The Brazilian Traitor

A few days ago, one of the founders of Facebook, Eduardo Saverin, a native of Brazil, caused an uproar when it was made public that he had renounced his U.S. citizenship before that company´s IPO (he holds 4 percent of the shares).

Two Senators, Charles Schumer (D-NY) and Bob Casey (D-Pa), have introduced a bill retroactively aimed at Saverin and anyone who renounced U.S. citizenship in the last decade, imposing on them a 30 percent capital gains tax—on top of the existing exit tax. The “Ex-Patriot” Act (Expatriation Prevention By Abolishing Tax-Related Incentives For Offshore Tenancy) would also bar them from entering the country ever again. Republican leaders such as John Boehner joined the chorus, explaining that in his view what Saverin had done was already illegal. But if that was not the case and the new law was necessary, he added, he would “surely support it.”

Only an editorial in the Wall Street Journal that felt compelled to cover its back by expressing contempt for Saverin as an individual, a few Republican critics of the tax system and a small bunch of libertarians dared to defend the Brazilian, who now lives in Singapore. Saverin himself tried to explain that his decision was not motivated by the desire to reduce the tax bill but by his having set up camp in Singapore, his investment base. This claim didn´t get him anywhere with the public, whose idea of Saverin is inextricably tied to his depiction in “The Social Network.”

Something is seriously wrong here. Only totalitarian regimes punish people for leaving. They take everything away from those who can get out of the country. An entire community in the U.S. (Miami´s Cubans) is made up of people whose assets were expropriated because they left their country (of course, many left because certain things had been taken away from them by Castro but whatever they left behind was subsequently stolen by the government.) The Nazis imposed predatory exit taxes on the victims lucky enough to leave, as did, and continue to do, the communists.

Only totalitarian regimes retain the (feigned) loyalty of their citizens by force. Free countries do so simply by offering citizens more liberty and security, and therefore more opportunities. That is all that the U.S. had to do for a couple of centuries to instill in millions of people the desire to become Americans. In order to retain their loyalty, it did not have to subsequently threaten them or impose impossible exit barriers on them.

What kind of man Saverin is, whether we like what he has done or not, and what side we take in his legendary dispute with Zuckerberg are irrelevant issues. That he came to the U.S. in 1992, became a citizen in 1998 and turned into a billionaire a few years later thanks to Facebook is a testament to the wonderful things that the United States, despite the colossal growth of government, still offers. But this reality does not impose on Saverin (who, by the way, was not poor when he arrived) the duty to continue to find the U.S. the most attractive place in the world if other shores offer him a better chance to do what he did quite successfully here for a time—i.e. invest in people and companies in which he sees potential.

Surely the fact that Saverin has ceased to find the U.S. a more attractive place to live and do business in than other countries is a sign that something has changed for the worse, not that he is a traitor. All he has done is adapt his status to his interests. It is not by forcing them to sacrifice their interests that countries should aspire to preserve the loyalty of their citizens. And, if you think about it, it is pretty self-defeating to make it hard for disloyal U.S. citizens to renounce their citizenship by imposing on them draconian punishments. Does the U.S. really want to keep disloyal citizens in? Does common sense not dictate that they should be kept out? And how do you keep bad people out if you prevent them from leaving?

Eventually, Saverin will be better off as a Brazilian living in Singapore. I say eventually because, contrary to widespread perception, the move has already cost him a lot of money. First he had to pay an exit tax on renouncing his citizenship. Unlike U.S. citizens and residents, who only pay taxes on realized capital gains, people who give up U.S. citizenship have to pay an exit tax on unrealized gains. Also, if he had chosen to continue to be a U.S. citizen, Saverin could have lived on credit, borrowing against his paper assets. He would only have had to pay a capital gains tax when he sold his shares. Theoretically, he could have kept them forever, and only paid an estate tax upon his death.

But, of course, he presumably wants to dispose of some of his shares so he can make other investments in the not-too-distant future. In that case, he will be better off in Singapore as a non-U.S. citizen because that country does not impose a capital gains tax and because he will no longer have to file a tax return in the U.S. as do expatriates who keep a U.S. passport. Singapore´s treatment of money earned overseas is also attractive compared to most other places.

It strikes me that Saverin is a type of guy—highly educated, wealthy and global—that the U.S. cannot really afford to lose to competitors if it is to keep its edge in the 21^st century. I doubt very much he would have renounced his citizenship if the U.S. was not one of the few countries that taxes expatriates who retain their passport and one in which every indication is, given the deficit and the fat chance that entitlement programs will be reduced, that taxes on capital gains and on dividends will go up whatever happens in the next elections.

Some ten thousand people have renounced their U.S. citizenship in the last decade. The annual rate has doubled. Some three million U.S citizens have chosen to live overseas in this same period. They have not renounced their citizenship, but they have found it for the most part attractive to emigrate. The humane and intelligent way to lure them back is not to stigmatize them and prevent others, by means taken out of a totalitarian handbook, from joining their ranks. The way to do that is simply to remember what made the U.S. such a potent magnet for two centuries.