Copyright John T. Reed 2014
In 2010, I researched and wrote my book How to Protect Your Life Savings from Hyperinflation & Depression. I re-researched it and came out with another, second edition in 2012.
Much time is wasted nowadays on TV and elsewhere discussing the bad policies of the U.S. government and what the right policies are and the chances that the current rascals will be thrown out.
Who cares? If the current rascals are thrown out they will be replaced by new rascals. For example, if the Republicans take control of the Senate and keep control of the House in 2014, it will simply restore the situation in six of Bill Clinton’s years where the Gingrich Contract With America resulted in Clinton only having two years where his party controlled congress followed by six years where the other party controlled both houses. George W. Bush had two years where Democrats controlled both houses. Neither was any Valhalla for supporters of the party that controlled Congress. The same has been true when the same party controlled all three, like the first two years of Bill Clinton and four of George W. Bush’s eight years. It generally doesn’t matter who controls Congress or the White House. Politicians say it does to persuade you to elect them, but they lie. Most spending is either mandatory entitlements or uncuttable for political reasons even when one party has control of all three law-making entities.
I talk about the right policies at times, but mainly to prove there is not a snowball’s chance in Havana that we are going to get such policies, so let’s move onto Job One, which is dealing with the fact that rascals control the Congress and White House, as it was in the beginning, is now, and ever shall be. This is such an article about how to protect yourself from the rascals rather than wasting time talking about the rascals or the chances of getting better rascals in the future.
In the course of doing that research and getting feedback from readers, I found that the protection from monetary crises was often moving assets and maybe yourself outside of the U.S. That led me to do that and to research “internationalization” as many call it.
Clearly, everyone should get out of the US dollar as much as possible and into hard assets and selected foreign currencies because of the risk. The hard assets can be in the U.S. and probably should be. But the foreign currencies must be outside of the U.S. because of the danger of future U.S. capital controls.
But the “internationalization” gurus in general, advocate a broad or total movement of yourself and your assets and business abroad. Among the reasons they cite are onerous regulations and laws in the U.S.
There is no question that the U.S., which once was the best country on earth in terms of economic freedom, has fallen in those rankings.
Heritage Foundation Economic Freedom Index
Here are the Heritage Foundation’s top 20 economic freedom countries in order:
1. Hong Kong
5. New Zealand
12. United States
14. United Kingdom
15. The Netherlands
Note that four of the top six are the currencies I hold and recommend; the other two are city-states which I deem too small for currency purposes. They may, however, make sense as places to locate your business.
Fraser Institute Economic Freedom of the World Index
United Arab Emirates
So should you move to Hong Kong or Singapore? That is sort of what the internationalization crowd urges. Actually, they are not so much into specific foreign countries as much as just telling you to go to some country other than the U.S. They are actually quite fond of recommending places you never heard of like Dominica or Norfolk Island.
A couple of points
1. You need to come up with your own economic freedom index. For example, I am a non-fiction writer. The U.S. has the First Amendment which guarantees freedom of speech and the press. That is the best such law on earth.
What country’s laws are best for you depends on what you do.
2. It’s not all or nothing at all. You can put parts of your economic life in various countries—each part in the country that is most advantageous for that part of your financial statements. And you should.
My rainy-day savings and current U.S. bill-paying money are mostly in Australia, Canada, and New Zealand. I also have rainy-day savings in the form of Swiss franc cash in a safe deposit box in Canada.
3. I have also scouted Australia, Canada, and New Zealand as places to possibly take refuge in the event of hyperinflation or another financial crisis here in the U.S. And I scouted Northern Washington State as a possible place to take refuge in the sense that it would allow me to spend part of my day or week in Canada doing things that might be difficult in the U.S. during a financial crisis like shopping for food, fuel, and medicine.
And I have researched on line and through books possibly taking refuge in countries other than Australia, Canada, New Zealand, and Switzerland. The reason for that would be those four countries have relatively high costs of living. One could go to other countries with lower costs of living, but still access the money in the countries where I have my savings. During hyperinflation, USD would be worthless. But you can live in, say, the Canary Islands (a low-cost-of-living part of Spain) and use your Canadian or other stable currency to pay your living expenses. Having to convert your AUD, CAD, CHF, and NZD into, say, euros (the currency of Spain) would incur another currency conversion fee and an international wire fee, but it would be more than offset by the savings in cost of living.
4. The existence of onerous rules, regulations, and laws in the U.S. does not necessarily mean they apply to you. You may be exempt or often you can change your situation so that you become exempt.
Because moving to a foreign country is such a monstrous hassle and changes so many things, most of which you are probably happy within the U.S., like nearness to friends and relatives, language, your knowledge of the market for your good or service in the U.S., your first step should always be to read the onerous rule or reg in question and see if you are or can become exempt.
How can you become exempt?
A. Stop doing whatever triggers the onerous rule. For example, employer-employee relations are the subject of a zillion laws in the U.S. So get rid of all your employees. You can probably replace some with automation. You can stop doing labor-intensive things and switch to non-labor-intensive ways of providing your good or service. You can sidestep onerous local, county, or state rules by moving to another municipality, county, or state.
My basic advice: read the rule, regulation, or law. It will list who is exempt. Or maybe it will say who is covered by the law and you can thereby identify the categories of people who are not covered by it. For example, it is well know that Obamacare is triggered by having 50 or more full-time employees and that they define full-time as more than 30 hours. Predictably, many employers are laying off workers to get below 50 or reducing the hours of some below 30 hours a week so they no longer have 50 full-time employees.
I once got a federal wage-and-hour complaint against me dismissed because my nationwide income from operating apartment buildings was less than $250,000 year.
Most such laws are what I call IF laws. Here is what I said about those in a 2010 article:
Leftists do not understand the meaning of the word ‘if’
October 13th, 2010 by John T. Reed
Copyright 2010 by John T. Reed
Obama, Pelosi, Reid and all the other anti-business, anti-rich nut jobs will, if allowed, enact a ton of IF laws.
They all have this format:
If you do X, you must do it the way we say. or
If you do X, you must pay this tax.
For example, if you sell health insurance, you must not turn away persons with pre-existing conditions.
Or If you make more than $250,000, you must pay a 2.38% tax on “unearned income.”
Obama and his ilk, being ignoramuses about incentives and business, think businesses and rich people are inanimate objects from which money can be extracted. Obama does not believe money grows on trees. He believes it grows on rich people and businesses. All he needs to do to spend that money is remove it from the businesses and rich people.
They have it. We want it. We will take it. We are the mighty U.S. government. Businesses and rich people are powerless to stop us. Wanna bet?
Here’s the way it really works.
The rich who earned their money are not stupid
Business people and rich people (other than heirs, lottery ticket winners, etc.) did not get to be successful or rich by being stupid. Plus, they have an extremely different perspective on IF laws than dummies like Obama. Obama thinks those laws say things like “health insurers will accept pre-existing conditions” or “people who make more than $250,000 a year will now send me more of their income.” Not at all. Businesspeople and the rich read such laws this way:
I have two choices:
• I can stay in health insurance and accept pre-existing conditions or I can do something else or
• I can continue to make $250,000 before tax as defined by the Internal Revenue Code and pay higher taxes or I can change my taxable income either simply making less than $250,000 or by changing the details of the income so it moves to a less taxed category of the Internal Revenue Code.
For a detailed example of the latter, read my book Aggressive Tax Avoidance for Real Estate Investors, now in its 19th edition.
Maryland’s millionaire tax
Maryland famously decided to tax the rich more heavily in 2008. It raised the tax bracket to 6.25%. Baltimore and Bethesda also impose income taxes. The combination of state and local tax rate can go as high as 9.45%. Governor Martin O’Malley said the rich (made more than $1,000,000 a year) were “willing and able to pay their fair share.” The Baltimore Sun said the rich would “grin and bear it.” In 2009, one-third of the millionaires disappeared from Maryland tax rolls. In 2008 about 3,000 million-dollar income tax returns were filed; in 2009, 2,000. Maryland politicians figured they would get $106 million more from the tax. In fact, they got $100 million less—a total $206 million loss to the state run by those politician geniuses.
This phenomenon is best known as the Laffer Curve effect. Arthur Laffer is quick to point out that the first known person to write about the revenue-depressing effect of overly high tax RATES was Adam Smith in 1776.
Think of it this way. If the tax rate is 20%, the government collects a certain amount. If it’s 21%, they collect more. But what if you raise it to 100%? Obviously, they would collect zero because no one would go to work. The government would also collect zero if they lowered the tax rate to 0%. If you graph tax revenue by max tax rate from 0% to 100%, you find that it maxes out at about 20%.
When you go above that point, the revenue goes down because people change their behavior to avoid the tax. They retire, change businesses, change states, invest in tax shelters, cheat, leave the country, etc.
NJ car insurance
NJ politicians started beating up on car insurers not too many years ago—like Obama and health insurance companies. They passed more and more laws against the car insurance companies. NJ became the toughest state in the nation to be a car insurance company. IF you sell car insurance in NJ, you have to do X, Y, Z, A, B, C,… I do not know the details, but I seem to recall reading that car insurers, whose marketing plan was to be nationwide, decided 49 states was enough and stopped selling car insurance at all in NJ. Eventually, all or almost all of them left the state and the state had to be its own car insurer. That was a disaster. So they had to entice real car insurers to come back and did. I may be a little off on my facts. I would appreciate hearing from those who know better.
Raising tax rates makes earning money less attractive and makes avoiding taxes by spending more on tax advice, relocating outside the jurisdiction raising the tax rates, and even cheating more attractive.
When you tax something, you get less of it. When you subsidize something, you get more of it.
Obama and his fellow geniuses tax successful business and individuals and subsidize people who are unemployed, who do not pay their mortgages, who are in unions, who are sick, and so on. Consequently, they will get less tax revenue and have to shell out more to loafers. Higher tax rates change the economics of businesses, often to the point where they are no longer profitable. Take Amtrak. Once upon a time, railroads that provided passenger service were privately owned. But government encouraged unionization of railroads, the high tech rich companies of the day. And the government held down the ticket prices to please the voters. Ultimately, all, I repeat, all of the privately owned railroads got out of the passenger business. There is only one passenger railroad in the U.S. now: Amtrak. It is unionized, government owned, ratty, never on time, and never operates at a profit even though its supporters promised that it would when it started in 1971. Want to see the future of health care? Take a trip on Amtrak. Actually, running a railroad is pretty straightforward. Health care will be far more screwed up by government control than the railroads. Every time Obama passes one of these beat-up-on-the-rich or business laws, the rich and business stop doing the thing in question or do it differently so they are exempt. There is no free lunch, not even for politicians who failed to learn about economics or business when they were growing up.
B. Taxes are a special category of onerous laws, but you can avoid those, too. I have an entire book titled Aggressive Tax Avoidance for Real Estate Investors. I have sold over 100,000 copies. It is now in its 19th edition.
For example, income taxes tax income. So don’t have income. Duh. In that case, your income tax bracket falls to zero.
Live off savings temporarily
How would you live? Off savings for awhile. Or by borrowing. Obtaining a loan is not a taxable event. Whether the interest in deductible depends on whether it is a qualifying home equity loan or the proceeds are used for a business purpose. But obtaining the loan itself is not a taxable event regardless of any of that.
Avoid social security tax
Many types of income are exempt from social security tax (FICA), like rent and royalty income. If you live entirely off renting some rental properties, you would not have to pay any social security tax. Same is true if you live off of royalties which are paid on creative works like books and songs or on oil wells and other mineral extraction. You don’t have to pay FICA on family employees under age 18. Gambling winnings are exempt. As are students who are enrolled at least half time. There are many others. Read the law.
Early settlers were tax exempt, and still would be
Think about the early settlers in the U.S. They were better off financially with each passing day. What income tax did they owe? None. And if you did the same as them now you would owe nothing, too.
They acquired a piece of land, cleared the trees and stumps, started building a cabin, planted crops, harvested them, and ate them. Over time, their home got bigger and they also built fences, barns, and expanded their farm fields. Were they working? Yes, very hard, but they did not receive any taxable income. They ate the food they grew, the game they hunted, the milk from their cows, meat from their livestock. None of those things is a taxable event.
That is less viable as a way to live today, but it is still possible, perhaps while waiting for a better government that reduces the taxes or other laws that are adversely affecting you. And you don’t have to be an 1825 settler in the American west. You could be living in a suburban fixer-upper, renovating it to make it worth more. Succeeding at that is not a taxable event. If you rent it out and the rental income is entirely canceled out by depreciation, interest, and operating expenses, you owe no income taxes.
Guy who built two homes a year and kept them
I wrote about one guy who built two homes a year from scratch then rented them out. He hired out parts of the work like digging the basement, but did most of the work himself. He worked, but did not get paid for it in a form that is taxed—either cash or in kind—goods or services bartered for his labor. He is paid in the form of a property he owns becoming more valuable as it is changed from raw land to a home. That is not a taxable event.
Family that built motels themselves and kept them
I read about an extended family once that built motels, retained ownership then rented them out in the Chicago area. Because it was all family members who were joint owners, they could not be unionized or taxed/regulated in many ways.
Family-owned ethnic restaurants
In Australia, they have a high minimum wage—around $15. As a result, they have no cheap chain restaurants like Denny’s or Appleby’s, except for small, family-owned and operated restaurants like Chinese or Indian and so on. Regulations may technically apply to them, but no workers in such families complain to the authorities. Or they are exempt because they are owners, not employees.
Again, read the law. Almost all laws, including tax laws, exempt many people implicitly or explicitly.
C. The following are usually exempt from laws:
• small in size
• short in duration
• small in dollar amount
• mobile versus stationary
What are the underlying principles of exemption from laws?
• Elected officials do not like to piss off large numbers of voters—so many laws exempt the little guy, the consumer—like the Obamacare law that only applies to companies with at least 50-full-time employees. Rent control usually does not apply to one-to-four-family size buildings, especially if they are owner-occupied. Last time I checked, you could discriminate by race, creed, national origin if you were renting out a duplex in which you lived. I see no business opportunity in that. But it is a stark example of what surprising exemptions you find if you read the law.
• Elected officials seek the fast buck not the last buck. When they want revenue, people who are small in terms of income or mobile, or operating for only a short period are too inefficient to tax or regulate. Federal Express started using only executive jets. Why? All airline fares, including cargo rates, used to be regulated by the Federal government. FedEx wanted to charge lower rates for cargo than allowed. But the law only applied to large jets. By using executive jets, they were exempt. Those jets were extremely inefficient. They had to fly squadrons of them side by side to Memphis every night from all over the U.S. Each had its own crew. But the profit margin was so high, and there was no unregulated competition, that it was profitable. As Fed Ex expanded, perhaps because it expanded, the law was repealed. FedEx immediately switched to flying large, efficient jets. That is a classic example of using small size—planes—to be exempt. The law did not exempt low-income income companies, only those that used small aircraft. They did not exempt those with only a few aircraft, only those with small aircraft, no matter how many of them they had.
Like I said, read the law. If you can do it, operate in a way that is exempt from the law.
• The Bill of Rights exempts some businesses like mine (freedom of speech and press) and religion and at least core gun owning by hunters and such.
• Under federal law, things that do not cross states lines are supposedly exempt—although the courts have stretched that embarrassingly at times. Another airline, Southwest, initially operated only in Texas and CA. Why? They wanted to charge low fares, like FedEx, but such fares were illegal. How were they exempt? Their planes did not cross state lines. I had supper with their founder, Herb Kelleher, when I was co-president of the New Enterprise Club at Harvard Business School. We asked what about New York State, which has a lot of people? No can do. When you land at JFK or LaGuardia, you have to orbit over NJ and Connecticut. That would cross state lines.
• Short durations often exempt you if you stay for less than a certain period of time. For example, living in a country usually requires lots of paperwork, unless you are not going to stay for more than 90 days. Americans can live in almost all the countries of the world—if they leave before the 91st day. Often they can come back again during the same year as long as no one visit lasts longer than 90 days. You are a resident in many jurisdictions for tax purposes if you live there more than half of the year, but not if you are there less than half the year
Read the laws. If you are mobile, agile, small, quick, live off speech or the press, etc., etc. you are exempt from many laws and taxes. And that is a lot less complicated than changing countries.