will just touch on the changes made to the Immigration and Nationality Act first, since the only purpose of those changes was to discourage wealthy Americans from leaving and their only effect was to scare more wealthy Americans into leaving. The Illegal Immigration Reform and Immigrant Responsibility Act 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 expatriate was wealthy, under the afore mentioned government standards, at the time of his expatriation.

Pay special attention to the fact that this law did not apply to ordinary expatriates, but only to the wealthy. Our government obviously doesn't care if you or I should leave, since it is not our taxes that funds their gravy train.

Obviously, the feds, who publically claim that native capital flight is not a serious problem, must be privately terrified of the consequences that the continued increase in native capital flight will bring. However, they erroneously believed that those wealthy Americans, who were considering leaving, would ever want to come back to a country that treated them like second class citizens, for no better reason than they had worked hard and acquired some assets. Instead, the wealthy saw that law for what it was - a harbinger of things to come.

Instead of discouraging expatriation, that law was, in fact, the trigger event that caused even more wealthy Americans to leave. As I mentioned above, I have lived offshore for most of a year. Furthermore, in my business, I travel offshore a lot and often to tax haven countries. Both in London and elsewhere, I routinely have a chance to talk with American "expats." I was not surprised to find that among the reasons high on the list of recent expats, for leaving the USA, was this change to the Immigration and Nationality Act.

The Health Insurance Portability & Accountability Act of 1996, on the other hand, has much more ominous overtones. So, what does a health insurance law have to do with expatriation? 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 expatriate was guess what... wealthy, under the afore mentioned government standards, at the time of his expatriation. Do you see what this says? Think about this.

The United States government is now claiming the right to tax foreigners!

They want to tax people who live in, work in and pay taxes to another country and who no longer hold US citizenship or even US permanent residence. They want to tax people who are, by every reasonable definition, "foreigners". Follow the above link. It's there, in plain language.

The United States long shared with Libya the infamous distinction of being one of only two countries in the world that claimed the right to tax the income of its citizens regardless of where in the world that income was earned or banked. But, even Libya was not so tyrannical as to claim the right to tax foreigners, who had no connection to the country. In fact, even Gadaffi was smart enough to realize that taxing the foreign income of citizens was causing an unacceptable amount of native capital flight and Libya has now dropped its claim to the offshore earnings of its citizens.

If a self-absorbed despot like Gadaffi can understand that, what does that say about our government?

It should be noted that the Wall Street Journal reported, in the December 28, 1998 article, "Renouncing U.S. Citizenship Becomes Harder Than Ever", that only two other countries in the entire world attempt to tax the offshore earnings of its citizens. One is the Philippines. The other is Eritrea. Since that Journal article was published, South Africa has also implemented such a tax regime. But, enough of the sad company that our government keeps...

The real problem is not the abhorrent nature of this law. It is its effect.

When word of the Health Insurance Portability & Accountability Act of 1996 reached the wealthy, they saw this law for exactly 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 rhetorical 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 the wealthy 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 a good 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, to pay that 10-year tax penalty.

Let me emphasize that word.  ALL!

Expatriates can no longer afford to leave anything behind. To protect what they have earned, they must sell or encumber ALL of their US-based real estate, US stocks and bonds,... EVERYTHING! Over a period of time, they must move all of their wealth into offshore investments or at the very least, create debt against anything that is left here. Then, when they leave, there is nothing left behind for the IRS to confiscate. Unfortunately, it also leaves nothing behind to fund US jobs or pay US taxes.

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 stay or to leave any money in the United States, when they left.

So, instead of preventing wealthy Americans from leaving, that law not only encouraged them to leave at an even higher rate, but it forced them to take ALL of their wealth with them when they leave. And, therein, lies 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 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, stocks, bonds or direct investment, 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 investment capital funds move offshore, as well. We are already beginning to see this.

Some of that investment capital will be replaced, it might be argued. In fact, some, though not all of it, will be replaced. But, it is 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.

Just look at how much Communist China has invested in the US. As more and more wealthy Americans are forced to flee the United States, the remaining 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, the recent rash of government confiscations (forfeitures*) and the heavy burden upon business, represented by legislation like the Patriot Act and the Sarbanes-Oxley Act 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 big glob of snow. But if we don't create some major incentives to keep US capital in the United States, it will soon become an avalanche.

Creating Incentives and Removing Disincentives

The problem is very complicated and there is no single solution. But, there are two issues that, far and away, represent the most pressing problems surrounding native capital flight. Those issues are the abuses of the IRS and the USA Patriot Act.

I mentioned earlier that I have interviewed many American expats about their reasons for leaving. Until six years ago, the number one reason for leaving, cited by EVERY expat that I talked with, had something to do with the IRS - not the Income Tax, but the IRS. When I asked them to be more specific, they cited IRS abuses and witch hunts, lack of privacy in their financial dealings, hundreds of thousands of pages of incomprehensible and contradictory laws from which the IRS picks and chooses and let us not forget, the Health Insurance Portability & Accountability Act of 1996 and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, which are nothing more than covert tools of the IRS.

Every last expat that I talked with, prior to 2001, told me that the "principal factor" that pushed them over the edge had something to do with the "not to be sufficiently damned IRS." (By the way, I have found that phrase in quotes to be rather common in the expat community.) Even when I tried to suggest that, since they rated the IRS as the key factor in their leaving, that it all boiled down to taxes, they corrected me. Though taxes may have been a factor, the tax load alone, was not enough to force them to leave. The thing that pushed them over the edge had to do with the IRS, itself.

I should mention that today, there are some who now cite the Patriot Act, as their number one reason for leaving, though the IRS still holds a commanding lead. The point to remember here, is that both the IRS and the Patriot Act represent attacks on personal and business privacy.

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. One of the most important things that we must do to stop native capital flight, is ABOLISH THE IRS.

That would mean replacing the Income Tax with some system of taxation that does not require such an autocratic 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 three tax plans that would fit this requirement - excise taxes on imports, a National Retail Sales Tax and taxing the states according to their productivity, which would allow the states to collect all federal taxes, as their voters choose.

Since broad use of excise taxes have generally been found to have a negative impact upon the economy, they are not a practical solution. Of the three options, taxing the states, instead of individuals, is most in line with the intentions of the Founding Fathers and it would achieve the desired affect of getting the government out of the affairs of individuals. The competition between the states would serve to keep the system efficient. But alas, no such bill has been proposed in Congress.

That leaves the National Retail Sales Tax (H.R.25, in the 110th Congress), that has been proposed in every congress for years and gains supporters every year. It was sponsored by Rep. John Linder, of Georgia and now has 69 cosponsors. Even Tom Delay announced his support for it in April of 2004 and set a schedule to push H.R.25 through committee and get it to a floor vote. The Fair Tax is also a major component of Mike Huckabee's presidential bid. As more in congress learn about the Fair Tax, the more support it gets.

The findings of a CATO Institute Policy Analysis on "The Economic Impact of Replacing Federal Income Taxes with a Sales Tax" predicts 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. Former House Ways and Means Committee Chairman, Bill Archer reported, "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America!"

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 native capital flight and bring a lot of expatriated capital back into the United States. But, for that to happen, the 10-year expatriation tax on the wealthy and the "Don't come back" law would have to be repealed, as well.

New Disincentives to Overcome

Although a National Retail Sales Tax would serve to slow the flight of the wealthy, that alone, would no longer have the sizable effect on keeping native capital here that it once did. Financial analysts have made many excuses, for why the US dollar is falling and continues to fall against the Euro and other currencies. But, for the most part, they limit their analysis to traditional models and those models just don't fit here.

The problem that traditional models fail to account for is, since the implementation of the Patriot Act, transferring US dollars internationally, has become extremely difficult. Even transfers of US dollars from one bank in a foreign country to another bank in that same country could be held up in the Fed for weeks.

It is not unusual for US dollar transactions that used to take one to two days, to be held up in Patriot Act compliance for one to two months. Such delays did not exist prior to the Patriot Act and do not exist today, when dealing in Euros, Pounds, Yen or any other foreign currency, if you are not a US citizen. That's because those currencies don't move through the Fed and because foreigners, who deal in other currencies, don't have to meet Patriot Act requirements.

To understand what is happening, you must understand how the US dollar became the currency of choice for investors worldwide. The creation of the Fed made it possible to execute US dollar denominated transactions internationally, in two or three days that previously would have taken six to ten days or longer, with other currencies. That extra few days of interest on, say $100 million dollars, is a lot of money. It was the efficiency of the Fed that made the US dollar the currency of choice in international transactions. But, the Patriot Act has reversed all that.

Today, as a result of technology, foreign currencies can usually be transferred via Euroclear, almost as fast as dollars. But until enactment of the Patriot Act, the dollar remained the currency of choice, not only because of the certain efficiency of the Fed, but because there was no reason to change. It was just practical.

But, with the onerous requirements of the Patriot Act, it can now take weeks to transfer US dollars, while the same amount of a foreign currency may only take a few days. Today, when using Euros for such transactions, the interest savings alone, can be significant.

It should be noted here that every US government agency that watches such things, has reported that the terrorists did not and do not use our banks for laundering money, since they have access to Arabic banks that provide untraceable transfers. In other words, the financial provisions of the Patriot Act, that make up almost two-thirds of that bill, had absolutely nothing to do with terrorism, but were instead, aimed at control of wealth and wealthy Americans. But, like previous such attempts at disincentives, to control wealth (HIPAA, IIRIRA and S.1701, mentioned above), the Patriot Act had an effect that was exactly the opposite of what the government desired.

Disincentives don't work.

Disincentives like those discussed above, along with about two-thirds of the Patriot Act, have had the exact opposite of the intended effect. Disincentives just don't work. If native capital flight is to be reversed, before it's too late, we must eliminate all of those disincentives, abolish the IRS and roll back large portions of the Patriot Act (mostly the financial provisions).

Then, we must replace those disincentives with incentives, like a National Retail Sales Tax and a return to a banking system that encourages the use of the US dollar in international transactions, before another currency rises to the top and becomes the de-facto standard for international business. We also need to implement some serious tort reform laws that include, amont other things, "loser pays."

But, here is the important thing. Those changes must be implemented soon, before the US dollar ceases to be the currency of choice in most international transactions and before the expatriation snowball picks up too much speed to be stopped. If other currencies become as common in international transactions as the US dollar, it will be too late, as the dollar will stagnate. If we wait until the economy begins to react to this native 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 native capital flight. Once that slide begins, it will be the economic equivalent of the collapse of the World Trade Centers and all that we will be able to do is pick up the pieces of a shattered economy and wonder why our government didn't do anything to stop it. Unfortunately, few will realize that government disincentives were actually the cause.

WE MUST ACT NOW!

It's no longer simply a matter of equity in taxation nor of the tracking of terrorists' funds. As a result of recent and continuing legislation aimed at controlling or punishing the wealthy, the economic future of the United States of America is now seriously at risk, since those who can save our economy, are precisely the people who are being forced to leave.

The wealth expatriation snowball is growing, day by day. Nobody can say when it will reach critical mass. But at the rate it's going, it likely won't be long.

We urge you to contact your Congressman TODAY and tell him/her that you want him/her to support the Fair Tax Act of 2007 (HR 25) and the repeal of all of the financial restrictions in the Patriot Act. The Fair Tax Act will go a long way toward reversing capital flight, eliminating IRS confiscations and getting the IRS out of our personal lives. But, without the roll-back of the Patriot Act, even that bill will give us only limited relief.

There is however, one other alternative. You can start packing your bags.

 

* To make confiscation seem less severe, the government has taken to calling it forfeiture.  The term, "confiscation" connotes taking something that belongs to a citizen.  The term, "forfeiture" connotes giving up something that was not the citizen's property in the first place.  Who says subliminal messages are dead?

Discuss this article.

Copyright 2008 John Gaver
All rights reserved

See related articles and supporting documents:

1986-2005 IRS Collections Data by Income Category
The Privacy Factor
More Attacks on the Wealthy
US Taxpatriates List
2000 Statistical Yearbook of the Immigration & Naturalization Service (6.2mb PDF)
2003 World Wealth Report (Merrill Lynch/Ernst & Young)
American Citizens Residing Abroad (US Bureau of Consular Affairs)
Health Insurance Portability & Accountability Act of 1996 (26 USC 877(a)(1))
Immigration and Nationality Act of 1996 (8 USC 1182(a)(10)(E))
The Economic Impact of Replacing Federal Income Taxes
      with a Sales Tax (CATO)
Fair Tax Act of 2007 (H.R. 25)
Americans for Fair Taxation
National Retail Sales Tax Alliance

Recommended Books:

The Fair Tax Book
Fair Tax: The Truth
How to Hide Your A$$et$ and Disappear
Escape From America

See Expatriate sites:

The Sovereign Society
Escape Artist
Expat World
Second Passports

Contact your Congressman here.

 

Would you like to have John Gaver speak at your meeting or public function?

 

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