On the back of Facebook’s upward revisions of their Friday-mega-IPO price estimates, Eduardo Saverin’s renunciation of his US citizenship has been big news. Saverin, mostly of The Social Network fame, was one of the four founders of Facebook and his 5 percent stake is now valued at more than $3 Billion. Ostensibly, he decamped to Singapore to avoid the 15 percent capital gains and 35 percent estate tax that would be levied on his sizable wealth. Saverin, however, claims mere coincidence – he filed his application back in January 2011, and the government routinely announced his renunciation at the end of April 2012. Whatever the reason, Saverin has earned the ire of online commentators and even Senator Chuck Schumer (D-NY), who brought a bill to the floor calling Saverin to be banned from entering the United States.
Although complete renunciation appears to be uncommon, Saverin is certainly not alone in moving large swaths of wealth to low tax “havens” like Switzerland, Singapore, and Hong Kong. Singapore, in particular, has a no capital gains tax and a fast growing wealth management industry which continues to attract wealthy individuals in large numbers. There are few boundaries to moving money around the globe, and from the tax collection point of view, this is certainly a problem. Mitt and Ann Romney are known to have had several undisclosed bank accounts in Switzerland and the Cayman Islands. Apple’s tax practices are just as innovative as their products – clever office relocations to low-tax states and storing billions overseas has left them with a comparatively tiny corporate tax bill. Should we blame these individuals and corporations for, in Romney’s words, “[paying] all the taxes owed. And not a penny more”?
The problem lies instead in a tax code that is ill-equipped to combat today’s highly mobile capital caused by technological advances. Instead of being put to work through domestic reinvestment, capital is stockpiled overseas. Furthermore, tax competition both between states and globally continues to drive tax rates downwards and exacerbates the problem of insufficient revenue.
Unfortunately, there is little recognition of this. Instead, on issues of revenue, there are constant calls for reducing tax on “wealth-creators” from the right. Forbes Magazine even hails Saverin as a hero for “de-friending” the United States. On the left, calls for higher marginal rates point to a better grip on fiscal reality, but neither solution would prevent capital outflows. On the corporate tax front, there is growing recognition that lower rates are needed to maintain competitiveness, but at the expense of what? One should not forget the seesaw effect of tax reduction – lowering tax costs for one group increases it for others (be it intergenerational or not). Given the seeming impossibility of preventing capital outflows, how can the U.S. maintain competitiveness while generating sufficient revenue?
Some would point to places like Saverin’s new home, Singapore, which may stir the envy of the U.S. budget. Constant budget surpluses contribute to already-large reserves and there is ample money to invest in defense, education, and even in foreign holdings. What may not be obvious is the simple explanation for this: lower tax rates are accompanied by an even lower federal government bill – a comparatively tiny social safety net, a small pension bill, and so on. In addition, there are large regressive consumption taxes. Basically, stuff that conservatives drool over. These same people constantly decry Obama’s policies as driving the US towards a Greek-style default, but let’s face it; the US is not southern Europe. Neither is it Asia. Perhaps taking a leaf out of the similarly highly-developed Northern European socio-economic policies would be helpful.
In Scandinavian countries like Denmark and Sweden, investments in education and training are responsible for high levels of competitiveness (third and fourth in the World Economic Forum’s competitiveness index) despite high marginal income tax rates of up to 55 percent . This leads to low inequality (smallest Gini coefficients), and fiscally sustainable welfare systems. In terms of education, Finnish students, for example, are amongst the best in the world despite their low number of school hours and public education. Furthermore, the Scandinavian countries survived the 2008 recession remarkably well, with strong consumption as a result of generally higher disposable income.
Today, America faces competing visions about how to balance its spending and revenue. Which direction will it take – the reduced spending of Singapore, or the higher taxation of Scandinavia? Hopefully, it will lean towards the latter. Unfortunately, marginal rates probably won’t increase anytime soon, widening the tax base would lead to contention over vertical equity, and closing loopholes would be fiercely lobbied against (despite many fortune 500 companies effectively paying a fraction of the supposed 35 percent corporate rate). Often lost in this debate (which can tend to center around marginal rates and social security spending) is the important question of education and infrastructure investments. If one looks just beyond the short-term, increasing competitiveness through investments in education and infrastructure is likely to be revenue-positive, Scandinavian style. Some kind of political consensus is needed on this, and the sooner that Congress takes a serious look at the tax code, the better.