In the US, you have the highest corporate tax rate in the world, one of the highest progressive personal tax rates, tax on your savings, tax on your dividends (after they have already been taxed!!!), and tax on every other productive activity I can think of.
Here in Estonia, there is no corporate tax, 21% flat tax on personal income, no tax on savings, no capital gains tax, no estate tax but 20% VAT consumption tax. I’m not saying Estonia is perfect, but the tax methodology is quite different.
What is wrong with this comparison? Just like with alcohol and cigarettes, when you tax it, consumers use it less. It is the same with any method of taxation. When you tax something, you get less of it. So why do the policymakers in the US continue to tax productivity and incentivize consumption? I don’t know, but if any of you readers have any thoughts to this, I would like to hear it.
But the more important question is, what do we do about it? Fortunately, there are solutions. One thing you can do is to open an offshore bank account and start holding cash in foreign currency. I know of a bank here in Estonia that pays over 8% on its 12 month time deposits. And the EEK is fixed to the Euro. Does anyone know a bank in the US that pays 8%? Or even 2%?
Another option is to restructure your business overseas in a low or no tax jurisdiction and keep your retained earnings outside of the country. This is complex and requires a bit of work, but if your business is large enough, this can be a huge advantage.
Another option is to structure your life in such a way that you can continue to earn income in US dollars and move to a low cost country. For 2009, your first $91,500 in income is tax free for US citizens. If you are married and own your own business, you can pay your spouse the same amount plus there is a $15,000 housing allowance giving you nearly $200,000 in tax free income. Imagine cutting your expenses in half by living in a place like Costa Rica and eliminating or sigificantly reducing your tax burden. This creates the double whammy effect for your income.
While I realize the mentioned strategies may not be for you, there are options available. You just have to be diligent enough and take control of your life instead of having the government direct it for you. Live well.