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Issue 18
Ramblings, thoughts and occasional sense from the Eastern Caribbean >>
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The HEART of the Matter
by Howard Rich

When my wife, Andrea, asked me what this month’s Rich Report was going to be about, I replied, “Politics.” And she promptly threatened to pull the plug on my trusty laptop. Rightly so, I might add – because this column is about economics, not politics.

Specifically, it’s about offshore opportunities for serious investors – or, “high net-worth individuals,” as some people like to call them. That’s the way I like it. That’s the way you, my readers, like it. And that’s the way we intend to keep it.

But, occasionally, the two worlds – economics and politics – collide. When they do, it’s invariably because the latter has intruded upon the former – to the decided detriment of everyone who works hard to pay their bills, from Main Street to Wall Street; down on the factory floor, or up in the executive suite.

And since my beat is economics, I’m not going to sit idly by like Voltaire’s Dr. Pangloss making believe that “all is for the best in the best of all possible worlds.” Not when the salons in Washington, D.C. continue to treat serious investors like the Eighth Plague.

And that brings me to the “Heroes Earnings Assistance and Relief Tax Act of 2008.” Just in case you missed it – and the bill’s sponsors would deeply resent it if you did – the acronym is HEART. As in, “Anyone with a heart would vote for this bill.” Move over Madison Avenue, the real slicksters are on Capitol Hill.

The bill’s sponsors tell us that the purpose of the bill is “to provide tax relief to the men and women in our nation's armed services and others volunteering service on behalf of the United States, including Peace Corps volunteers and AmeriCorps volunteers.” So far, so good.
The Rich report

Then, they add, the tax relief will be offset by a special punitive “tax reform that closed the tax loophole that allowed defense contractor KBR to avoid paying its fair share of taxes.” For the uninitiated, the bill’s proponents harbor deep-seated animosity towards a government contractor called KBR that used the current tax code to legally escape paying Medicare and Social Security. Hence, a special new law ostensibly to punish the wrong – rather, make that right – doers who henceforth, under HEART, will be converted into wrong doers.

I use the word “ostensibly” because, in fact, the real intent of the HEART Act is not just to punish KBR. That’s only a happy by-product for the politicians. Nor is it really aimed at rewarding our fine service men and women who deserve all the tax breaks they can get, and more. Otherwise, the rewards provision could have been passed on its own by a quick voice vote and sent to the President months ago rather than being tucked into a convoluted tax measure.

No, the real purpose of the HEART Act is to sic the IRS on “certain high net-worth individuals” who dare to diversify their portfolios beyond U.S. borders. Specifically, its purpose is to inflict a confiscatory “exit tax” on expatriates (former U.S. citizens) who have had the gall to make money through savvy worldwide investments.

And it’s a shot over the bow to every “high net-worth” American who still thinks his money is his own.

Now, please understand: The problem with the so-called HEART Act is not that it’s Democrat or Republican, liberal or conservative, anarchist or jingoistic. Frankly, I can contend with all of those.

It’s that it’s a punitive attack upon honest, hardworking citizens who decide they want to exercise their right to leave America permanently and choose to take their own money with them. It violates the U.S. Constitution, recent rulings by the European Court of Justice, and the U.N. Charter. And, it is class warfare at its worst.
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Here’s how one of its sponsors boasts of his bill on his own website. You can almost see the vitriol against “high net-worth individuals” (that’s right: the very people for whom this column is written) dripping from the sponsor’s pen:
“The HEART ACT would revise tax rules on expatriation. American citizens and long-term U.S. residents are subject to tax on their worldwide income. Under current law, taxpayers can avoid taxes by renouncing their citizenship or terminating their residence. The Heart Act would tighten current law rules to ensure that certain high net-worth taxpayers cannot renounce their citizenship or terminate their residence in order to avoid U.S. taxes."
“Under this provision, high net-worth individuals would be treated as if they sold all of their property for its fair market value on the day before such individual expatriates or their residency would be terminated. The gain would be recognized to the extent that the aggregate gain recognized exceeds $600,000 (which will be adjusted for cost of living in the future).”

In short; If you want to leave this country, go right ahead – but don’t think you’re taking your money with you.

Now, I have to tell you that this onerous form of confiscation is not without precedent. As former Congressman Robert Bauman warns in his excellent expose of the HEART Act, it echoes the notorious “departure taxes” that stripped Jews of their property before they were allowed to escape Nazi Germany.

More recently, it was one of Stalin’s favorite tools for oppressing those fleeing the Soviet Union. In the early 1960s, it was Castro’s mean-spirited method for dealing with those who chose to leave his “people’s paradise.” An in certain African totalitarian countries, it has long been de rigueur.
The Rich Report

Yet, as bad as all of that is, for serious investors, it gets even worse. And, I think that some of those reading this column know what’s coming.

In government programs, there is what my good friend Bill Wilson, the executive editor of the award-winning publication The Daily Editorialist, calls a “Ratchet Effect.” In short, government programs only go in one direction – from smaller to larger, from minutely invasive to totally pervasive. And that’s the single greatest danger of the HEART Act.

If President Bush signs it into law (and the reason the “exit tax” was buried in non-germane legislation to help veterans was to force him to do so) … and if it does not produce a maelstrom of protest from the investment community … it is a significant escalation of the unbridled assault on “high net-worth individuals” who invest their money offshore.

It’s an assault that actually started in earnest in May of 2006 with the signing into law of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPARA). (There they go again with one of those warm and fuzzy titles for a piece of legislation that actually eviscerates its intended target – the international investor). While attempting to give the appearance of the “prevention and reconciliation” of tax increases, TIPARA actually changed the IRS code to nearly quadruple the taxes on foreign earned income.

Here’s how the respected journal Eurojuris International explained it:
“For example, an individual with US$100,000 of foreign earned income and housing exclusion and with US$20,000 in other taxable income (after deductions) would be subject to regular tax on that US$20,000 at the rate or rates applicable to taxable income in the range of US$100,000 to US$120,000.
Therefore instead of paying a tax of US$2,270 at rates of 10% on the first US$1,460 and 15% on the excess over US$1,460, the taxpayer pays US$5,003 at rates of 25% on the first US$19,950 and 33% on the excess over US$19,950. This is a big “boo”. If the taxpayer is also subject to the AMT, the “boo” is bigger.”

For three years running – dating back to the passage of TIPARA -- the high-tax contingent in Congress inserted the exit tax into a variety of bills, only to have it stripped out in Senate-House conference committees. Then, this year, without the benefit of public hearings, it was sneaked into the bill by the Senate and House conferees themselves and eased to final passage with record-setting speed by a non-recorded voice vote. The President, of course, will sign it into law.

So, what’s a serious investor to do? In this writer’s opinion, you have three choices:
(1) You can dismiss the new law as just punishment for those who have the gall to renounce their citizenship;

(2) You can ignore it all together; or

(3) You can “read the handwriting on the wall” and realize that once the HEART Act finishes digesting its expat appetizer, this voracious monster will look around for its main course: “high net-worth individuals” who haven’t been smart enough to get their investments offshore before the final curtain falls.

The good news is, if you choose the latter course, you need only learn a few simple Spanish words for “offshore assets protection”: Spanish words like “Costa Rica,” “Panama,” “Honduras,” “Dominica,” “Martinique,” and … well, I think you get the picture.

Before I bring this column to a close, you need to know “the rest of the story.” The HEART Act’s primary sponsor, whose website I quote above, is a gentleman you might have seen on the nightly news lately. His name is Barak Obama. His presumptive opponent in November, John McCain, also voted for the bill. And with that, this particular “high net-worth individual” is now going to pull the plug on a larger percentage of my domestic portfolio and further diversify beyond U.S. borders. Comprende? See you next month.
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April 2008
---> Read More
June 2008
I`m going to start off this month`s column by saying something that may sound almost heretical to a lot of serious investors (that`s right, the very folks I write it for): Investing in offshore properties is something akin to a beauty contest. Now, before you take umbrage and turn away in indignation, allow me to add a corollary, if I may: Which is something equity investors do every time we pick a stock. And some do quite well, I might add. ---> Read More
May 2008
My good friend Harry is not the altruistic type. So, when he asked me to meet him for lunch to discuss my first Rich Report, I knew who was paying. I suggested Hanratty’s, a modest uptown establishment. He countered with The Tavern on the Green. Hence, I soon found myself staring out across the grand expanse of Central Park and, of course, picking up the check. ---> Read More
April 2008
This is my first column for, so allow me to introduce myself. My name is Howard Rich. My friends call me Howie, and I hope that in the months ahead, you will come to do the same. I am a commercial real estate investor and have been for almost 40 years. Most of my success has been in Manhattan, though in recent years I have spread my investments throughout the U.S. ---> Read More
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