America's Berlin Wall, A Disaster That's Hard to Escap
Economics / US Economy Sep 20, 2009 - 12:43 PM GMTBy: DailyWealth
Editor's note: My friend Steve Sjuggerud is one of the most optimistic analysts I know� and he always manages to find big opportunities even in the worst market situations. That's why when Steve warns me something is going wrong, I always take notice. I know it's serious. Please read on for just such a warning...
Dr. Steve Sjuggerud writes: I can't believe I was such a fool...
In 1990, I was offered a raise if I moved from Florida to Baltimore, Maryland. So I moved. But you know what I ended up with? A smaller paycheck!
Now how is that possible? It's simple: Florida has no state income tax. The top income tax rate for residents of Baltimore is now a terrible 9.45%.
But when federal income taxes soar, what do we do then?
I'll show you in a minute. Before we get there, let's continue with the Maryland example to show what might happen nationwide...
The state of Maryland couldn't balance its budget last year. So the state decided the right way to raise tax dollars was to fleece the millionaires... Maryland state politicians created a "millionaire" tax bracket.
Maryland Governor Martin O'Malley of course expected tax receipts to go up. He said Maryland's 3,000 millionaires were "willing to pay their fair share." The Baltimore Sun said the rich would "grin and bear it."
But the opposite happened...
Instead of 3,000 Maryland millionaires filing taxes in April 2009, only 2,000 did. According to the Wall Street Journal: "Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year – even at higher rates."
A friend of mine lives here in Florida. He is not an American citizen. He pays U.S. taxes while he lives here. But under the threat of higher national income taxes, he is contemplating giving up his green card and moving elsewhere.
When Maryland's governor raises taxes, Maryland residents leave and government income goes down.
When the nation's President raises income taxes, foreigners like my friend leave and government income goes down.
Unfortunately, YOU CAN'T LEAVE.
Wait a minute. This is America, land of the free, right?
Not so fast... The U.S. government will track U.S. citizens everywhere to get tax money. If you leave to work in another country, you still pay U.S. income taxes. America and North Korea are the only countries that tax you on your worldwide income.
If it gets bad enough, you can just give up your citizenship, right? Nope, you can't do that either. At least, you can't do it without paying a potentially massive "exit tax."
The exit tax acts like an estate tax. If you want to give up your citizenship, you have to give up nearly half your wealth above a certain level. The Economist magazine calls it "America's Berlin Wall." Nice, eh?
Want some more nice? Once you're gone, you're not legally allowed to come back and visit family and friends. Yes, if the government decides you have renounced citizenship for tax purposes, a federal law prohibits you from entering the country ever again. (You can look up the rule under 8 USC 1182(a)(10)(E).)
You can escape states with oppressive taxes. But "escaping" the U.S. – the land of the free – is much more difficult. And you can bet it won't get any easier as the government needs more and more of your income to pay its bills.
In DailyWealth, we try to be optimists. We recommended buying stocks in March, before most others did. We said the recession was over, before anyone else did. And we said buy homes in recent months, before anyone else did.
But we're also realistic here. And it's hard to be optimistic about America's Berlin Wall getting any better. Based on the facts, we urge you to take all the reasonable actions you can to protect yourself and your wealth.
Regards,
Steve
P.S. You can read about two of my favorite strategies for protecting your wealth from taxes here and here.
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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