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Greetings John: As always, I'm enjoying your newsletter tremendously. As a semi-libertarian (total libertarians come a little too close to anarchy for my taste) at heart, I strongly identify with your outlook. I am strongly considering either Panama or the DR as relocation possibilities during the coming years. I do need to offer a brief comment on something you stated in a recent newsletter. You stated that the current unemployment rate in the DR is 25% as it was in the US during the great depression. You stated that unlike in the US, people in the DR are not jumping out of windows as a result. John, I'm sure you know that average Americans were not committing suicide during the depression. The fact that some people did jump out of windows must be put in historical context. As a former veteran of Wall Street you know that the raging bull market of the 1920s was greatly influenced by, among other things, the big credit expansion brought about by the Federal Reserve Bank. This availability of easy credit encouraged many people to unwisely borrow vast sums of money in order to invest it in the seemingly ever rising stock market. For many years this seemed like a slam-dunk as the market kept going higher. However, the inevitable day of reckoning arrived when the market crashed in late 1929. Many people obviously lost a lot of money. However, many of the more prudent investors simply absorbed those losses, just as many people, including myself, did during the more recent crash of early 2000. Those jumping out of windows were characterized by that group of people who had financed their stock purchases with the debt made possible by the central bank orchestrated credit expansion. When the market crashed, these people had not only lost money, now they were left with huge debt and no way to service it. Some of them responded by jumping out of windows. The average American, however, faced the great depression with admirable courage. Indeed the country went on to lead the allied victory in World War II. As dismayed as I am with what America has become in terms of over regulation and excessive taxation, I believe there is still much to admire about America and Americans. Who else but the USA is now leading the present global war on terrorism - which is a very real struggle. We just had a young former NFL player, Pat Tillman, killed in Afghanistan. This very decent young man, who exemplifies so many of America's fighting men, gave up a $3.6 million dollar contract in order to join the Army Rangers. I believe this does say something about the character of a people - The fact that they still produce individuals like these. Also, it must be acknowledged that the great technological advancements that we continue to see are being brought about by and large in the US. Now, like you, I question the premise that America is that much of a free country any more. I believe that once one has managed to accumulate a certain amount of financial wealth, he can do much better managing that money as a non-citizen of the US than as a citizen thereof. By this I mean that if a person manages to accumulate $400K and he can invest it prudently, the chances of making that money grow steadily are much better in the DR than in America, where the income tax eats away at the growth. I can see how once a person manages to accumulate that base capital in the DR, if he is prudent there is no stopping that person. From thereon, the sky is the limit. Nonetheless, I believe it is still the case that accumulating that base capital starting from zero is still much more doable in the US than it would be in the DR, Panama or anywhere else in Latin America.

EDITORS REPLY: Thank you for your letter. In regards to the comments about the twenty-five percent unemployment statistics and related points in terms of how Americans handled it then (in 1929) versus how Dominicans handle it today (2004) - I personally think that there is a very important economic scale difference to consider. In fact, for what I am about to say, this also holds true for some predictions about severe upcoming financial difficulties in the US (and fears of how many Americans might handle such a catastrophe). In short, it is easier for a poor man who has not really known a wealthy or comfortable lifestyle to continue to deal with being poor than it is for a wealthy or economically comfortable man to realize he is now in the poor house, so to speak In other words, many Americans in 1929 thought the good times would go on forever and got used to living a comfortable lifestyle – often way above their means (and very often on borrowed money as you point out, which runs some parallels to today also I think). When the carpet was pulled out from underneath them (perhaps literally in some cases), the option for some was suicide and anarchy or public civil disobedience for others. In regards to the Dominican Republic, it perhaps is either a testament to the amazing internal or psychological value system these people have (to take it all in stride to some extent and not resort to suicide or violence) or for the vast majority of people – perhaps they have not fallen as far down economically (and perhaps are not so shocked or angry as a result). Stated another way, it is very difficult to psychologically accept you have to trade in a Mercedes Benz for a donkey (because you cannot afford the Benz any longer). Much harder, for example, than going from a horse down to a donkey or having to use your own two feet as transportation (even though the Horse for sure was an upgrade from the other two). So, in my own estimation, this can explain the possible differences or attitudes between the two countries with similar economic situations. Although, one very blatant difference is the much higher interest rates in the Dominican Republic (which makes borrowing very expensive) and the very strict lending practices (easy credit, no money down, no interest for one-year are all American innovations) make borrowing money very difficult as well. So this may also play into your point about easy credit and negative equity in the US as compounding a severe recession (or depression as you may prefer), whereas there is much less unsecured consumer debt floating around in the Dominican Republic (simply because of the difficulty in obtaining it and the high interest rates).

On the issue of wealth accumulation, I am not so sure if there is any substantial proof either way, although there perhaps is more opportunity for some economic mobility in the US as compared elsewhere. To be sure, there are some very, very wealthy Latin Americans who have made money even faster without the taxation, regulations, etc. My guess is that – Yes – Americans can often be more innovative than others and certainly a higher percentage of the population are fairly well educated (although I must admit many of my clients feel the US education system is lacking these days and that many Universities must provide tutoring in English writing and reading skills for entry level freshmen – which is utterly amazing). However, if you are on the ball, so to speak, in many developing countries - I also think the higher level of freedom and lower level of government regulation allows for far greater opportunities. Of course being able to spot such opportunities and know how to take advantage is a skill in and of it-self as well. It is interesting to note however that there are more new millionaires in place like China and India these days than in the so-called modern developed countries. And as such, the same circumstances seem to exist in many of these developing markets that USED to exist in the US some 100 years ago.

Dear Sir - I've read your papers and I generally agree with much of what you say but I would take issue on some of your views on the EU savings tax directive: You put forward the idea that someone should be able to opt out of tax payments just because he feels he doesn't personally benefit. But the objective of welfare is to maintain a minimum standard of living for everyone. If you don't benefit it is because you don't need help, but you may still be helping others. The young, good-looking, talented and clever can usually get along in life quite well but those less fortunate have a big struggle ahead of them. Tax that goes to welfare programs is not always wasted. In Europe it helps to pay for education for the poor-but-gifted, it pays for heath care for people who wouldn't get health insurance, and it pays for a semi-decent standard of living for the less fortunate in society which avoids them resorting to petty crime in order to pay the rent (or just plain dying of cold or starvation). Therefore by paying tax destined for welfare programs you are indirectly helping others and hence helping society in general. It is unfortunate that the super-rich; those most able to afford to pay are the ones most able to cheat and the middle classes end up paying for everyone. The idea behind the tax directive, as I see it, is not to punish the rich but to get them to pay their fair share and so reduce the burden on the middle classes. It is quite clear that many super-rich people could do a lot more with their money to help others but they instead squander it. If they are made to pay tax and hence squander less, does it really affect their lifestyle? And what is so bad about socialism (with a small c) anyway? Americans seem to be indoctrinated that socialism is the first step towards communism. This attitude only helps the rich to get richer and the poor to get poorer. However, in the US, as you have said yourself, crime and drug abuse is endemic. How many are forced to turn to crime because they cannot get a job or welfare? What are they supposed to do? Disappear? Starve? A system which, lowers welfare, creates crime and the money saved in paying benefits has to go to pay for more police. Also if the education system only works for the rich, then you clearly create a permanent underclass, predisposed to cause social problems, with a corresponding permanent brain drain due to the poor being denied education. If there is little opportunity for anyone to get ahead by legal, decent means then the end result is social unrest and riots. Furthermore I have seen how the sick are treated in the US. The first question everyone is asked at any hospital is do they have insurance. If they don't then they wait and wait, with blood sopping from their wounds. In fact the uninsured would be sent away if the law allowed it. When they finally get the (often quite poor) service they are left with a huge bill (30,000 dollars for a 3 night stay in hospital - it's totally immoral). Then they can never again afford health insurance and they never get out of debt. Even if you have insurance but use it too much you are not allowed it again. Two of my wife’s relatives are in this situation. One has hepatitis and may die without treatment. The other had her colon removed due to cancer but she nearly died because she didn't tell anyone of her illness, as she didn't realize she was then covered by health insurance. They are both legal US citizens who still work hard and still pay taxes but are now refused insurance. This in the self-proclaimed most advanced civilization on earth. This is where your fear of communism leads you, and the rich are laughing all the way to the bank; running over the homeless on the way.

I've also seen what happens to illegal immigrants here in Spain. The vast majority wants to work legally, send money back to their families and pay their taxes. The work exists because Spaniards don't want to do menial tasks like farm labor. However the immigrants are not allowed to do the work. So they cannot pay taxes and their families in Africa cannot receive money. Worst of all, they are forced to commit crime or starve so everyone in society is at greater risk. Wouldn't it be better to allow them to work on a temporary permit, and pay tax, which would then benefit everyone? Tax is not always a bad thing. It just depends on where the money goes. Paying to prevent disease, crime and social unrest is good and it should make one feel good to see the good done by properly used taxation, unless one is totally selfish. In conclusion, I am not passing judgment or being political, but it seems to me that rampant, unchecked capitalism can bring lasting damage to society and that welfare spending should be regarded as good, not bad. Legal, decent capitalism with a well-funded social conscience is the perfect balance. I hope that those who save money by living in the Dominican Republic should remember to contribute to charities that help the less fortunate in the country. Being poor is just an accident of birth. Sickness and crime both usually result from poverty. So helping the poor helps us all.

EDITORS REPLY: First and foremost, thank you for your letter, which I found to be lucid and well thought. In addition, I would have to say I am sympathetic to some of your arguments also, even though I do not agree with all of them. Completely uncontrolled capitalism does not provide all the answers, as certainly swinging the pendulum to the other leftist extreme does not either. George Soros, I think, has it about right when he advocates embracing free markets and capitalism (the environment that has made him quite wealthy) while calling for a government to provide for basic social services to the public often ignored by the private sectors (because such may not be a profitable venue). As Soros indicates, there are certain things only government can do and is willing to do. So, in the end, the real difficulty is trying to get the proper recipe or blend correct. However, there are also some basic premises regarding human behavior that must be accounted for in or when seeking such a balance.
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For example, I do think that most people are not opposed paying a certain amount of taxes so government can do it’s work and carry out the mandate it has in terms of its citizens. You have said yourself in your letter: Tax is not always a bad thing - It just depends on where the money goes. In this lies the rub or problem. Meaning, one of the problems with politicians is that they have no incentive to allocate or spend taxpayer money wisely. Lets face it, the government can never go broke the way a private business could. If they (government) need more money, they can always go back to the trough (tax paying citizens) and raise taxes (of various kinds) and they can also print more money as well. They do this often enough with no punishment or even fear of reprisal. In theory, in a democracy, the citizenry have the last say and are the safeguard against politicians that run amok (the politicians are supposed to be accountable to the citizenry, or at least this is the theory). However, in reality, how many people refuse to vote for an incumbent and how many actually dive into the politician’s political record before making a decision? The voters instead rely on whatever information might be presented in a political campaign advertisement as their sole source of research in the matter. In addition, when have you ever heard of a politician hauled off to jail in a democracy because he or she inflated the money supply or pushed the government into severe deficit? It may sound like a crazy idea, but the final point is – there is NO accountability. Politicians get away with, shall we say, economic crimes against the welfare of the country or citizenry, whereas if these things were done in private industry – there would be fines and jail time (hopefully, maybe).

In tandem with this thought, I also think there should be a truth in adverting or truth in information dissemination regulation as well. How often are we told one thing about a government expenditure project - only to find the numbers quite different later on? Obviously many things can be hard to calculate with pinpoint accuracy, but we have the very recent case in US Government whereby an official in the Medicare Division was told to lie or low-ball the numbers in regards to a proposal for a national health insurance plan (to be administered of course by the very same Medicare arm of social services). Why wasn’t this official or perhaps more important, his boss, locked up in jail? If a financial officer of a company misstates accounting or financial information, he or she could not only find their employment terminated, but could also find him or herself incarcerated as well (the previous financial head chef of Enron, Mr. Fastow, comes to mind with his incredible cookery and various baking efforts in regards to the books and accounting practices of Enron). So, why are the standards any different for public officials? I do believe that many politicians constantly lie about the true costs (of military expenditures, of public works projects and of social welfare programs they would like to implement) so the public will swallow it without complaint, rather than to disclose all the true facts up front (which in turn would then allow the public decide if it is worth it or not, or if they are willing to pay for it or not).

Next in line is the idea of socialism itself. I think it to be a nice idea or ideal, but not practical in the real world because of how we function as human beings (or at least not as a full blown purpose of government - or not taken to the extreme of totalitarian government operating under the auspices of complete socialism). This simply does not work, which is why the former Soviet Union fell apart, which is why the so-called communist Chinese and the Vietnamese have now turned to capitalism, not to mention the much hated Fidel Castro (by the US Government) who also has allowed elements of capitalism in to save the economy. Incredibly enough, Shanghai City in China has one of the largest concentrations of new millionaires in the world. This has not come about because of socialism, but rather the spite of it – the allowance of capitalism and the free market to flourish in what was a stagnant and morose economy before. Which is to say, what motivates people to earn their living legally and perhaps work up to 80 hours per week (often enough at two jobs) is the hope and promise to provide a certain standard of living and benefit for themselves and their family. People do not do this because they want to secure a prosperous standard of living for everyone else - People work hard or the motivation is, to better themselves and their family. They may feel bad that there are others suffering in the world and I think any decent, moral person would feel bad. But feeling bad and working hard just to turn over half of one’s earnings to the government are two very different things. Let us face facts and be realistic - altruism is not what motivates us to work hard or put our money at risk in a business venture. In addition, when a government takes such a large amount from hard working and productive citizens – what is the message they are sending? The message is you are a chump or a fool to work so hard or invest. Why bother to work at all? Better off not to work at all or better off to sign up for the social benefits check rather than start a legal small business. What is the incentive otherwise? If you do all the things a good citizen is supposed to do, you are in essence punished financially by the government for it. Whether you want to admit it or not, that is in fact the end result and problem. Socialism, taken to the extreme, always will kill personal motivation and innovation (at least for those who want to work). Capitalism left completely unchecked is not a good idea either, but the free market system does work.

However, an argument over the merits or pitfalls over socialism as a political philosophy is not even the real problem or issue. Meaning that I tend to think, if the government said they are going to take perhaps 3 percent or 5 percent of ALL government tax revenues and place it in a fund for social benefit purposes, I doubt most taxpayers would have a problem with that. Even if this amount was higher, but the overall income tax on earnings kept to a bare minimum (let us say 15 percent as a reasonable amount), I still think taxpayers would not complain (let us remember that the government takes in a wealth of other kinds of taxes as well, such as tax on gasoline, tax on alcohol and cigarettes, tax on imports, sales tax on store purchases – which can go as high as 25 percent is some Europeans nations). So, the idea of setting aside some funds for social benefit purposes is not the entire problem, but rather just one part of the overall government tax expenditure picture, which seems to be out of control.

The argument of socialistic or left leaning politicians is usually the class warfare syndrome. An image is created showing a tuxedo-wearing millionaire sitting atop his gold coins and sipping champagne - while the poor are outside suffering in the cold. The truth of the matter is, while there very well could be individuals that fit this description, it is not the masses at large and certainly not the middle class (who pay most of the taxes anyway). However, such an argument and image always makes for good propaganda, especially among those that might feel themselves under-privileged or locked-out of the mainstream prosperity. So, there is class crisis going on, but it not what you think. George Soros got it right on page 92 of his recent book – The Bubble of American Supremacy – when he states the unintended result of some globalization policies has been an increase on the tax burden of the middle class (to perhaps make up for the loss of taxation taken from corporations relocating abroad and the ultra-wealthy). In addition, real wages in the US (and I suspect in Europe also) when adjusted for inflation have actually remained stagnant (or actually declined in some cases) during the last 20 years (for most people). So, if you are working harder, working at two jobs even, and feel like you just barely keeping up, this is the reason why (and if you think you are crazy, you are not – what you are feeling is very real and not imagined).

So, what is the final point? The middle class ARE bearing a larger tax burden and do have less disposable income to show for it, in part because of higher taxation and in part because erosion of purchasing power (inflation) and wages. In addition, the previous promises of a social welfare or social benefit system that is often SOLD by politicians as a safety net for everyone, including the middle class, also is in deep trouble (and getting deeper). For example, look at the US estimates of a possible bankrupt pension system (social security) within the next 15 years (or sooner by some accounts). Examine the statistics of 100 Million baby-boomers (those people born during the period 1950 – 1962) who will start straining the social pension and public healthcare systems in 2012 and continue doing so for 20 years beyond. These programs are not true insurance plans (where payout obligations must be secured by 102 percent as is the case with life insurance companies in the US), but rather a wealth distribution system, which MIGHT work if the previous models stayed the same. Meaning, when such programs were implemented there were roughly 12 working people paying in to the system for each 1 taking out benefits (those getting a check). Today it is about 4 or 5 to 1 and soon to be 2 to 1. Why? Declining birth rates in the industrialized countries. This certainly has not been the government’s fault or doing – just a societal trend. However, hints of the problem are already starting to surface by examining these very same government pension systems in England and the US right now, where it has been announced retirement ages will be pushed further away so citizens can ONLY obtain the so-called full benefit check if they wait until age 70 or later (in five years they might tell you to wait until you are 80). Another interesting item to examine is the Government Health Care system in Canada and Sweden that put you on a five-month waiting list to start chemotherapy treatment once you are found to have cancer. This is the reality TODAY, never mind what the situation will be like 15 years from now when all those baby-boomers become elderly. The list goes on. This is the social welfare state dream? This is what the middle class can look forward to after paying the bills for so long, and are now paying even more? Again, this is only part of the larger picture, which includes such shameful spending and waste in so many government run bureaucracies, pork barrel projects, political nest feathering, etc.

So, you disagree that the middle class should consider to just opt-out of a system that offers them no benefit? In other words, you DISAGREE that middle class citizens SHOULD have the right to relocate or expatriate to a lower tax or no tax jurisdiction? Fine, but what are the other options? Stay and continue to go broke? Have hope that an honest politician will come along and make everything better? The fact is that most middle class people in MANY so-called wealthy industrialized countries feel very frustrated. Perhaps even an emotion beyond frustration, whatever that term might be. They and you have two choices: Stay and Pay or try to emigrate to someplace less expensive, less taxing, less dangerous for the long-term (economically speaking and perhaps otherwise as well). There is an old saying which states that the Pen is Mightier than the Sword. I think the feet are mightier than both. Plus, the old Feet Do Not Fail Me Now response, might be just what the doctor ordered considering it would seem the socialists are ready to confiscate and take by mandate (their belief that they own you and all your money) the funds they need to plug the shortfall – a shortfall they created via bloated spending and mismanagement.

EDITORS REPLY: No, it is not true and in fact there are politicians who would very much like to take away whatever tax breaks do exist for Americans working abroad. For example, currently an American living and working abroad (earning a salaried income outside of the US) can get an exemption for up to roughly US$80,000 or so. HOWEVER – this does not apply to some other kinds of taxes (such as Social Security tax payments – ahem, forgive me – Social Security contributions) and does not apply to capital gains nor passive income (bank account interest, investment income, etc.) So, Americans are expected to pay up for the rest of their life (just because they are American Citizens) no matter where they are living, no matter where they earn their various sources of income. Of course, the answer for many people is to renounce US Citizenship as one way out such a trap. As such - if you become an Irish Citizen (for example) or a citizen from some other EU member country you have a very good visa free travel privilege with your new passport AND can declare yourself non-resident for tax purposes (the Europeans fairly believe if you are not living there, you should not be liable to pay taxes for public services you are not using). Even a citizenship from say the Dominican Republic, Costa Rica, Panama, Thailand – wherever - is not so bad as you might think in terms of travel either, and the mindset is very much the same as the Europeans in terms of taxation issues. I am oversimplifying things a bit, but you get the idea. Interestingly enough, the US tax authorities (The IRS, which one of my clients affectionately calls the Irrational Revenue Suckers) claim the right to tax you for up to 20 years after you renounce US citizenship IF they think you are doing so for tax benefits. God Bless America, and please pass the collection plate.

EDITORS REPLY: Well, I am always amazed at some of the things people hear (rumors) when it comes to living outside of the US in general and some countries specifically. The things people have told me as far as rumors regarding the Dominican Republic have especially been mind-boggling. For example, some time ago someone called concerned about contracting Polio while in the DR, after reading some crazy information to this extent from the US CDC (Center for Disease Control) website – which has been removed, by the way, due to what I can imagine was protest from the Dominican Government (local doctors and government officials assured me they eradicated Polio more than thirty years ago). Someone else recently asked if the Haitians were invading (due to the political issues in that country). Another person telephoned in a panic because their doctor warned about Malaria and the list goes on and on.

On the topic of banking, bank account interest is 100 pre-cent locally tax-free in the Dominican Republic, as is commercial paper investments as well. For this reason, there is no governmental reporting because there is no reason tax-wise for any reporting. In fact, the banks do not have any reporting mechanisms in place regarding their accounting systems because it was never an issue. Since there is no reporting to the local government, there certainly is no reporting to any foreign government either. And this, by the way, is the situation in many, many other countries as well. So, as a US Citizen, you are technically required to report and pay tax on bank interest earned to the IRS. However, because no one else is reporting it, the responsibility is on yourself to voluntarily do so.