Dateline: Kuala Lumpur, Malaysia
Imagine if you worked an entire day, an entire week, or even an entire year… and had every dime of your salary taken away, or every penny of your business income confiscated. Imagine 100% tax rates on your income.
As capitalists, we no doubt realize that no one would toil away to see their entire salary go up in smoke. It may take a politician awhile to realize that working for free isn’t very attractive, but it doesn’t take the rest of us much time at all.
The funny thing is that many of the people living in countries with screwed up economies realize just how bad things are there. This is in contrast to western countries like Australia and the United States, where I find the majority the population actually LOVES when the government takes steps to tank the economy.
As we speak, oddsmakers are betting pretty heavily on a Democrat winning the White House in 2016. Now, I’m no fan of politicians in general, but the big message of Democratic candidates for years has been simple: the rich need to pay more taxes.
Bernie Sanders, summoning the post-war days of Dwight Eisenhower, suggested the top marginal rate under his administration could be close to 90%.
In Europe, socialists like France’s Francoise Hollande imposed a supertax on millionaires that took almost every penny they earned, with the effective top rate nearing 100% in some cases.
Why 100% tax rates already exist
While the idea of a 100% tax rate seems impossible, it has not only been imposed before but when you look at things in a different way, it already exists.
A contact of mine in Croatia recently sent me a report he created that shows how the Croatian government effectively gets 100% of high-earning employee salaries. It goes like this:
In Croatia, an employer who pays an employee 3,859 kuna (about US$537) sees 1,286 kuna – or 33% – of that income go to the government in the form of income tax, payroll tax, and other deductions. The employee is left with 2,573 kuna, exactly twice as much as the government gets.
If not for the government’s money grab, the employee would have a 50% raise.
In another example, an employee who takes home 5,000 kuna – a mere $697 – has another 3,340 kuna deducted from their real pay of 8,340 kuna and sent to the government. That employee would get a 67% raise if it weren’t for their “fair share” of taxes.
In the ultimate example, an employee with a gross salary of 21,016.42 kuna actually receives less than the government. They receive just 10,508 kuna, while the government keeps a few pennies more than that.
While the government is not taxing 100% of their income and leaving them with nothing, the employee is foregoing and effective raise of 100% because more than half of his or her money is going to the government.
The same applies to self-employed people, contractors, and small business owners. In many countries around the world, the situation for these people is even worse.
I’ve had high-earning clients from New York and Los Angeles tell me they were paying 60% effective tax rates when you factored in income tax, state tax, city tax, Medicare, Social Security, AMT, and more.
Their governments get more of their money than they do.
How to stop paying 100% tax rates
The biggest reason government can do this is that not only do they control what happens within their own borders, but that most people choose not to leave their borders.
It’s funny how people talk about leaving when “things get bad enough”, then cite examples of what “bad enough” would look like, only to completely ignore that their definition already exists.
One reason cited in my contact’s report was that Croatia “is a beautiful country”. I can’t tell you how many people I’ve met who pay so much to live in California so they can live an hour away from a beach.
As if no other place on earth has beaches.
If you want to stop paying sky-high tax rates that a small group of bureaucrats can raise on a whim, you need to detach yourself from just one place.
That usually means getting a second residency in a zero- or low-tax jurisdiction and actually leaving the country you do business in.
If you run an on-the-ground business or storefront, it means removing yourself from the day-to-day operations of that business or selling it entirely so that you can spend time somewhere else.
As long as you keep all of your eggs in the basket of a high-tax country, they have control over you. I get emails all the time from people who ask “how do I live in the United States and pay no tax?”
It’s not possible. Despite the grandstanding of guys like Bernie Sanders, there is no loophole used by “the evil rich” to earn income from an active business and pay nothing by using offshore companies.
It just doesn’t exist.
If you live in the United States, you’re going to pay some tax. If your business is large enough, it’s possible to move various parts of it offshore to reduce your tax, but so long as you take money out, you’ll pay something.
The same goes for any other country on earth that taxes your income.
Whether you believe in “social contracts” or not, most governments from Croatia to Canada want a piece of what you earn within their borders, and as we’ve seen in many western countries lately, politicians in favor of high taxes have been winning at the ballot box.
It only takes one election to go from reasonable taxes to high taxes… or high taxes to higher taxes.
If you live in a country where you feel taxes are on the rise, now may be the time to consider your escape plan. If you have a business, setting up an offshore company is a good anchor to get started, even if you plan to continue living in a high-tax country.
Having residency in a tax haven may also be beneficial, and it can also lead to a second passport in many cases. I believe more countries will adopt citizenship-based taxation like the United States, and having a second citizenship will be very important if you don’t want to give away the majority of your earnings.
Ultimately, the best way to avoid outrageous tax rates is to be mobile. That doesn’t mean being a nomad; it can merely mean being an expat. A lot of people I talk to think they have to move to South America or Southeast Asia and carry a backpack around to live a low-tax lifestyle, but for some people, it can be as simple as moving yourself and your company to Ireland.
While having an offshore company for your business won’t help you much with taxes if you continue to live in a high-tax country, setting one up is a good first step to prepare for a low-tax lifestyle. So is second residency.
Have a plan in place to prevent one government from taxing you into oblivion and you’ll avoid the day where you have to work for the government free.