Tempted to Cheat

If you leave money unattended in front of person who has no money, the temptation is too great for that person to hold his moral code. He will steal the money.

fistThis philosophy had a tremendous impact upon me when, as a young man, I read the “The Sea Wolf ” by Jack London. Wolf Larsen, captain of a seal hunting schooner, a crude and cynical man, was also highly intelligent. He ruled over his ship and terrorized the crew by sheer physical might.

Humphrey, his cabin boy, was upset because his money had been stolen by one of the crew members. He wanted the Captain to exact justice. But in Larsen’s mind, the real crime had been committed by Humphrey who had left his wallet out in plain view. Larsen believed that the temptation of “free” money was too great for a desperate man. In his opinion, Humphrey had corrupted an otherwise innocent man and it was he, therefore, who had committed the greater crime.

In 2011, Facebook founder Eduardo Saverin renounced his U.S citizenship after cashing in on the sale of his Facebook stock. Mr. Saverin, born in Brazil, has lived in Singapore since 2010 and now plans to remain there.  Singapore has a maximum personal income tax rate of 20 percent with zero taxes on capital gains. Comparatively, the U.S. has a 39% tax bracket for its highest earners and a 15 percent captital gains tax.  Saverin’s net worth is estimated at close to 4 billion dollars, so he saved close to 600 million dollars by renouncing his U.S. citizenship (the figures here are a guesstimate as the sale price was not officially published). Senator Chuck Schumer (D-New York) was “appalled” by Eduardo’s move, then offered legislation that would bar people like Eduardo Saverin from ever returning to the United States.

The undeniable reality is that with a capital gains rate of 15% and an income tax rate close to 40%, Eduardo did what a rational man would do…he looked for ways to keep as much of his money as possible. Given the structure of the IRS code, he was forced to make a decision he probably would not have made otherwise.

Clearly Saverin profited by having lived in the U.S.  Further, he benefited by going to one of its top universities. He had access to a system and culture that allowed companies like Facebook to thrive. But, but when faced with the option to pay the tax to a system that allowed him to create such wealth, one could argue that he chose personal enrichment over ethics. Simply put, he cheated.

One could also argue that a system so confiscatory leaves a rational being, who works hard to amass his financial largesse, little choice but to seek financial asylum elsewhere. Given the complexity and onerousness nature of the IRS and its code, Saverin decided to opt out and leave the system. Wouldn’t it have been better if the Code was structured in a manner that made it simpler and less punitive to pay a reasonable tax instead? I think it’s also applicable to say he was “forced to cheat.”

A record number of U.S. citizens relinquished their citizenship in 2013.  As quoted in Fortune Magazine “While dumping citizenship may seem unpatriotic or smack of tax avoidance to some critics, tax lawyers blame the byzantine complexity of American tax regulations.” The rules “are confusing, complex, and so complicated that even Americans with good intentions can easily find themselves running afoul of the law,” said Jeffrey Neiman, a former federal prosecutor who was involved in the government’s offshore banking probe and is now in private practice in Fort Lauderdale, Fla. “This very well may explain why we are seeing a record number of Americans renouncing their United States citizenship.”

The private sector encounters challenges not unlike what has occurred with the IRS Code and U.S. citizens seeking to avoid excessive taxes. However, left to operate in an unfettered free market… it solves them as well.  For example, when the music sharing system Naspter came out in the late 1990’s, it allowed people to share their music for free with other people in their network. As more users came in, more songs were added and the inventory of total songs grew. The public was getting all of the songs they wanted in a format they craved. The problem was that all the users were stealing. None of the artists were getting paid for their downloaded songs and they were mad.

The problem wasn’t that users were thieves. For years, music companies did not offer a platform whereby consumers could buy merely one song…when one song was all they wanted. Instead they were forced to purchase over 10 songs in an album costing $13.00 or more to get the one song they wanted.

Apple solved this problem with iTunes. It is a platform that allows people to buy their music one song at a time and users to carry their songs wherever they go, even transferring them to other Apple devices. The iTunes platform has been a massive success. Now, customers buy the songs they want and the artists get paid.  By the way, upon creation of iTunes, Napster still existed. But, given the option to cheat or pay a small fee, consumer elected to do the right thing.

Which leads me to a defining principal: People will due the right thing given the right incentives. However the U.S. government fails to understand two basic concepts: 1) liberty and 2) money will always flow to the place where it is best treated. If the U.S government had a simple and fair way for people to pay their taxes, people would stay and not seek to game the system.

The irony and sad fact is that as more people leave, it is likely the tax laws will grow even more complex and confiscatory, forcing more people to cheat and/or leave. After all, taxes are like water. The more you tighten your grip the more slips through your fingers.

 

Steven Clark