The New Middle Class Expatriates: The Great Escape
are some very interesting trends taking place today in terms
of whom exactly is going where. Surprisingly enough, it is now
the middle-class that are leaving the so-called developed
wealthier nations and often are Trading Places with those from
poorer developing countries. The question is why? First
and foremost, when you hear the term expatriate, offshore
banking, tax exile, offshore trusts and a number of other
things - what comes to mind? Probably what you have been
lead to believe by the much of mainstream media and rumors as
well. Which is to say, you probably think all of these
subjects involve very wealthy people trying to avoid or escape
taxes. Or you may think, such things involve criminals,
drug dealers, and those that are doing something
illegal. Go on, admit it - that is what you were told or
taught to believe. However, the truth is quite different.
Let us start then with this first topic right from the start – taxes. It is true that someone might be able to reduce or eliminate income, inheritance and other kinds of taxes by living in another country? Yes, but that is only a small part of the larger puzzle. Meaning, there any many, many other issues and motivations, which we will explore shortly. Taxes might be the stated motivation for some, but taxes alone are not always enough to push someone to relocate. And not only the idea of relocation to another state or province - but, rather relocate to another country, with possibly a different language or culture.
To be sure however, taxes are a very visible and important issue. If you think about it, of all the expenses or deductions you have against your income (rent, mortgage payment, car payment, etc.) income and social welfare tax (FICA or social security for Americans) is the single largest deduction from your income. What if you could reduce it or even eliminate it? How much more disposable income would you have to live on? It is curious to note that under rule by monarchs in Europe prior to 1917, the average tax rate was less than 10 percent. When the income tax was first introduced in 1913 in the United States, the rate was 7 percent. So, what happened? How is it possible that some governments can provide the services that they are mandated to provide with taking so little, while others claim they need to take 50 percent or more? In 2015 the US Government had a windfall record year for tax collection and guess what? It still was not enough and they still ran a budget deficit of US$400 Billion Dollars despite the fact they hauled in more money in 2015 than any other year in the history of the United States. The problem is not that citizens are not paying taxes, the problem rather is proliferate spending on the part of governments. If the spending is not brought under control then it really does not matter how much taxes they collect because it will never be enough.
Part of the answer has to do with the great welfare state experiment put into place after 1930, and part of the answer has to do with the nature of public officials in a democracy as well. Which is to say, regarding the latter, the nature of politicians in a democracy is to spend other peoples money without any repercussion. Citizens of a democracy are lead to believe they have a voice or some control in that they can vote out a politician at the next election, but the reality is the politician (once in office) can run amok unchecked. The financial damage is done, left to the next group coming in to clean up or the taxpayer to pay for later on. If you take a look at government spending in the so-called wealthy, industrialized social welfare governments of the twentieth century, you will find ever-increasing expenditures over the years (as a percentage of the nations gross national product) and ever increasing government deficits (debt, which the taxpayers some day must pay for). You cannot live on borrowed money forever and you cannot continue to take money away from the productive citizens of society and simply give it away to someone else (presumably much less productive) without a price to pay (socially and economically).
Many middle class people in these highly taxed welfare state democracies already are paying a hefty price - in terms of the ability to maintain the same middle class quality of life their parents were able to do before. One very blatant example of this is the fact that a two-income household is required today (in the so-called modern industrialized nations) in order to provide the same lifestyle that only one income could provide forty years ago. One of the reasons for this is that real wages have been stagnant, and in some cases have declined, over the past forty years, where as inflation has consistently eroded the purchasing power of money over time (and salaries have not gone up in tandem). Why? One culprit that has accelerated the devaluation of money has been the removal of the gold standard after 1970, and the resultant true inflation of the money supply (devaluation of the US Dollar), which has not been correctly stated or reported in the selected government inflation figures. Another reason is the inequality in taxation rates, whereby the middle class have borne the largest burden, both for income taxes and payroll taxes (contributions to social security and other welfare schemes).
It sounds incredible, but it happens to be true. Meaning, many people think or have been told that expatriates or tax exiles are all very wealthy people who might be interested in leaving for greener pastures. Greener pastures? They have it pretty good right where they are. For example, in the case of the US, did you know that the super wealthy earn most of their accumulated wealth from capital gains and not salaried income? This means they (the very, very wealthy) pay only 20 percent under the recent changes by the Obama administration which are now being reflected in current tax collection amounts (15 percent was the previous rate). Most middle class citizens who rely on salaried income principally might pay about 45 percent on more on combined federal, state and payroll (social security) as a marginal tax rate (often enough, much higher). US Corporate income taxes collected for fiscal year 2015 amounted to about US$350 Billion which compares to US$1.6 Trillion collected from individual taxpayers and roughly US$1 Trillion Dollars taken in from social security and other kinds of taxes. In Europe, the situation is in fact even worse.
In terms of social security payroll taxes in the US, Social security deductions are applied to salaried income up to US$87,000 per year, and at a top rate right now of 6.2 percent. This means if you are unfortunate enough to earn US$87,000 or less, you are paying a much higher proportion of your income to welfare contributions than someone earning more. Why? This is because salaried income above US$87,000 is not taxed for these types of payroll taxes (social security contributions). So as a result, so as a percentage of income being paid in, someone earning US$250,000 per year in salary is only paying 2 percent (of gross salaried income) into the social security system - where as someone earning US$85,000 per year is paying 6 percent of income. And when you consider that the Social Security program in the US is basically a Ponzi scheme that is running out of younger working age people paying in to cover all the currently and soon to be retired baby-boomers taking out benefits, you come to realize that Social Security payroll deductions MUST increase. In other words, even if politicians decide not to increase income tax rates, for certain monies to be taken out to cover Social Security in the future is going to go up regardless. It has to because when the program first stated roughly 80 years ago there was about 10 working people paying in for every one taking out a check, so the ratio was 10 to 1. Right now we are soon approaching a demographic that indicates there will be just about one person paying in for every person taking out a check. As such, the burden is not split among ten different taxpayers or plan contributors, but rather just one.
This might all sound like some sort of left wing rhetoric designed to complain about the rich versus poor, but it is not meant to be. It is however meant to clearly highlight that it is indeed the middle class that have been hurt the most over the last forty years and WHY this is the economic group that needs to do something in order to survive. The super wealthy in fact, do have an average lower tax burden (as a percentage of earnings or income), and the poor pay almost nothing (or certainly much less than the middle class) and do get a tremendous amount of free benefits as well. So now you know. The people that are leaving the US and other so-called wealthy industrialized nations are the middle class, and small business owners rather than the mega wealthy. Also, it is not about taxes directly. Which is to say, higher and higher tax rates is one of the symptoms and not the actual disease. The disease is the wasteful government expenditures, outrageous accumulated debt, and bankrupt social welfare programs, which need to be funded somehow. The disease is also the reduced quality of life, reduction in true freedom and social ills that have come about from many of the policies and agendas put into place over the last half-century.
So, the questions remain - When will it end? How much more can the populace be squeezed to pay for it all? Are things being managed responsibly or will it get even worse? Is it too late? While it can often be difficult to predict the future, certainly one can surmise what the potential future direction might be - and for many, it does not look encouraging. In other words, a large ship in motion (even after the engine has been turned off) will continue to drift for some time in the direction it is pointed. You may not know exactly where it will end up, but based on the direction it is going in, you have a pretty good idea, more or less. This is the overall concern for many middle class people living in such environments and why for many, the goal is self-preservation.
TO LEAVE OR NOT TO LEAVE - THAT IS THE QUESTION
For many people, the idea of leaving or expatriating from the country they are in at the moment seems unthinkable. But in part it also depends upon who you are and how connected you are to the current social welfare system, which encompasses a large number of things in general. If you are getting a monthly government check, chances are you do not want to give that up. If you are living month to month (even with a comfortable salary or income), with no savings, no equity - then equally you will find it difficult to extricate yourself. However, this is purely an economic reason, as to why or why not you may be able to leave financially (there are other issues as well). Those people with some assets and some savings can of course easily buy a new home or luxury apartment for cash elsewhere and probably have enough money left over to life off banking or investment interest (which would be almost impossible in North America or Europe these days). How much is enough? Well, if you do have liquid assets of about US$200,000 or more (or have some fixed income in excess of US$2,000 per month from pension, etc, coming in) - you can realistically either retire, or in the least have enough of a base income coming in to pay monthly expenses from interest income (in the case of relocating to a number of different countries). However, this is all part of the problem to be aware of as well in terms of those that would like to keep you against your will.
Meaning, those people that are so intertwined or tied into the social welfare state system, or that are so broke that they cannot leave - develop a subsequent jealousy and loathing for someone that can or does. Of course this is not manifested directly as jealously or loathing, but rather it is displayed as an attack on the so-called moral and social responsibilities of such persons (or the supposed lack of moral and social responsibility). This is why you hear such terms as tax cheat or some similar negative phrase created to describe such a person. In other words, the idea has been to chastise such persons as being anti-social and anti-nationalistic. We are told then by the media and government functionaries that such person are almost tantamount to being criminal simply because they have decided to leave and renounce government and or national affiliation. We are lead to believe that patriotism is intertwined somehow with the collective socialist welfare state, and that we are not good citizens if we disagree or are even disgusted with how things have turned out after 50 years of such a direction.
But how is it so that a person that has legally earned an income or has accumulated wealth in accordance with local laws at the time, and that such a person has paid whatever share of taxes they were supposed to pay up until that point or day they decide to leave - be described as a cheat or a criminal? If I pay my long distance telephone bill each and every month to AT&T, and then decide to switch over to Sprint from today going forward, am I cheating AT&T somehow? All I am doing is deciding to switch from one affiliation to another, presumably because there is some better benefit for me to do so (better service, lower costs, more options, etc.). Do I have some moral or other kind of obligation to continue supporting AT&T financially if they have let me down somehow? It is the very same with countries, your current citizenship and where you decide to live. Are you somehow morally or ethically liable to stay and participate in a system that might be detrimental to you long-term simply because you had the luck (or misfortune) of being born there? No one questions the motivation of someone wishing to leave a nation with communism and a totalitarian government in place. Yet, when someone wishes to get him or herself away from a democratic socialist environment, they are labeled as malcontents, crazy or even worse.
Much of this is part and parcel to the psychology at work, or maybe even better stated - a form of brain washing. Meaning, there are many middle class people that can financially relocate, but what is often holding them back is themselves. Or, it could be the case that you are contemplating the idea, but find nothing but criticism and negativity from other people. In this regard, it is very interesting to note this idea of nationalism or patriotism has been a very useful psychological control tool for many governments. Prior to the American and French revolutions, people would move about at will - without passports or checks on movement. In other words, even though someone was born and raised in France, or Italy or where ever - such persons of course identified themselves as coming from a particular place, but they did not have any mental hang-ups about moving and living somewhere else. And in part, prior to democratic republicanism, rulers were often foreign and changed so much, that people thought of themselves are being part of a more open and fluid polyglot society than they do today. One major change brought about by democratic republicanism has been nationalistic rhetoric and the idea that you are a member (and confined to the borders) of a particular nation. With that we now have strict border controls, travel documents and checks on movement of the citizenry in and out. What is the point of bringing this idea up and what does it have to do with expatriation?
Well, today we live in a world where the local national flag is used as more than just a symbol to identify a particular country or territory. In is used as a psychological tool designed to enforce and cement the idea of separation - us versus them. It also is used as a tool designed to convince citizens that they are part of a greater good that they are responsible to somehow (in terms of the nation state they live in). Stated another way, an emotional argument is created in that we are all a group of worker bees existing only to toil and benefit the so-called greater society (and government that administrates it). But are we really? If you were born in a particular country and the rulers of that country corrupt or abusive in any way, does this mean you are bound to stay there and take it? The laws of nature and the very ideals of democracy and freedom would tell us that no, we are not. Yet at the same time, ironically it would seem that the idea applies to everyone and everywhere else, at least in the minds of the leaders of countries that expose such thinking. Meaning, using the US as an example, it is thought to be natural and logical that citizens of another country would want to immigrate to the United States - but unthinkable that anyone in the United States would want to leave. How can this be? Such a person must be anti-social, anti-democratic and just plain insane. If not this, then they must be radical lunatics that wish to shirk the so-called social responsibility (read this to mean financial welfare payments) that they supposedly have for eternity (till death do us part, and even then there are estate plus inheritance taxes).
In addition, in the case of Americans especially (who certainly do not travel internationally as much as their European counterparts) - they are taught and lead to believe that the rest of the world is corrupt, evil, impoverished, and without basic services considered standard or expected in a civilized nation. This of course is not true and could not be farther from the truth, yet many Americans still believe it - because they are taught to believe it. Think about the kinds of news stories and information you are fed. Mostly, when it comes to other countries and international topics, in the US particularly, you are lead to believe the rest of the world is suffering economically, socially or otherwise - or that is usually the slant. The spin machine or propaganda machine is on full blast- and you probably do not even know it. Maybe you do, and you do not care or maybe you feel helpless to bother with a counter argument.
Regardless, the idea is that you do have a choice. In addition, we all should expect the respect of others in terms of our and their choices as well. Meaning, if you understand everything you think there is to understand and have made a choice to stay where you are (regardless of where that is), then you should do so. But, if someone has made the decision to leave, then that should be respected as a basic human right as well. Despite being told otherwise, there is no irrevocable contract that binds us to any state, location or any form of government. The idea or nature of a contract is that two parties enter into it of their own free will and agreement. Does this not mean then that one or the two can voluntarily (and peacefully) exit the contract as well (assuming one does exist)? And using the basis of law, it is not true that one party can exit the contract when one of the two parties fails to hold up their end of the bargain? Certainly many would say that some governments have indeed failed in the so-called contract in terms of the modern social welfare state. Government managed pension and health care programs are bankrupt, and now they want more of taxpayer money to fix it. Public Debt has been piled on top of debt, and it is the local citizenry that has to pay for it some day in the future. Where is the accountability and responsibility? Is it only a one-way street in that one party (the person making payment or the taxpayer) has to blindly continue while the service provider can do whatever it wishes without compensation or repercussion? In private business, a customer can and will leave if the service provider drops the ball or is even negligent. Government is also a service provider and nothing more. It is not some mystical, magical entity but rather a provider of services in exchange for payment (taxes).
Some people have already identified this trend of people who have decided to switch governments or switch countries some time ago. In fact, many have made the comment that in the case of the United States that America's best and brightest are leaving. But they are not talking about people like Bill Gates, George Soros or some other wealthy high profile person. These people have no reason to leave. They probably pay lower marginal tax rates than the average person and they are certainly plugged into the government spheres of influence as well. No, the person being discussed was or is the independent self motivated thinker that feels crushed and abused by a system that punishes hard work, productivity, innovation and self reliance - and rewards sloth, little or no productiveness and parasitic behavior (people that might prefer to live off the hard work and earnings of others). We are of course talking about socialism (see recent events in Venezuela).
Interestingly enough, those countries with socialism and a dictatorial government have failed already. Some have gone away altogether (Soviet Union) while others have moved so close to capitalism (China, Vietnam) that the founding revolutionaries probably would not recognize the place today. But what about the so-called free western democratic socialist countries? In reality, this term applies to what we have in North America and Europe at the moment. Does socialism some how work better under a democratic form of government than under a dictatorial regime? Considering the current crisis regarding the state of affairs with the government run pension and health care systems in the democratic nations we referenced - it would seem not.
WHY IS THE GRASS GREENER ELSEWHERE?
Is it true that the grass is greener in Panama, Ecuador, Brazil, Thailand and the Dominican Republic (just to name but a few)? Well, we could not necessarily say about the grass literally, but certainly the long-term prognosis would seem to be. Again, taxes are lower in many of these jurisdictions - but why? Taxes are not in and of themselves a problem, but rather it is a reflection or symptom of something else. Meaning, in many other countries, for a variety of reasons (some intentional, some not), a bloated government infrastructure and expensive social welfare scheme does not exist. Also, a more libertarian environment does exist (in many cases by accident rather than design), whereby the local culture is such that people are still responsible for themselves (responsibility has not been socialized) and government handouts almost non-existent (as least in comparison or to the extent in Europe and North America). This is a very important point, because even when it comes down to the law and the local society, in many other nations, citizens are still responsible for themselves. Which is to say, responsibility has NOT been socialized. The government is not to blame for everything (and is not responsible to act as a nanny, with the charge of taking care of every one and every aspect of life via regulation) and others are not always to blame for certain events either.
So, why is it that such middle class people from the supposedly wealthier industrialized nations are attracted away to these other places? In part, because like attracts like. Meaning, expatriates are often enough Libertarians by nature. They feel very comfortable with less government regulation, not more. They do not want or expect any handouts from government, yet they do not want government to pick their pockets either as the counter balance to this idea. They believe in private property rights. They believe in personal responsibility. They believe in short, in liberty. An idea often enough expressed in words in many places, but not practiced. So, in summary, is the grass greener elsewhere? It certainly can be, and lower cost of living, lower housing costs and lower taxes are only a part of the appeal. Liberty, freedom and escape from socialism yet another benefit that can be found in some of the least expected places as well.
About The Author: This article was written by John Schroder of Ascot Advisory Services. John's firm has been helping clients in the Dominican Republic for the last 17 years with residency application services, naturalized citizenship filing, banking assistance and legal services pertaining to real estate (title transfers, legal representation at closing, sales contract review). You can contact him by telephone at 809-756-1917 or click the about the author link above to reach a contact page to send an email directly.