Expatriate Saverin saved FAR more on CA income tax than he did on his net federal tax

Richard Rider, Chairman, San Diego Tax Fighters Richard Rider, Chairman, San Diego Tax Fighters 14 Comments

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What is usually overlooked in the discussion of Facebook co-founder Eduardo Saverin leaving the U.S. for Singapore (presumably to sell his Facebook stock) is the CALIFORNIA capital gains tax.  Saverin avoided $67 million in net federal income taxes by leaving the country, but he saved several times that amount by leaving CA — which by law has no “exit tax.”

If he were still a resident of CA when he cashed out the shares, he’d pay 10.3% of the profit to the rapacious “Golden State” — a state that treats capital gains as ordinary income.

If either(or both) of the state’s “millionaires tax” propositions are passed by the voters in November, he would pay 13.3%. Or 15.3%. And yes, these taxes would be RETROACTIVE to the first of this 2012 year.

But by leaving the state and moving to a place with no capital gains tax, he will pay no such tax.

Hence he could choose to move to Singapore.

Or to other exotic lands.

Such as Nevada. Or Washington state, South Dakota, Florida, Texas, New Hampshire, Wyoming, or Tennessee.

BOTTOM LINE: People are reluctant to leave a country to avoid taxes — but with big bucks on the line, they WILL leave a state. And no state “exit tax” can stop that.

Any lucky Facebook IPO California multimillionaire who pays a CA capital gains levy on this once-in-a-lifetime windfall is, in essence, paying a tax on their own stupidity. Hopefully the liberal recipients dutifully remain CA residents.

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Comments 14

  1. Post
    Author

    Bill, does the California state university system benefit from our state’s November millionaires tax driving many of the wealthiest residents out of the state? How’s THAT helping the funding of our colleges and universities? How does that help the California economy?

    Given that we ALREADY have the second highest income tax rate in the nation, and given that about half of the California residents pay little or no state income tax, isn’t it fair to say that the wealthy are already paying far more for the schools than is true in all but one other state?

    Because there is some benefit derived by a business from our collegiate system, does that mean that any tax for any amount that at least partially goes to the colleges is therefore a good tax, and that those being taxed should never complain, regardless of the amount confiscated?

    Maybe that’s true in your county government insular world, Bill — where every dime in extra tax you pay comes back 20-fold in higher compensation. But it’s not true in my world. Nor in the real world.

  2. Richard,

    In the real world, Mr. Savarin would have found a way to avoid paying the tax even if the tax was half as much, or less.

  3. Richard,
    I don’t work at the county. I live in the county, not the city (actually not any incorporated city). Regardless, there was a time when the right would vilify someone who either never became a citizen or, worse yet was a citizen and then renounced it. And then on top of that they would support the government placing an IRS lein on his belongings. Charlie Chaplin comes to mind.

    Now, many on the right seem to be applauding this man’s actions.

    I feel like I’m living in bizarro world.

  4. Post
    Author

    So Alger — how else would Saverin avoid the U.S. capital gains tax? I’m curious.

    Set up a charitable remainder trust? Yes, that WOULD avoid THAT tax, but the earnings would still be taxable. Moreover, ultimately the entire proceeds would go to charities — a tax “dodge” that gives all the money away. Some “dodge”!

    Never sell the shares, and just borrow against them, increasing the loan each year? While that might be satisfying to an obsessive tax avoider, it’s hardly sound financial planning.

    One important decision for a Facebook multimillionaire is to sell most Facebook stock and diversify ASAP. Owning primarily Facebook stock into the future is like owning “My Space” stock. Today’s hippest trend is too often tomorrow’s bankrupt company.

    Indeed, IMHO, a gutsy investor should be looking at SHORTING the Facebook stock, as the hype dies down. As a business model, Facebook seems to be vastly overvalued.

    But gamblers can place their bets on either side of this wager. The important thing for an INVESTOR is to not at this point bet it all on Facebook. And to diversify, the stock must be sold — and the gain dealt with, one way or the other.

    But the most important point I keep making is that, while the FEDERAL capital gains tax is hard to avoid, such is NOT the case for highly appreciated public stock owned by California residents facing our onerous California income tax. MOVE to a tax-free state, THEN sell the shares — and the entire CA capital gains tax drops to zero.

    Alger, do you have other ideas for avoiding the federal tax? I’d sure like to draw on your tax expertise in this matter. I suspect we ALL would!

    Alger, the idea that the rich don’t pay taxes is a fiction popular among you and your labor union friends. Especially so with capital gains tax. But with the AMT and other “safeguards,” it’s simply not true.

  5. Post
    Author

    Bill, as a true liberal, you have a moral duty to move to the state that charges the highest taxes. If that is too much trouble, ease your conscience by filing a “tax me more” form with the state, paying far more to our benevolent government.

    I’m sure that as a loyal liberal, you don’t take any itemized deductions. That tax dodge would be a traitorous act against our state and federal governments. Indeed, even taking the standard deduction reveals a level of greed that surely makes you shudder.

    Be a good liberal. Pay more. Man up!

  6. Richard,

    Again I was making a simple point that seemed to elude you: Mr. Saverin would have more than likely moved from California even if the STATE capital gains tax was significantly less than 10%.

    You made a comment about the onerous cost of California taxes in the context of Mr. Saverin leaving the State and the Country. I responded, ON POINT, that he left not because our taxes are excessive, but because we have taxes at all.

  7. Post
    Author

    Actually Alger, you did NOT say CA taxes. You said ” In the real world, Mr. Savarin would have found a way to avoid paying the tax even if the tax was half as much, or less.” Apparently you MEANT the CA capital gains tax, but you did not.

    After all, you said that Saverin “left not because our taxes are excessive, but because we have taxes at all.” The whole issue of him leaving (the national “outrage”) was that he left the US to avoid the FEDERAL tax, so naturally I thought that tax was what you were referring to.

    No matter. Let’s move on.

    BTW, most countries in the world have lower capital gains taxes than our country — and particularly the combined US-CA capital gains tax we Left Coast folks face. Next year it likely will exceed 40%.

    I would somewhat disagree with the concept that people would go to great lengths to avoid a small percentage tax. Would you make an out-of- state purchase to avoid a 1% difference in sales tax? Me neither. But when a person can avoid an 8% tax, obviously that can be a significant reason to avoid the tax, all else being equal.

    It’s a matter of degree — higher taxes increase aversion motivation.

    Still, few taxes are as easy to avoid as the state capital gains tax — IF you are willing to move. That decision is likely a function or of the DOLLARS saved rather than the percent of the tax. In other words, few would move to protect a modest capital gains profit — regardless of the percent of the tax.

    That being said, the state capital gains tax is a particularly bad tax to raise on people. UNLIKE the annual earnings a person receives, it can be a major one-time gain that can be controlled as to when exercisd, and, once avoided, one can (if they so choose) return to their high tax state to live (properly done, which is tricky).

    Even worse, the “temporary” state expatriates might find living in a low tax climate with less of a nanny state mentality more than offsets our moderate weather climate — and these rich folks might fail to return to our confiscatory (government) workers’ paradise.

  8. Richard,

    It may surprise you to know that I agree that our state’s taxes are too high and we must be more cognizant of what other states are doing. I just think you picked a bad example to illustrate this. If he couldn’t renounce his citizenship, Saverin would have certainly at a minimum left California unless our tax rate was the lowest in the Country.

  9. What a shameful,tawdry sight of such envious people yapping at the heels of Eduardo Saverin because they want his money. But you have no shame, only envy.

  10. Mole,

    No envy on my part, only disgust. I am happy that the man came up with an idea that revolutionized the way we communicate and will make billions for it. I have no problem with ingenuity, hard work or being rich. My disgust comes from Saverin’s belief that while our society is funded by the taxes of others, he shouldn’t have to pay any.

  11. In an earlier post in this thread (just before Facebook went public) I wrote:

    ———–
    One important decision for a Facebook multimillionaire is to sell most Facebook stock and diversify ASAP. Owning primarily Facebook stock into the future is like owning “My Space” stock. Today’s hippest trend is too often tomorrow’s bankrupt company.

    Indeed, IMHO, a gutsy investor should be looking at SHORTING the Facebook stock, as the hype dies down. As a business model, Facebook seems to be vastly overvalued.
    ———–

    The good news is that I was right, as usual. The bad news is that I’m not a gambler and didn’t ACT on my clairvoyance. Ah well.

  12. Alger, Saverin will and has paid hundreds of millions of dollars in taxes and exit fees. Yet you claim he doesn’t want to pay ANY taxes.

    I’d say he doesn’t want to spend the rest of his life paying HIGH taxes to bloated nanny state — a government that yearly seeks new ways to confiscate more from the well-to-do while obstructing business at every turn.

    While doubtess you are okay with a 45% estate tax, he has chosen to die elsewhere where such a final indignity is not imposed. Taxes DO have consequences.

    Ben Franklin said, “Where liberty is, there is my country.” I can’t fault that sentiment.

    We are steadily losing our freedom in America — in every aspect of our lives — financial and otherwise. While the U.S. is better than most other countries in the world, there are more free societies beckoning to those with the means or motivation to start a new life there. Kind of how America was founded!

  13. Richard,

    Actually I think the Estate Tax is an abomination and if you really knew me as you claim, you would know that I have worked for its repeal.

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