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What If Tax And Pension Death Spiral States Try To Tax Fleeing Residents?

December 18, 2012
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What If Tax And Pension Death Spiral States Try To Tax Fleeing Residents?
Bill Frezza writes at Real Clear Markets:

One of the most fascinating characteristics of government borrowing – whether at the local, state, or federal level – is that debts contracted over time are obligations tied to specific geographical boundaries but not to the citizens living there when those debts were incurred. For example, while it’s customary to say that each of the 210,000 residents of Stockton, California, are on the hook for their share of the bankrupt municipality’s estimated $700 million in unpaid bills, the day one of them picks up and moves, personal responsibility for that debt drops to zero.

Imagine if that type of tax “evasion” were eliminated. How would it change America?

Government debts are accrued on your behalf by elected officials for whom you had a chance to vote, all supposedly representing your interests. In a democracy, all citizens are obliged to pay the government’s bills as determined by the duly empowered taxing authorities – regardless of whether they voted for a particular officeholder or not. What’s to stop legislators from passing laws that make debt obligations due and payable by any citizen who decides to leave for another jurisdiction? After all, they don’t hesitate to take your money when you die.

Mayors and governors of most tax-and-spend, heavily unionized, low-growth cities and states are both desperate for revenue and tired of watching disgruntled citizens vote with their feet. Think how politically attractive it would be for them to make “economic deserters” pay their “fair share” of old debts. I can see the arguments already: “You can’t move away from credit card debt or commercial debt, so why should government debt be so easy to dodge?” Politicians could easily win kudos from both public employee unions and the overtaxed residents left behind, for the mere cost of enraging emigrants who won’t be around to exact retribution at the next election.

…Exit taxes imposed on emigrants have a long history, including their use in both Nazi Germany and the Soviet Union. They were imposed under the theory that, since citizens were educated by the government and were either provided benefits or allowed to profit from jobs and business held while living under the government’s protection, they were obligated to pay back some of that money on their way out.

Sounds like something only a Hitler or Stalin would love? If only. Try surrendering your U.S. citizenship and moving to another country. Thanks to a series of expatriation tax laws passed by Congress dating back to the 1960s, with the most recent revision sponsored by Rep. Charles Rangel (D-N.Y.) (no stranger to tax evasion himself), emigrants leaving the U.S. must pay capital gains tax, including on unrealized gains, across all their holdings marked to market as of the day of departure. In addition, expats are liable for gift taxes on amounts above $12,000 a year given to anyone in the U.S., for the rest of their lives, even though they are no longer citizens themselves.

To date, the Supreme Court has had no problem with any of these laws. So what is to stop, say, California from imposing exit taxes on the steady stream of citizens heading off for Texas, Arizona, and Nevada? More than 200,000 people flee the Golden State every year, taking their money with them while leaving behind their share of the state’s $617 billion in state debt, which comes to about $16,000 per resident. That’s $3.2 billion a year in tax evasion!

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