Philosophy creates the culture of a society and society further defines itself by taxation.
In 1991, I was invited by the American Branch of the International Law Association to speak at their annual conference. I am not a lawyer but was recognized as having a special viewpoint on the issue of taxation. The topic was Expatriation which is when a person renounces their citizenship. It became a hot topic around that time as a number of Americans were doing it. I have always had a wide range of clients from the very modest to the very wealthy. That spectrum has given me a lot of experience with financial planning and the way it affects various income groups. Examining the trends that were developing, there were clearly many stories and cases of the wealthy considering more radical options for planning. In that regard, the nature of taxation is quite important, not just for the ultra wealthy, but for everybody. Taxes are the biggest investment most citizens will ever make and are a big part of any financial plan. They also have the most influence on society over time. Would there have been a colonial rebellion without them coalescing with the concept of “no taxation without representation”.
To do a financial plan, it is necessary to understand the current and future implications of taxation and how people are behaving as a result and what are the expectations of their future behavior. Expatriation is an interesting phenomenon that has been in use for the past several decades. It has become the ultimate financial plan for some Americans. You need to know about it even though you may never use it yourself. (I will provide a more practical plan in a bit.)
The trend may have begun with John Templeton, who was the founder of a very successful mutual fund company. He renounced his U.S. citizenship in 1966. For this former Tennessee farm boy to do that at that time would have been thought of as treason by many. However, it may have been one of his best investments as he avoided U.S. taxes for the rest of his life living nicely in the Bahamas.
The trend continued with the Dart brothers. You probably drank coffee from one of their foam cups recently. One of the richest families in the country, Robert and Kenneth gave up their citizenship in 1994. Kenneth relocated to Belize and had the audacity to have that government try to establish a consulate at his Florida mansion and appoint him Consul.
Two more brothers, Fred and David Alger built up a respected investment firm in New York. Very tragically, David was at his desk in the World Trade Center when the plane crashed into his office. Fred came back from Switzerland to run the business, but he needed a work visa as he had given up his citizenship earlier.
If you have had the pleasure of a Carnival Cruise, it may be because the founder, Ted Arison, renounced his citizenship in 1990 and moved to Israel to avoid U.S. taxes. The company also registered their ships in foreign countries for what appears to be the same intent.
There are two primary reasons for this trend.
First, there are a growing number of citizens who are dissatisfied with their personal rate of return on their investment in taxes. Along with that they have become frustrated with the costs and aggravation of advanced estate planning.
Second, there is a growing nervousness with some people about the continued effort by governments in their attempts to control and confiscate wealth. The Panama Papers illustrate that fear. This is indicative of the general widespread attitude of resistance to any tax system.
It’s rather interesting that it is so difficult to get nations to agree on anything. Recent divisions on climate change and nuclear weapons demonstrate the challenges. However, all governments appear to have a common interest in taxation. A number of years ago, nations, some who don’t get along, came together in relatively swift action to effectively attack those countries who try to help people hide from taxation. This action virtually shut down offshore banking and with an astonishing twist pierced the shield of the infamous Swiss bank account.
As the former Chairman of both a bank Investment and Compliance committees, I saw numerous laws and restrictions to close loopholes. The only ones remaining are those paid for by lobbyists. At the same time, more and more private information is being reported to the government. It has been happening for several decades and is accelerating.
All of this has a significant influence on your personal finances.
So where does that leave you for an ultimate plan. It lies in recognition and change.
The inter connectivity of the world and its increasing volatility mandate that your financial plan needs constant oversight and active management. A plan set for years and followed arbitrarily may lead to financial disaster.
Taxation is very important, but not the only issue.
Extreme swings in asset values – adjust your plan.
Turmoil and shenanigans in elections – adjust your plan.
New laws and regulations – adjust your plan.
National debt goes up – adjust your plan.
Whatever China does – adjust your plan.
The President says the media is the enemy – adjust your plan.
The wealthy are always adjusting their plans and pushing for changes to their benefit. They have increased their wealth substantially over the past decades which has increased the wealth division among people in this country and the world. Even though tax rates have not changed dramatically over the years, a smaller number of the wealthy are paying a larger share of total tax revenue. if you raise their rates it will not produce a windfall in revenue and more may leave. A large portion of people pay nothing. Will the wealth gap widen more? Will the national debt get worse? Where does that leave the middle class?
To protect yourself you need to become more observant regarding what is happening in society and how it can affect your personal plans. You also need to become more active in the governance of our country. That will be your ultimate plan.