A big part of this trend will be related to an increasing percentage of high income individuals who will have location independent income. Take a blogger who has 100K readers for their typical article (I have exceeded this for selected articles and intend to exceed it routinely over the next couple of years) and has net revenue of 3.00 USD per year per reader. This is a very small player in the independent columnist world, but he or she will earn 300K USD per year. Their income is location independent and it places them in the top 2% of the population in income, even in developed countries. These people present a general problem for countries but, importantly, also a specific problem of how to extract a significant percent of their 300K USD in the form of taxes.
Most high tax countries view their high producers as a kind of involuntary sugar daddy to the rest of the population. Ample research demonstrates that a 80%-20% Pareto distribution describes value added in all but the most menial of tasks. Yet, distribution of purchasing power almost always is less than 80%-20%. Some of this is probably justified (See An Information Age Income Model), however, much of it is nothing more than governments commandeering wealth and income from the high producers because they can.
This is not lost on high producers. Unless they identify with the local nation and decide voluntarily to disproportionately support it, the progressivity of income tax may be viewed as institutionalized theft and something to be avoided, if possible.
The Multinationalist lifestyle weakens identification with a person's country of birth and does not always get replaced by the adoption of a new country of residence. Suppose a U.S. citizen decides to have a winter home in the Bahamas. Their 'sense of place and community' is reduced because of the four months, or so, that they spend in the Bahamas. Now, suppose they visit Limassol, Cyprus for a summer break, fall in love with it and decide that they want to spend four months in the summer there. Add a month per year of world travel and they are now spending just three months per year in the U.S. If their income is global and their time is mostly spent offshore, they, quite likely, over time will lose an American identity and start building a Multnationalist identity. At that point, they might quite reasonably begin to resent a 40% or higher U.S. income tax rate. This is, actually, what is leading to an increasing number of U.S. citizens renouncing citizenship.
The situation is different for most European citizens. Imagine a wealthy Brit who decides to winter in Dubai. Then after a summer in Monaco, decides to make that country a permanent summer locale. Because of the tax laws in the U.K., the wealthy U.K. citizen does not pay British income tax and, because neither Dubai nor Monaco have income taxes, he or she does not pay any income tax. Andrew Henderson is very much concerned that such people will cause the U.K. and other European nations to adopt the 'worldwide income' model of the U.S. It could be, in fact, that over time high income Multinationalists holding almost any passport will find it necessary to renounce their high tax nation citizenship.
Actually, Multinationalists are not fleeing high tax nations solely or, in many cases, primarily to avoid taxes. In my case, cost of living issues was the primary driver. For example, my wife and I are U.S. passport holders. However, I can set up a corporation in Turks and Caicos, pay us salaries and through the Foreign Earned Tax Credit avoid taxes on up to 240K USD per year. However, there are plenty of places around the world that have fully modern neighborhoods with the cost of living no more than 1/3 that of the U.S. Not only does that increase my effective income to 720K USD per year, if I live the Multinationalist lifestyle, I will pay no income tax. On the other hand, in the U.S., I will pay 70K USD or more in income taxes. So, I will be able to choose between a 720K USD lifestyle as a Multinationalist and a 170K USD lifestyle as a U.S. resident. Because there are wonderful places to live internationally, this is not a difficult choice to make.
Multinationalists also can become frustrated with regulations imposed by virtue of their residence in a high tax country. Some of these regulations, such as FATCA can follow the Multinationist from country to country. There are also business regulations that may confound their efforts to run their enterprise. Right now, there are several drug regimens in human trials that could substantially reverse the aged phenotype and not only increase lifespan, but also return older people to a more youthful phenotype. Of course, if these treatments prove to be safe and effective, in order to deliver them within the U.S. and, to a lesser degree, in Europe, the provider will be required to obtain very costly and time consuming approvals. Consequently, these treatments will likely start in countries with lower requirements for approval. As the treatments move offshore, the owners of the treatment providers will likely move offshore as well.
There is also the not insignificant matter of climate, geography and culture. The affluent U.S. citizen winters in the Caribbean and the affluent Brit winters in Dubai primarily because of the warm climate and tropical beaches. While, both the U.S. and Europe have some wonderful summer locations, many wonderful ones are also in low tax, low cost of living countries.
As the global economy becomes more dominated by intangible goods and services and therefore location independent and the number of affluent people with a location independent income stream increases, the high tax, high regulation countries, primarily of North America and Western Europe will find it progressively more difficult to hold onto their high producers.
It is likely true that for a period of time the high tax nations will strive to thwart the Multinationalist's effort to avoid the taxation of income in countries where they hold a passport but do not reside. However, it will be met by resistance and ongoing efforts to circumvent these efforts. In the extreme situation, which the U.S. is beginning to experience now, the high value added, location independent producers will start renouncing citizenship in their home country. In other words, the high tax nations, ultimately, cannot win the battle. They will need to move on to other tactics.
In the final analysis, there is no way that high tax nations can win the residency battle. Simply put, if a person has 10 million USD of annual location independent income, there is no way that they can be convinced over the long run to reside in a country that will take 4 million USD to 5 million USD of that as the cost of residence. People when they are young are indeed conditioned to think of their national identity as an important component of their personal identity. However, for many, that fades with age. Also, culturally, that is weakening over time. There is absolutely no doubt that young Americans are less patriotic as a group than older Americans were at the same age.
The argument has been made that Multinationalists use the infrastructure of the country they visit without paying for it. My experience, however, is that Multinationalists, Digital Nomads and Nomad Capitalists are not inclined to evade reasonable taxation. They wish to avoid confiscatory taxes that are designed to fund transfer payments from them to less affluent citizens. These may or may not be appropriate for members of the national community, but not for visitors. They cannot benefit from the social welfare system and reasonably do not wish to contribute to it. If one identifies as a member of the community, they may have a tolerance for that. However, if I am visiting, I am willing to pay for roads, police, emergency services, etc. and through sales taxes, VAT, property taxes, I do.
High tax nations, as a rule, believe that wealthy people have an obligation to fund less affluent people and that the tax system has a right to commandeer such funds. For the most part, the U.S. is fine with France taxing their wealthy and Japan taxiing their wealthy, but, in increasing measure, are offended by wealthy people who, while they are not residing in a high tax country, are not having a proportionate share of their income commandeered by some country. So, a war is taking place between wealthy multinationalists and high tax countries.
Andrew Henderson is correct that high tax countries are trying to make the lives of wealthy multinationalists progressively more difficult. There are two major fronts. High tax nations other than the U.S. are trying to increase tax liability of Multinationalists residing in low tax or no tax countries. In other words, they may begin moving toward declaring some taxability of international income for expats. In the U.S., since there is already taxation of worldwide income, renouncing citizenship is becoming more and more difficult.
Andrew Henderson, from time to time, lists the ways that high tax countries are attempting to extract taxes from wealthy Multinationalists. He also, from time to time, argues that these restrictions on tax avoidance will likely become more onerous. This, then, means war. We can reasonably expect that an increasing number of affluent (and even not so affluent) InfoAge workers will leave their high tax nation, if they live in one, and, discovering that it is not sufficient to avoid native country taxation, will also renounce their citizenship.
As I have stated often, tax avoidance has not been my primary motivation for leaving the U.S. The primary reason is Cost of Living (COL) improvements. Suppose I earn 120K USD globally. I can live in, say, Danang/Hoian, Vietnam where 1.00 USD spends like 2.94 USD. So, the 120K USD spends like 353K USD. Now, I also will avoid about 30K USD in taxes that I would pay if I lived in the U.S. So, while the 30K USD is important, the 233K USD improvement in COL is far more important.
However, to the U.S., the 30K USD is very important and my decrease in COL is invisible to them. Clearly, they can afford to lose my 30K USD, but if 10 million InfoAge workers do the same thing, the 300 billion USD in lost revenue is far more than their savings due to a decrease in government services. The U.S. may try to transfer this lost revenue onto the remaining affluent citizens, but this simply encourages those citizens to leave, as well. They can lower government expenditures, but this will anger their voters.
While, obviously, a looming tax revenue problem, strategically, the situation is even worse for the high tax nations. For example, Andrew Henderson left the U.S to create his Nomad Capitalist business and, with time, renounced his citizenship. His business grew and now he employs a whole team to assist him. He lists 12 associates and they are overwhelmingly not U.S. citizens or even from the U.S. Most are from Eastern Europe. In other words, the U.S. has not only lost Mr. Henderson's tax revenues, it has also lost the tax revenue of 12 associates. Additionally, the income of all 12 is being spent elsewhere. As a strategy, this is a particularly bad one that will enhance the GDP of low tax nations at the expense of the GDP of high tax.
One might counter by saying that, while this multinationalist lifestyle sounds good, it does require one to live in a third world country. Thirty years ago, there would be significant truth to that. However, the 'third world' is changing. For example, in Vietnam, the countryside is still mostly rice paddies. Ho Chi Min City and Hanoi are still definitely what one imagines when one thinks of S.E. Asia. However, Danang/Hoian is not.
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| Danang, Vietnam |
Today, Danang, Vietnam is a modern city, with high rise apartments along a world class beach, shopping centers and fine restaurants. And it maintains the low COL. A 200 m^2 luxury condo right on 'China Beach' may cost about 500K USD rather than the minimum of 1.5 million USD that it would cost in Miami. And, this is just the beginning. Alanya, Turkey, where I am riding out the Pandemic, has magnificent beachfront condos for similar prices and also has fine restaurants. It tends to have shopping streets full of boutiques rather than shopping centers, however. The fact is, while high tax nations do, in fact, have some residual prestige, that is decreasing and is more reputation than actual superiority.
In summary, the high tax nations of Western Europe and North America are at a distinct competitive disadvantage and, in the absence of a dramatic turnaround, are going to lose this war. The loss will not just be because of their high tax status. Frankly, only small portions of N.A./EU can compete with the climate in several parts of the world, most notably, Eastern Europe and S.E. Asia. N.A./EU suffers from over-regulation which stymies economic growth and increases taxes. Also, with Muslim refugees in Western Europe and a violent, lawless underclass in the U.S. safety concerns have been turned on their head. When I came to Turkey, some of my friends in the U.S. asked me if I was worried about violence. Clearly, the riots ravaging most U.S. cities right now casts doubts on the significance of that concern.
In the end, the norm will be to charge for infrastructure through consumption taxes. You pay while you are there. If you travel to a different location, you will pay their infrastructure costs until you leave. Social welfare programs will need to be the sole purview of income taxes, if they are used at all. As a Multinatinalist, I am perfectly willing to pay for roads, police, parks, etc. and I will do so for the time that I am there via the purchases I make.
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| Golf and Beach Condo in Danang, Vietnam |
P.S: here is an example of what is drawing Multinationalists out of N.A./EU. The photo above is of the Master Bedroom of a 3 BR, luxury apartment with golf and beach access. It is located between Danang and Hoian. Its price, for 108 square meters, is 99K USD. This is affordable and at a level of luxury that is very difficult to afford in N.A./EU. One can easily understand that tax avoidance is not the number one reason for wintering in Danang.
These types of condos, whether in Sunny Isles Beach, FL or Danang, Vietnam are being bought by an international group. In Danang, they are dominated by residents from U.S., Canada, Australia, China, Japan, Korea, Russia and a fair number of affluent locals. For Multinationalists, it will be a seasonal residence generally occupied from January - May.
