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.
Hopefully more about Saverin’s family will come to light. In Brazil, I know of only 1 person who went to Harvard. And that person is connected to MEGA money, hotels all over LAM and HUGE development projects. This guy (Saverin) sounds like he always had a Silver Spoon in his mouth. He probably would have had the best anywhere he went.
@Eric – the overwhelming majority of Brazilians think the Portuguese are stupid and that most Brazilian problems are the fault of the Portuguese. And there’s a bit of anti-Brazilian sentiment in Portugal too. So I doubt they would have gone there.
When they immigrated, the US was a good place. Technology-related companies were taking off. A few people were starting to use the internet. I don’t know if you remember, but it was pre-9/11. It was pretty good there. How have things changed in 20 years!!
The idea that not taxing interest or capital gains from nonresident foreigners attracts foreign investment is based on one of the following assumptions:
1. The investor’s country does not tax interest or capital gains.
2. The investor’s country does not tax income from foreign sources.
3. The investor’s country taxes income from foreign sources, but does not allow a credit for taxes paid to other countries.
4. The investor’s country taxes income from foreign sources, allows a credit for taxes paid to other countries, but its tax rate is lower than that of the US.
Most countries in Europe, the Americas and East Asia do not fall into any of these cases, and I suppose that most foreign investment in the US comes from these countries. Therefore, the US would not lose foreign investment if it taxed this income. The foreign investors would simply pay tax to the US, use it as a credit and only pay the difference in the tax rate to their own countries. If the income was generated in the US, the US has the right to tax is first. This is logical and fair. I suppose that if the US did this, and stopped taxing its citizens abroad, like every other country does, it would end up collecting more tax reveue.
Also, if the US taxed capital gains generated in the US by nonresidents, and did not tax its citizens who lived abroad, there would be no tax-related reason for people like Eduardo Saverin to reside abroad or renounce US citizenship.
Whatever measures the US puts into place people will find a way around them. How about if his shares were in the name of a foreign corporation that he owned or some other convoluted arrangement. It’s not perfect but adds another layer between him and the IRS. If the US concentrated on raising other forms of revenue (like VAT) and balanced the books, we wouldn’t being having this discussion. All these approaches, chasing ex-pats etc, is like the US government looking under the cushions of the couch for loose change. It alleviates today’s short-term money problems, but long-term it doesn’t do a thing.
Eduardo Saverin just played by the rules imposed by the USA. He didn’t make the rules. He is paying exit-tax. In this case, the rules are favorable to him. But in many other cases the rules were not fair to ex-pats. For example, if expat born to Canadian parents in the USA but living all his life in Canada made billions in a business he started or if he inherits billions from his Canadian grand parents, he is also forced to pat exit-tax, where the US has unfairly leaving taxes on Canadian economy. Isn’t it hypocrisy to complaining about Saverin when he is playing by the rules, while ignoring that the same rules are unfair to many others.
@to all, of course it’s especially unfair for those with accidental citizenship such as the Canadian born there who’d only spent time there as a baby. It’s even worse in the case of one who’d merely inherited US citizenship from a parent. Though the US would argue that these individuals enjoyed the opportunity to study, live and work in the USA.
I also agree with Shadow that the IRS would net more money for the US if they simply automatically taxed all US-sourced income and gains. However, being the nationalistic and puritannical culture that it is, Congress feels the need to punish expats for choosing to abandon America by imposing citizenship-based taxation. It’s a matter of moral principle.
@all- I left a comment on Mr. Manjoo’s blog where I point out that his basic argument is an argument in support of indentured servanthood. I also pointed out that this same argument when expressed by expats, but couched instead in the negative as a proof of their indenturement, is rejected by the IRS as being a frivolous argument.
Does anyone else find the official term “alien” to be appalling when referring to an immigrant of a country? I certainly wouldn’t find it appealing to be called an “alien” as an immigrant in the US.
Is this an English-speaking country phenomenon? Is this how Canada refers to landed immigrants as well? We just call immigrants here in Belgium “foreigners”.
@ Don Pomodoro,
I think the official term “alien” for an immigrant is a US phenomenon. In Canada it only refers to immigrants from other planets.
The Canadian government replaced the official term “landed immigrant” with “permanent resident” some time ago (maybe 20 years ago?) … I still hear either used in conversation, but mostly permanent resident.
@Don: No the term “alien” is not used in Canada relating to immigrants. I can’t speak for other English language countries, but I personally have only ever heard it used in relation to US immigrants. I hope Just Me, Monalisa and others can give some insight about New Zealand, UK, etc.
I remember seeing and hearing the term when I was a teenager in the US in the 1960s. I thought it was bizarre then. Now, I think it is even more bizarre. When I go to the Post Office in my mother’s Pennsylvania village and see signs reminding aliens to register, I look to see if there are any Martians hanging around. So far, I’ve never seen one.
I must admit, however, when I’m in the US, I usually feel like an Alien From Another Planet. So, maybe it’s me they expect to register (not going to happen!).
Well to tell you the truth I did resent being called an alien when I lived in the USA. Amazingly I recently discovered, now that I have been back in Canada for 17 years, that they want to call me a US person, at least until I get my old, neglected green card officially accepted back and my I-407 stamped with approval. Somehow they must have found out that I have a few coins in my pocket (as opposed to when I entered into the USA for a 12 year sojourn with practically nothing) and they had better make nice a bit by granting me personhood — too little, too late.
More coverage about Saverin:
John McKinnon on the WSJ Blog:
http://blogs.wsj.com/washwire/2012/05/13/facebook-co-founder-america-is-ok-its-the-rules-that-are-a-pain/
And TaxProf quotes two tax professors who claim that Saverin’s taxes actually will go up because of his renunciation. Of course they both make the dubious assumption that he intends to hold onto Facebook shares for the long run rather than flip them ASAP after the pop:
http://taxprof.typepad.com/taxprof_blog/2012/05/seto-kleinbard-explain.html
@Expat_in –
Your hypothetical Canadian would be exempt from the exit tax due to his Canadian citizenship at birth and not having lived in the US for more than 10 of the last 15 years.
@Badge, I was known as a longterm resident before I became a British citizen. The UK don’t use the term ‘aliens’ when referring to immigrants.
yep, “alien” is bad. I think we’re probably a little more sensitive since we’re all immigrants (or emigrants) in some way.
Here, it’s “foreigner” (estangeiro). I have it on all of my documents and I *hate* that. I can’t wait till my citizenship is approved.
Only in the US.. alien..
The terms “alien” and “foreigner”, in English and their equivalents in other languages, generally derive from words meaning “other” or “outside”. Etymologicaly, they are not derogatory. However, because the word “alien” has in recent decades taken the meaning of “extraterrestrial”, I admit that it is now weird to use the word “alien” to refer to a person. I’m surprised to see that other English-speaking countries do not use that word to refer to foreigners. Maybe it reflects Americans’ concept and attitude regarding the “rest of the world”.
@geeez, You probably already know this, but if you become a Brazilian citizen, you will have to register in the military (if a man 18-45 years old) and vote in every election (if 18-70 years old). However, the penalties for not doing are usually very small.
Time for a replay of that earlier afterthought to the long-ago Whatchamacallit posting.
Many Brockers currently suffer from being non-resident non-aliens — aka “US persons” who are “overseas” or “abroad.”
@Don Pomodoro and Shadow Raider: many other Commonwealth countries use the word “alien” to mean a non-citizen who is also not a citizen of another Commonwealth country. Canada has stopped using this term but many Caribbean countries continue to use it, for example.
@geeez: another thing I like about HK: there’s only two types of ID cards (temporary and permanent) and everyone gets the same one regardless of nationality. Lots of other countries in Asia make you carry an “Alien Registration Card” that’s clearly different from a normal ID, and people always get confused when they see it because they’re only used to seeing citizen ID cards.
And I simply could not resist commenting. Here’s my question to Mr. Manjoo:
“Fascinating argument. Basically you are saying that Saverin needs to give something back to the US because he enjoyed safety, educational and career opportunities there. Fair enough but by that logic all immigrants in the U.S., especially those highly-qualified immigrants from Europe and Asia also owe something to their countries of origin. That is an argument that is being made, by the way, in places like my host country, France. After enjoying an excellent French healthcare system, a very good public education system in a very safe country that invests a lot of money in children, is it fair that these folks grow up, move to Silicon Valley and make good without giving anything back? You have just made an excellent argument that, yes indeed, these folks should do exactly that and transfer some of their resources back to their home countries. And if it so happens that their home countries decide to implement their own “tax the diaspora” systems would you have a problem with them giving up their original citizenships to become Americans?”
Eduardo Saverin does owe the USA something. His tax bill. Once paid, he owes it nothing. For, like all human beings, he is a free man, free to do with his life as he chooses, tugging his forelock to no king or state.
@Shadow– yeah, I’m pefectly fine with registering for the military. But personally, all the people I know in the miltary are in those jobs because they want to be, not because they were obligated. Remember, the government doesn’t like the spend money so the chances of me being called up, like everyone else I know, are pretty slim.
But hey, if they called me up to be some translator in a foreign country, I’d probably do it. I’ve already served in 1 countries military, so I could easily do it again.
This story just got major international coverage. Currently a top ten most read article on the BBC:
http://www.bbc.com/news/technology-18057926
@victoria- I thought that your reply was very well done and I also dropped a response in your defense. I have to admit that this article has proven to be very fertile ground for exposing U.S. residents to the sins of citizenship based taxation.
@recalcitrantexpat, thanks and I totally agree that this conversation is proving to be VERY interesting. Some great comments. I find it kind of funny that Americans don’t seem to understand that their immigrants did not fall out of the sky – they all emigrated from somewhere and it wasn’t Mars. 🙂