Pretend, just for a moment, that you’re President Obama.
You have big spending plans – national health insurance, two wars, and a trillion dollar bailout for your friends on Wall Street. Not to mention paying for the soaring costs of Social Security and Medicare.
Unfortunately, revenues simply aren’t keeping up.
Your Treasury Secretary – accused tax-evader Timothy Geithner – tells you that the unfolding recession is starving the country’s government for tax revenue. Indeed, just as you unveiled your trillion-dollar national health plan, Tricky Timmy informed you that federal tax revenues were dropping the fastest since 1932 – at the height of the Great Depression.
What to do…cut spending? Well, Obama did challenge his cabinet in April to come up with a whopping US$100 million in budget cuts. That’s out of an estimated 2009 budget deficit exceeding US$1 trillion, perhaps more. To put that in perspective, Harvard economics Professor Greg Mankiw commented:
“…[I]magine that the head of a household with annual spending of $100,000 called everyone in the family together to deal with a $34,000 budget shortfall. How much would he or she announce that spending had to be cut? By $3 over the course of the year–approximately the cost of one latte at Starbucks. The other $33,997? We can put that on the family credit card and worry about it next year.”
But seriously, what could Obama do to make a significant reduction in the deficit? Obviously, it won’t be to cut spending. Instead, Obama needs to raise hundreds of billions in additional revenues. And he needs to do it very quickly…
Suppose Tricky Timmy suggests that higher income taxes on rich folks that make over US$250,000 annually may raise a hundred billion dollars or so annually…but at the expense of depressing consumer spending by about the only segment of the population that can afford to spend.
With wealth tax systems already in place in countries like France and Norway, it might seem a reasonable conclusion to an administration aiming to drastically expand entitlements (like healthcare) in an age of plummeting tax revenues.
Well, here’s an idea that Obama and Tricky Timmy might be considering, although I must emphasize that nothing official along these lines has yet been proposed: a tax, small at first, but potentially growing, on everything you own, anywhere in the world. A “wealth tax.”
And when I say “everything,” I mean everything:
- The equity in your home
- Your equity in any other real estate you own, anywhere in the world
- The value of any business you own
- The value of your retirement plan
- The cash value of your life insurance policies
- The value of your securities portfolio
- The value of any assets held for you in trust
Indeed, with a wealth tax, you’ll need to declare the value of those gold coins buried in your basement, the cash under the mattress, and of course, previously non-reportable offshore investments.
From Obama’s perspective, a wealth tax would have two powerful advantages:
- It would generate considerable revenue on its own, although perhaps not as much as Obama and Terrible Timmy would like. For instance, the French “solidarity tax” on wealth – perhaps the world’s most severe wealth tax – raises only the equivalent of US$2.5 billion annually. The U.S. economy is five or six times larger than France’s so Obama might get his hands on an additional US$15 billion or so if he imposed a comparable tax. That’s still only a little more than 1% of the projected 2010 budget deficit, but it’s a lot more than Obama’s US$100 million challenge to his cabinet.
- More importantly, a wealth tax would make it illegal to hide wealth in any form from the government. And Congress can increase the tab anytime it wants.
Of course, the natural reaction of many wealthy people to a wealth tax will be to move their wealth – and perhaps themselves as well – out of the United States.
That’s exactly what’s happened in France, from which thousands of wealthy tax exiles have fled. And this may be the real reason for the government’s greatly increased interest in any assets you hold offshore: to flush out assets for the future imposition of wealth tax.
The possibility of a wealth tax is just another reason why if you’re a U.S. citizen or long-term U.S. resident with substantial assets, you need to consider the admittedly radical step of expatriating from the United States. This means acquiring a second nationality and passport, and then subsequently giving up your U.S. citizenship and passport or U.S. green card status. You also need to live outside the United States.
Expatriation is the only way that a U.S. citizen or long- term resident can legally eliminate their obligation to pay U.S. income, estate, gift, and capital gains taxes.
Sincerely,
Mark Nestmann
Wealth Protection & Privacy Editor
Source: Sovereign Society