Farhad Manjoo has a piece over at Pando Daily entitled “What Eduardo Saverin Owes America”. He gives a list of five specific items: his safe childhood, his erstwhile friendship with Zuckerberg, Harvard, the Internet, and the justice system. This made me think of the obvious counterfactual scenario: what if Eduardo Saverin’s family had moved to Europe instead to escape the threat of kidnappings in São Paulo, and he’d come to Harvard as a visa student? Four out of Manjoo’s five points still apply, but Saverin would face a far lower tax bill. Would Saverin owe any less of a moral debt to America? And what does the resulting tax situation have to say about the justice of the U.S.’ peculiar practise of taxing overseas citizens wherever we go?
Though Americans often don’t realise it, there are dozens of developed countries on earth which offer civil safety and high wages to migrants. South Korea has more Mongolians than the U.S.; the Netherlands has more Indonesians; France has more Senegalese; and Germany more Turks. What if Eduardo Saverin’s father would have decided, for example, that Portugal was a better destination to avoid disrupting his son’s education with the difficulties of adjusting to a new language of instruction? As Brazilians it would have been easy for them to get visas. Miami isn’t even particularly safe; its violent crime rate is 3x the U.S. average, which itself is higher than that in many foreign countries. Saverin could have had a safe childhood in many places other than the U.S., and would owe a moral debt to the Portuguese people for it. Or the Swiss people. Or the Canadian people.
Saverin would then have landed at Harvard on a F-1 visa with the same money to help Zuck buy servers. He’d have the same personality which led him into disputes with Zuck and caused their ultimate falling-out in July 2004. His lack of citizenship would do nothing to impede his access to the court system in which he sued Zuck. But Saverin’s tax situation would be very different: he’d be a “non-resident alien student” (yes, people who actually live in the US can be non-resident aliens, while us U.S. Persons abroad are stuck being taxed as residents). The IRS even has a publication about this very tax situation: “The Taxation of Capital Gains of Nonresident Alien Students” — suffice it to say, as long as Saverin were living outside of the US when he finally realised his capital gains, his tax bill to Uncle Sam would have come out to a big fat goose egg. He would have filed his 1040-C, received his sailing permit, and gone on his merry way to Singapore.
Of course, someone would still have had to pay for all the public infrastructure that nurtured Facebook’s other co-founders and helped them grow their company into whatever it’s worth today. That someone would be other U.S. taxpayers, among them readers of the Isaac Brock Society. In the real world Saverin just paid his exit tax (which may actually be higher than what he otherwise would have paid), but there are literally millions of other non-resident alien investors who are paying nothing at all, as long as they only earn capital gains and not dividends from their stocks. They enjoy all the security of property rights which U.S. laws and governance have to offer them (for whatever that’s worth) — but they pay no taxes for it.
Let’s think about the full implications of that for a moment: as we all know, Congress and the IRS refuse to honour the democratic wishes of the Canadian parliament that all Canadian residents regardless of nationality shall enjoy simplified tax and tax-reporting treatment on “Tax-Free Savings Accounts”, RDSPs, and the like. So instead, U.S.-born Canadians with no investments in the U.S. are paying U.S. taxes and filing complex IRS forms on the appreciation of their Canadian TFSAs, while the U.S. offers a sweetheart capital gains tax rate of zero to non-resident aliens in order to entice them to pour capital into U.S. stocks.
Of course, without that zero capital gains tax rate, many of those U.S. stocks would not offer a sufficient rate of return to attract foreign capital in the first place. That means the U.S. is subsidising the international misallocation of capital through its tax system. Investors in our countries who would otherwise invest at home are being enticed to invest in the U.S. — we U.S. Persons abroad are footing the bill for our countries of residence to be starved of capital so that U.S. companies can have access to cheaper capital and can grow faster, outcompeting companies where we live and possibly contributing to unemployment among our neighbours. And that’s not even mentioning the fact that many non-Americans who invest in the U.S. are not honestly reporting their capital gains to their countries of residence.
I suspect that Congress’ “solution” to the Eduardo Saverin situation will be to mandate that former U.S. citizens be taxed on U.S.-source capital gains as though they had never lost U.S. citizenship. That’s probably the least-bad solution for ordinary U.S. Persons abroad — especially those like Petros or myself who are specifically divested from U.S. stocks. On the other hand, there will be xenophobic isolationists calling for even more onerous taxes on all U.S. persons abroad in order to make us pay for “Saverin’s sins”. None of them are going to notice their own hypocrisy in taxing us but not taxing non-resident aliens on U.S.-source capital gains.