Incentives Matter

Incentives matter... a lot.  Government regulations and policies matter and people will respond accordingly.  As discussed last week it is impossible to predict human behavior and no matter how well intentioned policy actions may be (and pessimistically I am not sure such policy actions are well intentioned but rather calculated to achieve the maximum political benefit) there are unintended consequences (or perhaps just "consequences") to new government dictates.

In France new president Hollande has stated that he wants to impose a tax rate of 45% on those earning 150K euros and 75% for those earning above 1M.  Unsurprisingly people are responding.  Predictably this Bloomberg article discusses how French entrepreneurs are looking to setup shop outside of France.  It doesn't hurt that at the same time the UK is lowering its 50% tax rate on incomes above 150K pounds to 45% (still way to high in my mind, but incentives matter and a permanent, for the foreseeable future, change will elicit a response).

A bit closer to home it was reported that Facebook co-founder Eduardo Saverin renounced his US citizenship (he is now a citizen of Singapore) prior to Facebook becoming a publicly traded company which will mean he will not owe US tax on the profit he stands to gain from his share in the company.  Note: Mr. Saverin would have had to pay some tax after renouncing his citizenship as those with assets over $2M do owe a tax when leaving, and he says he'll pay "hundreds of millions of dollars" to the US in taxes.

Apparently in response Sen. Chuck Schumer and Sen. Bob Casey introduced the Ex-PATRIOT (Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy) Act on Thursday.  This proposed legislation would 1) impose tax on those who expatriate even after they leave and 2) bar the individual from ever returning to the US.

Never return to the US?  How ridiculous.  Mind boggling.  This must be a populist move aimed at enhancing their political appeal, they couldn't truly be so naive as to believe this will benefit the US?  Those that are able to generate significant wealth (outside of rent seeking with the government) should be celebrated.  We should be doing everything we can as a country to create opportunity for the best and brightest - to foster an environment that draws these people .  The market is telling us that they were able to meet the wants and desires of consumers better than others - their wealth is a by product of that success.  Collectively these individuals have made all of our lives better, more productive and indeed raised the standard of living for us all.

Forget driving the best and the brightest away.  Instead lets dramatically shrink taxes people owe.  Lets dramatically shrink the government which looks to profit from these people but as a by product squelches such innovators.  Lets focus on allowing a free and competitive global market where the best minds of whatever nationality seek to enhance all of our lives, and if successful, reap the rewards from an appreciative public.