Money: Taking it with you

[LinusK]

So I was reading an SD Classic, and I came across a link to this article, warning that US citizens are leaving the country, and taking their wealth with them, at “an alarming rate”.

Keep in mind that most of those expats are wealthy, since poor people can’t afford to leave. In fact, millions of poor people risk their lives in the back of trailers or crossing Arizona desert every year, to take advantage of our increasing welfare state. It is the wealthy, who are leaving and they represent lost US investment dollars and subsequently, LOST US JOBS.

Instead of reducing the number of taxpatriates, these oppressive laws have actually increased taxpatriation. But, to make matters worse, wealthy expatriates are now taking ALL of their money with them, to prevent it from being taxed for ten years after they leave (26 USC 877(a)(1)). The “small flood” of taxpatriates predicted by the Forbes Magazine article, “The New Refugees” (Nov 21, 1994 v154 n12 p131(5)) is threatening to become a large flood in the not too distant future. Also see the Forbes article, “And don’t come back.” (Nov 18, 1996 v158, n12, p44(2)). See the article, “The Economy Bomb,” for more information on these numbers.

Which got me wondering: how do “tax patriots” take their money with them?

Hear me out.

Suppose I’ve got a million dollars in the bank, and I want to take it with me. But my new country uses francs. So I change my dollars for francs. Haven’t I left my dollars behind?

Or suppose I own stocks and bonds. If I own Microsoft shares, how do I take them out of the country? Are my stocks out of the country because I’m out of the country?

Suppose I sell my Microsoft and buy Airbus shares. But my MS hasn’t gone anywhere. There aren’t any fewer MS shares than there were before.

Or suppose I leave with a trunk full of cash. Now there’s less money in the country. But how important is that?

The Fed estimates two-thirds of US currency circulates abroad. Does that hurt us? If so, how? Should we be trying to get it back?

Of course, you could leave the country with gold coins, or art work. Then there’d be fewer coins and paintings. But I don’t see how that affects taxes or jobs.

Does it?

Is there something I’m missing?

Or is the Galt’s Gulch scenario an empty threat?

[gnoitall]

@LinusK

Suppose I’ve got a million dollars in the bank, and I want to take it with me. But my new country uses francs. So I change my dollars for francs. Haven’t I left my dollars behind?

How 'bout if I deposit my money in a foreign-denominated foreign bank account? Say, in Switzerland, or the Cayman Islands? Followed by relocating myself with friendly-to-me expatriation and extradition terms?

I’m sure there are technical mechanisms in place to detect one-shot interbank wire transfers of hundreds of millions, but they can’t really be prevented–that’s how business is done. (What’s the detectable difference between settling your Accounts Payable and fleeing the country with your billions?)

And once you and the money are gone, what can the Feds really do?

[md2000]

You change your dollars to francs. No big deal.
A few hundred of you want to change 3 billion dollars for francs - suddenly, the demand for francs goes up, the value of dollars goes down. With a lower exchange rate, it costs more to buy that BMW or Bentley for the people who have not left.

Same with stocks and bonds.
If you keep them, you eventually have to exchange the dividends for Francs - same logic. If you trade in MS stock for Airbus, and all your like-minded .01% do the same, MS stock nosedives, Airbus stock goes up, plus the exchange rate issues; if MS needs to sell more stock to pay for Windows 9 development, they don’t get as much money per share.

If you settle in Franc-land and decide to start a business, odds are you’ll start it there. At the very least, the Mercedes dealer there gets the commissions instead. So the people with the desire to start businesses contribute to their new home instead…

So the problem is that as the desir to hold dollars goes down, dollars become a glut on the market and your dollars buy less from outside the USA. Your gas price goes up (foreign oil!), your employer pays you a lot more, but you can still only afford to buy the same amount at these inflated prices.

[LinusK]

@gnoitall

How 'bout if I deposit my money in a foreign-denominated foreign bank account? Say, in Switzerland, or the Cayman Islands? Followed by relocating myself with friendly-to-me expatriation and extradition terms?

I’m sure there are technical mechanisms in place to detect one-shot interbank wire transfers of hundreds of millions, but they can’t really be prevented–that’s how business is done. (What’s the detectable difference between settling your Accounts Payable and fleeing the country with your billions?)

And once you and the money are gone, what can the Feds really do?

If you deposit your money in a foreign denominated bank account, you must trade your domestic currency for foreign currency. But that doesn’t change the amount of money in either country. It only changes ownership.

[friedo]

@LinusK

If you deposit your money in a foreign denominated bank account, you must trade your domestic currency for foreign currency. But that doesn’t change the amount of money in either country. It only changes ownership.

Those dollars you used to buy your francs are now the property of your foreign bank.

[gnoitall]

@friedo

Those dollars you used to buy your francs are now the property of your foreign bank.

I didn’t realize those exact (probably non-tangible) US $1 bills were the point of this exercise.

Asides from variation in exchange rates, national currencies are fungible. $1 worth of Francs, or Renmimbi, or Zorkmids is identical to $1 US. Any differences in relative buying power are mostly smoothed out by the actual currency exchange process. (E.g.: I want to move my money into Zaire. My $1 has pretty serious buying power there. Luckily, the exchange rate already reflects this: I’ll get more than 500 CFA Francs for my one greenback.)

If I buy gold bullion with my big stack of US $1 bills (tangible or not), the dollars are now property of the gold dealer. But OP already concede that “smuggling” gold would be a valid form of money expatriation.

I think everyone’s focusing on the trivia. It’s not the dollars. It’s the wealth, and the fact that some forms of wealth (which can be purchased with dollars) can be safely and quasi-legally moved beyond the reach of those who would extract the expatriate’s “fair share”.

Because I assure you. If I had $1 billion in the U.S., I could almost certainly get most of it out of country with a minimum of effort and in a variety of other forms and get the functional benefits of obscene wealth along side practical immunity from taxation.

And, if I recall, that’s really the point of the original article.

Now, how does taking wealth out of the country affect taxation?

The idea is that money not in the US economy isn’t participating in any transactions that can be taxed. You aren’t investing it where the US can see it, so you don’t pay capital gains or income taxes on it. It’s not real property within a US jurisdiction, so you won’t pay property tax on it. Hell, you’re not buying stuff within a US sales tax jurisdiction, assuming you were before.

The wealth “disappears” from the US economy. More to the point, the opportunity to tax bits of it as it flies around the US economy disappears.

[LinusK]

@md2000

You change your dollars to francs. No big deal.
A few hundred of you want to change 3 billion dollars for francs - suddenly, the demand for francs goes up, the value of dollars goes down. With a lower exchange rate, it costs more to buy that BMW or Bentley for the people who have not left.

Same with stocks and bonds.
If you keep them, you eventually have to exchange the dividends for Francs - same logic. If you trade in MS stock for Airbus, and all your like-minded .01% do the same, MS stock nosedives, Airbus stock goes up, plus the exchange rate issues; if MS needs to sell more stock to pay for Windows 9 development, they don’t get as much money per share.

If you settle in Franc-land and decide to start a business, odds are you’ll start it there. At the very least, the Mercedes dealer there gets the commissions instead. So the people with the desire to start businesses contribute to their new home instead…

So the problem is that as the desir to hold dollars goes down, dollars become a glut on the market and your dollars buy less from outside the USA. Your gas price goes up (foreign oil!), your employer pays you a lot more, but you can still only afford to buy the same amount at these inflated prices.

Well the first part is right - if there’s a bunch of people all selling dollars and buying francs, the price of francs will rise, and dollars fall.

If you’re importing things from abroad, that’s bad news. But if you’re exporting, it’s good, right? Is it fair to say that “tax patriots” help make American products more competive? And therefore create jobs in America? If so, that’s the opposite of what the linked article was claiming.

It’s also true that if people start selling American stocks, that will drive the price of stocks down. Which is bad, if you’re selling. On the other hand, it’s good if you’re buying, since you’ll be getting more for what you spend. You’d expect, therefore, to enjoy better returns down the road.

As far as tax patriots starting businesses abroad, it’s true that the US will lose the benefit of any work that they do. But we’re talking about their money, not their labor.

[md2000]

@LinusK

Well the first part is right - if there’s a bunch of people all selling dollars and buying francs, the price of francs will rise, and dollars fall.

If you’re importing things from abroad, that’s bad news. But if you’re exporting, it’s good, right? Is it fair to say that “tax patriots” help make American products more competive? And therefore create jobs in America? If so, that’s the opposite of what the linked article was claiming.

It’s also true that if people start selling American stocks, that will drive the price of stocks down. Which is bad, if you’re selling. On the other hand, it’s good if you’re buying, since you’ll be getting more for what you spend. You’d expect, therefore, to enjoy better returns down the road.

As far as tax patriots starting businesses abroad, it’s true that the US will lose the benefit of any work that they do. But we’re talking about their money, not their labor.

If it’s a give-and-take marketplace, then great. yes, action one way lowers the price, inducing people to come the other way. (Buy dollars, buy MS stock, buy US manufactured products, if any.)

however, if there is a mass exodus, and everyone wants to get out now, you have panic selling and fewer people wanting to buy. Then the price goes down… and if people see no reason to buy into this, it stays down. (I.e. Blackberry or Facebook stock…)

[Iggy]

Take a case study - the Dart brothers. They made their fortune through Dart Container making cups and food service containers.

They expatriated, renounced US citizenship, and now have Cayman citizenship. They have since used their wealth made major investments in the Cayman Islands.

By building a hotel in Cayman they are providing jobs in Cayman rather than the US. This will help attract more tourists (primarily from the US) who will vacation and spend their dollars in Cayman rather than the US. The Cayman government will receive the related tourism taxes The hotel employees circulate their income in the Cayman economy and the government again gets its piece from import duties on these employees’ purchases.

Dart has made many more investments than just one hotel. They’ve started Dart Enterprises which owns a construction company, a realty development company, and more. They have built an entire city. They fund community parks. They are building an entire highway as a part of a private-public partnership.

The knock on effects are substantial. And this is just two wealthy guys.

[LinusK]

@gnoitall

I didn’t realize those exact (probably non-tangible) US $1 bills were the point of this exercise.

Asides from variation in exchange rates, national currencies are fungible. $1 worth of Francs, or Renmimbi, or Zorkmids is identical to $1 US. Any differences in relative buying power are mostly smoothed out by the actual currency exchange process. (E.g.: I want to move my money into Zaire. My $1 has pretty serious buying power there. Luckily, the exchange rate already reflects this: I’ll get more than 500 CFA Francs for my one greenback.)

If I buy gold bullion with my big stack of US $1 bills (tangible or not), the dollars are now property of the gold dealer. But OP already concede that “smuggling” gold would be a valid form of money expatriation.

I think everyone’s focusing on the trivia. It’s not the dollars. It’s the wealth, and the fact that some forms of wealth (which can be purchased with dollars) can be safely and quasi-legally moved beyond the reach of those who would extract the expatriate’s “fair share”.

Because I assure you. If I had $1 billion in the U.S., I could almost certainly get most of it out of country with a minimum of effort and in a variety of other forms and get the functional benefits of obscene wealth along side practical immunity from taxation.

And, if I recall, that’s really the point of the original article.

Now, how does taking wealth out of the country affect taxation?

The idea is that money not in the US economy isn’t participating in any transactions that can be taxed. You aren’t investing it where the US can see it, so you don’t pay capital gains or income taxes on it. It’s not real property within a US jurisdiction, so you won’t pay property tax on it. Hell, you’re not buying stuff within a US sales tax jurisdiction, assuming you were before.

The wealth “disappears” from the US economy. More to the point, the opportunity to tax bits of it as it flies around the US economy disappears.

Take the Darts, for example. Suppose they move to the Caymans, and sell their US assets, in order to purchase assets there - say they sell US dollars, in order to purchase Cayman Island currency. The dollars themselves don’t go anywhere - they merely change hands. They don’t disappear from the economy because when the Darts to sell their dollars, someone somewhere has to buy them.

There’s no change in the tax base, or in the number of units of currency in the economy. The Darts may not be paying taxes on the wealth they left behind, but somebody else is.

It’s the same if they sell stocks or land or whatever. Those things don’t disappear from being sold. They merely change hands.

If the Darts bring something with them, you could say it disappears. But most forms of wealth are not things that can be moved from one place to another. Stocks and bonds are not physical things, and real estate can’t be transported, for example.

And even in the case of at least one thing that can be transported - cash - you have to ask whether the US is any poorer when currency leaves the country. To my understanding, the answer is that it is not.

[Iggy]

The US dollar and Cayman dollar trade at a fixed rate. The Dart brothers can buy all the Cayman dollars they want and it won’t affect the exchange rate. US dollars thus spend freely in Cayman. The Darts (or you) can buy anything from your groceries to a house with US$ in Cayman.

The Darts left the US and put their wealth into circulation elsewhere. The Dart brothers’ economic activity creates businesses which have economic activity which pays salaries to employees who have economic activity. It is the benefits of this multiplier effect that provides the impact of movement of this wealth. The government which gets to tax a bit of all this economic activity gets the revenue from all this.

Then there is the nice lady I used to see walking her dog each morning as I drove to work… Susan Olde

[Little_Nemo]

@Iggy

The Darts left the US and put their wealth into circulation elsewhere. The Dart brothers’ economic activity creates businesses which have economic activity which pays salaries to employees who have economic activity. It is the benefits of this multiplier effect that provides the impact of movement of this wealth. The government which gets to tax a bit of all this economic activity gets the revenue from all this.

You guys might not want to hold up the Darts as role models. The entire family is basically nuts.

[Duckster]

@LinusK

So I was reading an SD Classic, and I came across a link to this article, warning that US citizens are leaving the country, and taking their wealth with them, at “an alarming rate”.

I seriously question the credibility of your source on its face.

As to the topic at hand, a recent WSJ article is at odds with the story’s premise.

[Iggy]

The Darts may be nuts, but they are RICH nuts.

Not all of the wealthy are nuts. Susan Olde, OBE, is sane and very nice. She has shown a considerable charitable bent.

[LinusK]

@Iggy

The US dollar and Cayman dollar trade at a fixed rate. The Dart brothers can buy all the Cayman dollars they want and it won’t affect the exchange rate. US dollars thus spend freely in Cayman. The Darts (or you) can buy anything from your groceries to a house with US$ in Cayman.

The Darts left the US and put their wealth into circulation elsewhere. The Dart brothers’ economic activity creates businesses which have economic activity which pays salaries to employees who have economic activity. It is the benefits of this multiplier effect that provides the impact of movement of this wealth. The government which gets to tax a bit of all this economic activity gets the revenue from all this.

Then there is the nice lady I used to see walking her dog each morning as I drove to work… Susan Olde

There’s no doubt that when someone takes himself out of the country the product of his work benefits the people of his new community. If he’s a baker, it’s his new neighbors who get to eat his pies. (Unless they export them back to the US). But what about his wealth?

You say the Darts can bring dollars to the Caymans and spend them there. So let’s say they do that. Now there’s more dollars circulating in the Caymans and fewer in the US.

Is that a problem for the US? Are we poorer if more of our dollars circulate outside our borders?

And if we’re poorer when dollars are removed from circulation, doesn’t that mean we’re richer when we add more? Can we make ourselves rich by printing money?