A few weeks ago I went to the local mall here in Tartu to buy some dress clothes.  I am not what you would call a ‘suit kinda guy’.  But I was going to an investment conference in Zurich and thought the usual jeans and a t-shirt may be a bit too casual. 

Whenever I am at the malls in different countries, I enjoy looking around at what the locals spend money one.  In this mall of about 50 stores, there are 5 electronic stores and another 6 that sell mobile phones and accessories.  There are also shoe stores, clothing stores, luggage, jewelry, several food establishments, and a really nice bookstore.  Anytime I am at a mall, my thoughts go to consumption and taxation.

Lately I have been contemplating a major flaw in the US tax system.  We provide incentives for consumption and restrict production through our tax system.  Right now in the US if you put your money in a savings account you will earn less than 1% annually, not exactly a motivator to save.  And you can get a 30 year fixed mortgage on your house for 5% interest.  With money that cheap, that is a pretty good motivator to borrow.  We also have the highest corporate tax rate in the world and one of the highest personal progressive tax rates.  Companies are even taxed on dividends paid, and the investor is taxed again when he receives dividends!!!  We are taxing production and incentivizing consumption.

Contrast this with Estonia.  (Don’t get me wrong, they have their problems too, but the methodology of taxation is vastly different).  Estonian companies pay no corporate income tax!  If they retain earnings for reinvestment, there is zero tax.  Personal income is taxed at a flat 21% for all people regardless of level.  If a company pays shareholders dividends, they deduct the 21% from the dividend payment but the investor pays nothing additionally.  There is a 20% VAT (national sales tax) on all consumption.  You can borrow money at about 7% to buy a house, 20% to buy a car.  And you can earn 8% in your savings account.  The Estonian policymakers penalize you for consumption and reward you for savings.  Interesting concept…  Who do you think has a higher savings rate?

The point is the US tax system is backwards.  Just like the taxation of alcohol and cigarettes, the more you tax it, the less you get.  Do we want to keep taxing our productive activities like investing and saving money, and provide incentives for consumption?  Isn’t that what got us into this mess to begin with?

But more importantly, how do we profit from these situations and what is the implication for our asset protection planning?  Really, the options are virtually endless.  You can start by moving money into an offshore bank account and save and invest in another currency.  You can structure your business either domestically or offshore to provide you with the maximum tax advantages.  You can even move overseas to a low cost country where your money goes further.  In the near future I will discuss a couple of these strategies.

In the meantime, you should be considering how to implement your own asset protection planning strategy in order to minimize your risk and maximize your gain from this perverse tax system.  As stated before, there are several tools available to you depending on your level of wealth.  Call today for your free 30 minute consultation.