It's a fun thought exercise for most of us. But whether or not to drop his U.S. citizenship for $1 billion was a legitimate question for Eduardo Saverin, one of Facebook's co-founders. Depending on what happens when the IPO actually launches, Saverin could get more than $3 billion. As an American, he might have owed about a billion in capital gains tax, but he won't owe any now because he decided to renounce his American citizenship.
Reactions have fallen into two extremes. One is exemplified by Forbes.com, where libertarian Daniel Mitchell crowed, "We now have a very high-profile tax expatriate." Rich folks, he went on to say, are fleeing the United States at an unprecedented clip due to our onerous taxes on the wealthy. Noting that more people gave up their American citizenship in 2011 than any previous year, he argues that Saverin is merely the latest example of "taxpayers escaping countries controlled by politicians who get too greedy."
Not so Fast
There are more than a few problems with this logic. First, if people are indeed fleeing the United States due to capital gains tax, you'd think that the highest rate of departures would be when capital gains taxes were most onerous. That time is not now: Throughout most of the 1970s, maximum long-term capital gains tax percentages were more than twice as high as they are today. OK, so capital gains taxes are low, but perhaps all these fleeing Americans are running from plain old income taxes? Same deal: Average income tax rates for those making $2 million a year or more are at the lowest or second-lowest point in 50 years.
While hard data is difficult to come by, anecdotal evidence, along with a New York Times article about American expatriates, suggest that a significant number of those renouncing their citizenship have moved to Western Europe. If they think they'll have lower taxes there compared to here...well, we just don't need them in the gene pool.
At the other end of the spectrum are those who vilify Saverin. They feel betrayed by an entrepreneur who made millions here, but would rather unfriend the U.S. than pay his fair share of taxes. "Writing this article without profanity has been almost physically impossible," begins post by David Gewirtz at ZDNet called "Why Facebook co-founder Eduardo Saverin is a schmuck."
What should an entrepreneur owe?
It's an interesting question, isn't it: What exactly does an entrepreneur owe to the nation where he or she started a business? I'm not sure, but I don't think the right answer can be citizenship for life, in which case a lot of Americans should be applying for Chinese citizenship about now. Conversely, if you owe citizenship where your company's customers are, then a lot of Chinese ought to be on their way here.
And the question of where Saverin made his money is murky. He was born in Brazil to wealthy parents, and his first big windfall came from investing in the Brazilian stock market. As to the IPO, that's a reflection of future expectations more than past earnings, and Facebook's future is not primarily American. The U.S. currently accounts for less than a quarter of its total usage.
On top of all that, Saverin doesn't even live here anymore: He's been in Singapore for the past three years. All things considered, if I were in his place, I think I very well might make the same choice he did, rather than pay $1 billion to a country that I no longer call home.
Honestly now, wouldn't you?