Facebook’s IPO today will likely mint a new crop of millionaires in Silicon Valley as well as a few billionaires. While much has been made of the site’s creator Mark Zuckerberg, its co-founder Eduardo Saverin garnered some negative press recently for a decision to renounce U.S. citizenship and move to Singapore.
While his reasons are likely personal as well as financially motivated, it’s interesting that much of the talk has focused on Saverin’s unstated desire to avoid high taxation in the United States. Depending on when he cashes in his stock Saverin would face capital gains or individual income taxes. Singapore has no capital gains rate and doesn’t tax income earned abroad. The United States has a long term cap-gains rate of 15 percent (increasing to 23.8 percent in 2013 thanks to Obamacare) and tries to tax income earned abroad.
Singapore’s highest marginal rate is 20 percent on income over $320,000. If Saverin cashes in his stock sooner, in the United States he would face the highest rate of 35 percent plus a state tax rate. Supposing he lives in California—where Facebook is headquartered—Saverin could face a total income tax burden of 44.3 percent before deductions, exemptions and credits.
We can’t say whether Saverin left for personal reasons or tax avoidance, but ATR’s point is that taxes change behavior and can drive valuable citizens and investors away from America to more tax friendly countries. This happens within the United States as taxpayers move from highly regulated, highly taxed states to more friendly neighbors. California is experiencing this right now.
So what’s the best response? Taxing people more according to Senators Bob Casey and Charles Schumer. Essentially Casey and Schumer are saying it isn’t fair for entrepreneurs to benefit from lower tax rates elsewhere. Their “Facebook Tax” would set a 30 percent capital gains rate on American expatriates like Saverin. This is the most convoluted definition of fairness and does nothing to encourage foreign entrepreneurs, investors and workers to come here and create jobs. Taxing success in the name of fairness is like taking Facebook profits to pay for Myspace losses.
In an interview, Senator Casey referred to Saverin when arguing in favor of the “Facebook Tax” claiming, “To renounce your citizenship and go to Singapore to take advantage of their tax laws, I think there should be a consequence for that.” Here’s an idea, lets lower rates here thereby making America more attractive to investors and entrepreneurs rather than raising taxes thereby encouraging businessmen to stay away from financing innovation and job creation in America.