Tuesday, November 25, 2014

sourav Malhotra

Why America Needs an Exit Tax

President Obama’s executive action on immigration will end the threat of deportation for as many as 3.7 million parents of American citizens, while also protecting about 350,000 immigrants who came to the U.S. as children. It’s being sold as a stopgap measure until Congress passes a comprehensive immigration act. If Congress does finally address immigration (and it’s a big if), it could use the opportunity to make emigration more equitable, as well—and raise some revenue at the same time.

The number of U.S. citizens living overseas is somewhere around 7 million. Perhaps 45,000 Americans leave to live abroad every year. As the IRS has tightened up on the requirement for U.S. citizens overseas to pay tax on incomes over about $100,000, a growing number of them have given up their citizenship—including Eduardo Saverin, a co-founder of Facebook, who might save as much as $100 million from the move.

The rich find it easier to move to other countries than do the poor. You can buy residency in the Netherlands if you invest 1.25 million euros in Dutch companies. In Portugal, residency will set you back only 500,000 euros invested in local property. And Greece will let you in for less than half that. Don’t fancy Europe? The Dominican Republic will give you residency for the knockdown price of $100,000. And don’t forget America! The EB-5 visa program gives residency to investors who stump up $500,000 and create at least 10 jobs.

It’s particularly unjust that the rich alone can use their wealth to buy global mobility, because their wealth is largely the result of where they come from. Former World Bank economist Branko Milanovic estimates that about 80 percent of the variation of incomes around the world can be explained by which country you live in and how much your parents earned. Within the U.S., a child born to parents in the highest fifth of the income distribution is more than five times as likely to end up in the top fifth herself than a child born to parents in the bottom income quintile. For wealth, the proportion accounted for by the lottery of birth will be even higher. Between 60 percent and 80 percent of wealth in the U.S. is accounted for by private transfers from older to younger generations.

Why should the rich get to take all that wealth with them when they move? Why should they be able to walk out of the country with resources that they have accumulated largely by dint of their history in the U.S.? We don’t let them walk out with a share of the mineral wealth of public lands or a piece of the interstate system—yet just like the interstate system, their wealth is mostly a product of the efforts of other Americans back through time. Exiting the country with all that property should surely count as theft.

The U.S. already taxes some of the capital gains of assets of Americans who renounce their citizenship, as well as the income of higher-earning Americans living overseas. But those policies are partial and misdirected. A progressive exit tax on wealth for those moving themselves and their money abroad would be more efficient, and might even affect fewer people. That’s because the potential problem of wealth drainage from emigration is concentrated. According to analysis by Thomas Piketty and Gabriel Zucman, about half of the U.S. population has zero or negative net worth. The top 10 percent of the population holds 75 percent of the wealth. So any exit tax could be broadly effective at dealing with the problem while potentially affecting only 1 out of 10 of the population or less.

The rate of the exit tax would reflect the proportion of wealth that is due to the lottery of birth. Of course, rich people have already paid some taxes on that wealth—so, in fairness, the top rate probably wouldn’t go above 50 percent. And the system would have to make exceptions for those who only briefly resided in the U.S. or are from families that only recently migrated here.

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But even with such tweaks, the exit tax would be a stopgap measure, much like President Obama’s executive action. It would carry heavy costs in terms of reducing international mobility, which is a powerful force behind global progress. Too few Americans spend time abroad as it is. Far better would be a system that appropriately taxed all capital of stay-at-homes and movers alike—the pay-as-you-go approach. But the likelihood of such a measure passing Congress makes comprehensive immigration reform look simple. So for the moment, perhaps legislators should consider a tax with the slogan “You can’t take it with you (no, really).”

sourav Malhotra

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