102517 SVC Transcript
The Bauman Letter Weekly October 25, 2017 Transcript Good day, and welcome to The Bauman Letter Weekly! This is Ted Bauman speaking to you from Atlanta, Georgia. I hope you are having a good week. I’ve got a couple of questions this week that I want to address. Two of them are oriented toward foreign issues, and I’ll address those first before coming back to domestic issues. The first one is from someone who writes: My mom was born in Canada. Can I become a citizen of Canada? If I become a dual citizen, do I have to pay taxes in both countries? What’s the best country you consider to have citizenship in besides America? Is it expensive to become a dual citizen? Well, first of all, let’s address the question of your previous citizenship. Whether a person is a Canadian citizen by descent depends on the legislation that was in place at the time that you were born. Now, I have a pretty good guess that you are someone who falls into the category of having been born before April 2009. In that case, if your mother was a Canadian citizen who was born or naturalized in Canada and has not actively renounced her Canadian citizenship, you can become a Canadian citizen simply by applying. Now, if your mother is a Canadian citizen by descent — i.e., she is also somebody who acquired Canadian citizenship when born outside the country and one of her parents was a Canadian citizen — then you would not be able to acquire citizenship so easily. But, as you say, your mom was born in Canada, so you should be able to acquire Canadian citizenship pretty straightforwardly. You would approach the Canadian embassy or consulate here in the United States, and they’d give you the paperwork to fill out. And, since you are legally entitled to Canadian citizenship, you are probably already regarded as a Canadian citizen under their laws.
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Now, let’s talk about paying taxes. Generally speaking, the United States has what are known as double-taxation agreements with most of the major countries in the world. Those agreements basically say that when a citizen or taxpayer of one country lives and works in another country, then the taxes that they pay to that second country apply toward the taxes that they owe in the first. So, in your case, if you were to become a Canadian citizen, move to Canada, get a job there and earn money there, you would pay taxes to the Canadian government just as any Canadian would. But, as a U.S. citizen, you would also be obligated to file tax returns with the IRS, because we are taxed on our global income — i.e., the money that we make anywhere in the world (it doesn’t matter where) is taxed. We’re one of the few countries in the world that does this. But the United States does allow you to deduct the cost of most of your Canadian taxes from your U.S. taxes. So, there should be an offset. Bear in mind that this only applies to earned income. If you have investment income in Canada, that is not something that can necessarily be written off or applied to your U.S. tax obligation. It can be in certain circumstances, but not in every circumstance. So, the short answer is that you should not experience an increase in taxes, although you will be increasing the complexity of taxes, because you’ll now be filing in more than one country and will have to provide supporting documentation for taxes paid to the other country. In terms of what is the best country in which to have citizenship, I really can’t say. In my Plan B Club, I provide a questionnaire that you complete to see what kind of country you might like to live in. But, honestly, it really comes down to what you value most. Certain countries are attractive from some perspectives and not from others. For example, I know a lot of investors who are really crazy in love with places like Singapore, or even Hong Kong, because they say the business regulation there is so light, and taxation is so well-organized and reasons like that. There are all kinds of reasons, from a wealth-management perspective, that they like living there. But, honestly, I have been to both of those places. It’s just not my kind of thing to be living on an island crowded with people where you have to live in tall tower 2
blocks, and there’s very little nature except for the ocean. So, you know, people go to different places for different needs, and they have different values. The main thing is to understand yourself and know what it is you value. For example, I went to South Africa as a young man and became a citizen there. Today, I still have a sense of yearning to be there because I like wide open spaces. I like a bit of a frontier mentality. I like the challenge of a young society that is trying to find its way and makes mistakes and is learning. I like the excitement and the challenge of helping a country figure things out. But that’s not for everybody. A lot of people probably would find that too tumultuous or even dangerous. So, it really comes down to what you like and what kind of person you are. My recommendation is “know thyself,” and, from there, you can work out what country you should be a citizen of. Having said that, Canada’s a great place. It’s a great country. I love Canadians, and I think you’d probably be very happy with a Canadian passport. In terms of expense, it depends if you are acquiring citizenship in Canada. Because you are a child of a Canadian citizen born in Canada, it shouldn’t be too expensive. Basically, I take it from my reading that you are, in fact, already a Canadian; it’s just a question of proving it. There will be some fees, I’m sure, but it won’t be too prohibitive. On the other hand, if you want to become a citizen of a country that has a citizenship by investment program, like many of the islands in the Caribbean, that could be very expensive. It could cost you a quarter of a million to a half-million dollars to acquire citizenship in those countries. Then there are other countries like Austria where you can conceivably acquire citizenship through investment or through some sort of a contribution that costs you tens of millions of dollars. Similar things happen in the U.K., where you can acquire residence through investment, but it costs you a lot. It really depends on the country. I think, in your particular situation, you will find it pretty easy, and it probably won’t cost you very much. On to the next question: 3
I was wondering if you know about the so-called BRICS alliance and if they’re coming out with a new currency backed by gold. Will it be one currency that all those countries will be using? When will that happen, and would it be advisable to get some? I’m not too sure where this idea comes from. Let’s start by defining what we mean by BRICS, which stands for Brazil, Russia, India, China and South Africa. The idea is that those are five countries that have large, growing economies that have the potential to become an alternative to the United States and Western Europe as the center of economic gravity in the world today. Furthermore, the idea is that those countries might come together and work together to try to create an alternative currency that they can then use to trade with each other, freeing them from having to trade in the U.S. dollar, which is the de facto global currency. Part of this idea came from an exercise about three or four years ago where Vladimir Putin orchestrated a conference where these countries got together and decided to establish a development bank that was going to cater to the needs of these five countries. The idea was that they could put money together and, instead of having to go to the IMF or World Bank to borrow money, they would get it from each other. The problem is that nothing has come of this from what I can see. I’m not aware that this has progressed to the stage where any loans have been made. But the idea that they are going to get together and create a currency backed by gold is ludicrous, because none of these countries have any tradition of wanting their currencies to be rolled back to that old-fashioned way of looking at what the currency is supposed to be. In fact, they are quite the opposite. The Chinese, the Russians, the South Africans … all of them have been very aggressive in manipulating their currencies precisely so they don’t fall into the trap of being pegged to gold. There’s no history that I’m aware of that would encourage those countries to do that. My guess is that you’re probably hearing this from some source that is just speculating, or maybe even just wishful thinking. I don’t think that we’re going to 4
see BRICS announcing a new currency. In fact, I doubt whether they will actually ever come together to form a coherent alliance because, frankly, the differences between them and the difference of interest between China as an exporter and Brazil as an exporter competing with each other is pretty significant. I would be very surprised if all those countries were able to come together and find some sort of common ground that would allow them to start acting like a mini United Nations. My next question is from someone who is asking about the article in my November edition of The Bauman Letter. The question is in regard to the notion of supplyside economics and the idea that tax cuts can generate economic growth and pay for themselves by increasing investment and economic activity. Now, I know that it’s something that a lot of us would like to believe … that there is this relationship where the government could cut taxes on corporations and on high-net-worth individuals, and, in turn, that would induce those people to invest in job-creating enterprises. But the problem is that there is simply no historical evidence that this relationship actually exists. In fact, if you talk to anybody who is actually involved in business or who is involved in anything other than financial speculation — in other words, somebody involved in a manufacturing enterprise or in a service-providing enterprise, like a restaurant or retail chain — they will tell you the same thing. That is, whether I invest or not, whether I create jobs or not depends on whether there is demand for my goods and services. If that’s not there, then there is no reason for me to invest. Simply by investing, I’m not going to create demand for my own goods, as that only happens if everybody invests all at once … and that doesn’t happen unless they see an increase in demand. The idea behind supply-side economics is that if you cut taxes, then you will see an increase in demand across the board, because people will have more money in their pockets, and they will go and buy stuff, and that will lead business people to invest and create jobs to meet that increased demand. The problem is that the theoretical basis for this idea is something known as the Laffer curve, which I discuss in the November edition of The Bauman Letter. The 5
Laffer curve says that there is a tax rate at which you will maximize revenue for the government by balancing taxation against any ways that it might discourage enterprise or discourage work. It states that you can actually reach an optimal tax rate that will produce the maximum revenue for the government and produce the least amount of interference and distortion in the private markets. It doesn’t say what that rate is, and it certainly doesn’t say that cutting taxes for corporations and high-net-worth individuals will, on its own, create demand. There’s a very good reason for that. If you cut taxes for high-net-worth individuals, they’re not going to go out and buy tens of thousands of cheeseburgers at McDonald’s or buy hundreds of suits from Joseph A. Banks. Individual households don’t consume in that way. They only buy things that they need, and the rest goes into speculative financial investment. By contrast, if you were to cut taxes on the majority of people in this country who are living hand-to-mouth, then you would possibly see an increase in demand for goods and services, and that would produce investment and thereby produce jobs, which would, in turn, increase incomes. The problem we have in the United States is that a lot of people already don’t pay taxes because they don’t make enough income to be able to do so. At the same time, a lot of people still have enormous debt, no matter how much they save in taxes. So, to my mind, the issue is actually misplaced. We shouldn’t be focusing on taxation as the main issue that we need to grapple with as a country. We need to get people out of debt. We need people to not accumulate enormous debt to go to universities and to get education. We need to end what has become a speculative spiral of cheap credit or chasing housing prices, which leads to ever larger loans, which saddles people with even more debt. Remember that every penny paid in interest on borrowed money goes to large financial firms and investors who already have more money than they could ever need. If you’re able to keep that money in your pocket, then you can spend it on things. You can buy a car or send your kid to college or all kinds of things that would boost demand and therefore boost wages and increase job creation. 6
So I think, instead of focusing on taxes, we should be focusing on the debt problem in the United States and figuring out how to live with as little debt as we possibly can. It has caused enormous problems for our country. It’s led to massive transfers of wealth that are unhealthy, and it’s really holding back our economic growth. Well, that’s all from me for this week. I’ll talk to you again next week. This is Ted Bauman signing off.
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Now, let’s talk about paying taxes. Generally speaking, the United States has what are known as double-taxation agreements with most of the major countries in the world. Those agreements basically say that when a citizen or taxpayer of one country lives and works in another country, then the taxes that they pay to that second country apply toward the taxes that they owe in the first. So, in your case, if you were to become a Canadian citizen, move to Canada, get a job there and earn money there, you would pay taxes to the Canadian government just as any Canadian would. But, as a U.S. citizen, you would also be obligated to file tax returns with the IRS, because we are taxed on our global income — i.e., the money that we make anywhere in the world (it doesn’t matter where) is taxed. We’re one of the few countries in the world that does this. But the United States does allow you to deduct the cost of most of your Canadian taxes from your U.S. taxes. So, there should be an offset. Bear in mind that this only applies to earned income. If you have investment income in Canada, that is not something that can necessarily be written off or applied to your U.S. tax obligation. It can be in certain circumstances, but not in every circumstance. So, the short answer is that you should not experience an increase in taxes, although you will be increasing the complexity of taxes, because you’ll now be filing in more than one country and will have to provide supporting documentation for taxes paid to the other country. In terms of what is the best country in which to have citizenship, I really can’t say. In my Plan B Club, I provide a questionnaire that you complete to see what kind of country you might like to live in. But, honestly, it really comes down to what you value most. Certain countries are attractive from some perspectives and not from others. For example, I know a lot of investors who are really crazy in love with places like Singapore, or even Hong Kong, because they say the business regulation there is so light, and taxation is so well-organized and reasons like that. There are all kinds of reasons, from a wealth-management perspective, that they like living there. But, honestly, I have been to both of those places. It’s just not my kind of thing to be living on an island crowded with people where you have to live in tall tower 2
blocks, and there’s very little nature except for the ocean. So, you know, people go to different places for different needs, and they have different values. The main thing is to understand yourself and know what it is you value. For example, I went to South Africa as a young man and became a citizen there. Today, I still have a sense of yearning to be there because I like wide open spaces. I like a bit of a frontier mentality. I like the challenge of a young society that is trying to find its way and makes mistakes and is learning. I like the excitement and the challenge of helping a country figure things out. But that’s not for everybody. A lot of people probably would find that too tumultuous or even dangerous. So, it really comes down to what you like and what kind of person you are. My recommendation is “know thyself,” and, from there, you can work out what country you should be a citizen of. Having said that, Canada’s a great place. It’s a great country. I love Canadians, and I think you’d probably be very happy with a Canadian passport. In terms of expense, it depends if you are acquiring citizenship in Canada. Because you are a child of a Canadian citizen born in Canada, it shouldn’t be too expensive. Basically, I take it from my reading that you are, in fact, already a Canadian; it’s just a question of proving it. There will be some fees, I’m sure, but it won’t be too prohibitive. On the other hand, if you want to become a citizen of a country that has a citizenship by investment program, like many of the islands in the Caribbean, that could be very expensive. It could cost you a quarter of a million to a half-million dollars to acquire citizenship in those countries. Then there are other countries like Austria where you can conceivably acquire citizenship through investment or through some sort of a contribution that costs you tens of millions of dollars. Similar things happen in the U.K., where you can acquire residence through investment, but it costs you a lot. It really depends on the country. I think, in your particular situation, you will find it pretty easy, and it probably won’t cost you very much. On to the next question: 3
I was wondering if you know about the so-called BRICS alliance and if they’re coming out with a new currency backed by gold. Will it be one currency that all those countries will be using? When will that happen, and would it be advisable to get some? I’m not too sure where this idea comes from. Let’s start by defining what we mean by BRICS, which stands for Brazil, Russia, India, China and South Africa. The idea is that those are five countries that have large, growing economies that have the potential to become an alternative to the United States and Western Europe as the center of economic gravity in the world today. Furthermore, the idea is that those countries might come together and work together to try to create an alternative currency that they can then use to trade with each other, freeing them from having to trade in the U.S. dollar, which is the de facto global currency. Part of this idea came from an exercise about three or four years ago where Vladimir Putin orchestrated a conference where these countries got together and decided to establish a development bank that was going to cater to the needs of these five countries. The idea was that they could put money together and, instead of having to go to the IMF or World Bank to borrow money, they would get it from each other. The problem is that nothing has come of this from what I can see. I’m not aware that this has progressed to the stage where any loans have been made. But the idea that they are going to get together and create a currency backed by gold is ludicrous, because none of these countries have any tradition of wanting their currencies to be rolled back to that old-fashioned way of looking at what the currency is supposed to be. In fact, they are quite the opposite. The Chinese, the Russians, the South Africans … all of them have been very aggressive in manipulating their currencies precisely so they don’t fall into the trap of being pegged to gold. There’s no history that I’m aware of that would encourage those countries to do that. My guess is that you’re probably hearing this from some source that is just speculating, or maybe even just wishful thinking. I don’t think that we’re going to 4
see BRICS announcing a new currency. In fact, I doubt whether they will actually ever come together to form a coherent alliance because, frankly, the differences between them and the difference of interest between China as an exporter and Brazil as an exporter competing with each other is pretty significant. I would be very surprised if all those countries were able to come together and find some sort of common ground that would allow them to start acting like a mini United Nations. My next question is from someone who is asking about the article in my November edition of The Bauman Letter. The question is in regard to the notion of supplyside economics and the idea that tax cuts can generate economic growth and pay for themselves by increasing investment and economic activity. Now, I know that it’s something that a lot of us would like to believe … that there is this relationship where the government could cut taxes on corporations and on high-net-worth individuals, and, in turn, that would induce those people to invest in job-creating enterprises. But the problem is that there is simply no historical evidence that this relationship actually exists. In fact, if you talk to anybody who is actually involved in business or who is involved in anything other than financial speculation — in other words, somebody involved in a manufacturing enterprise or in a service-providing enterprise, like a restaurant or retail chain — they will tell you the same thing. That is, whether I invest or not, whether I create jobs or not depends on whether there is demand for my goods and services. If that’s not there, then there is no reason for me to invest. Simply by investing, I’m not going to create demand for my own goods, as that only happens if everybody invests all at once … and that doesn’t happen unless they see an increase in demand. The idea behind supply-side economics is that if you cut taxes, then you will see an increase in demand across the board, because people will have more money in their pockets, and they will go and buy stuff, and that will lead business people to invest and create jobs to meet that increased demand. The problem is that the theoretical basis for this idea is something known as the Laffer curve, which I discuss in the November edition of The Bauman Letter. The 5
Laffer curve says that there is a tax rate at which you will maximize revenue for the government by balancing taxation against any ways that it might discourage enterprise or discourage work. It states that you can actually reach an optimal tax rate that will produce the maximum revenue for the government and produce the least amount of interference and distortion in the private markets. It doesn’t say what that rate is, and it certainly doesn’t say that cutting taxes for corporations and high-net-worth individuals will, on its own, create demand. There’s a very good reason for that. If you cut taxes for high-net-worth individuals, they’re not going to go out and buy tens of thousands of cheeseburgers at McDonald’s or buy hundreds of suits from Joseph A. Banks. Individual households don’t consume in that way. They only buy things that they need, and the rest goes into speculative financial investment. By contrast, if you were to cut taxes on the majority of people in this country who are living hand-to-mouth, then you would possibly see an increase in demand for goods and services, and that would produce investment and thereby produce jobs, which would, in turn, increase incomes. The problem we have in the United States is that a lot of people already don’t pay taxes because they don’t make enough income to be able to do so. At the same time, a lot of people still have enormous debt, no matter how much they save in taxes. So, to my mind, the issue is actually misplaced. We shouldn’t be focusing on taxation as the main issue that we need to grapple with as a country. We need to get people out of debt. We need people to not accumulate enormous debt to go to universities and to get education. We need to end what has become a speculative spiral of cheap credit or chasing housing prices, which leads to ever larger loans, which saddles people with even more debt. Remember that every penny paid in interest on borrowed money goes to large financial firms and investors who already have more money than they could ever need. If you’re able to keep that money in your pocket, then you can spend it on things. You can buy a car or send your kid to college or all kinds of things that would boost demand and therefore boost wages and increase job creation. 6
So I think, instead of focusing on taxes, we should be focusing on the debt problem in the United States and figuring out how to live with as little debt as we possibly can. It has caused enormous problems for our country. It’s led to massive transfers of wealth that are unhealthy, and it’s really holding back our economic growth. Well, that’s all from me for this week. I’ll talk to you again next week. This is Ted Bauman signing off.
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