A former professor of law at Columbia University, George Cooper (1979) claim that death tax is "a voluntary tax" since there are so many ways to legally avoid it. However, the truth is that all taxes are "voluntary" in the sense that if you really do not want to pay taxes there are ways to legally avoid all of them. We already saw in "Legal Taxation Reduction" that it is possible to move abroad and legally pay no income taxation. For example, you can move to a no labor income tax jurisdiction, like Dubai or Monaco, and have all your labor income coming from this place to be tax-exempt from labor income tax and most likely payroll tax too. However, you probably pay many other types of taxation, which you can legally avoid. According to the theory informally known as The Flag Theory, individuals should plant "flags" around the world to retain their wealth and increase their quality of life. For example:
- Capital income tax: If you have a capital income you should "plant a flag" in a place where does not tax capital gains, like Singapore or the Cayman Islands and buy bond and stock ETFs through these jurisdictions. This is more common than most people realize. As evidence of that, Luxembourg alone receives more portfolio investments than Japan. The Cayman Islands have one of the ten largest portfolio investment receivers in the globe (Hines, 2010). We do not recommend most individuals to buy dividend stocks, but if you do you should plant another "flag" in place with no dividend tax. (See "Capital Gains Tax" and "Trusts" for more).
- Inflation: is an indirect form of taxation since your cash decreases in value. In other words, you keep your money but you can now buy fewer goods and services with that money. Therefore, the effect of inflation and taxes is about the same. The first action against inflation is to not leave large amounts of cash parked in your checking account or under your bed. Many types of assets are great protections against inflation, such as stocks, inflation-protected bonds, real estate, and even gold. Although the last two investments cited have major negative features and should be avoided. (See inflation for more).
- Property Tax and Stamp Duty: Property taxes are usually charged annually and they are one of the hardest taxes to legally avoid, in case you do not want to move abroad. Even if you do not own a property, rent prices reflect property taxes. Moreover, it is much easier to send a stock or bond abroad than an apartment. Governments know that and so they decrease taxes on mobile assets to avoid capital flight and increase property taxes. In other words, the tax burden falls mostly on immobile factors, like real estate (Razin and Sadka, 1991). This is one of the main reasons why it is almost always a terrible decision to buy a property. Except on very rare occasions, your best financial choice is to only rent and invest widely between stocks and bonds. If you want to move abroad, some jurisdictions do not have property tax for expatriates, such as Monaco, Malta, Georgia, Fiji, UAE, Bahrain, Kuwait, Oman, Saudi Arabia, Cook Islands, Cayman Island, Dominica, Turks & Caicos, Seychelles, and Sri Lanka. Many countries also have a one-time real estate transfer tax called stamp duty, which usually ranges between 0-10% the price of the proprieties. Out of the 15 no-property tax countries cited previously, only 4 do not levy stamp duties: Georgia, Saudi Arabia, Cook Islands, and Kuwait.
- Consumption Tax: You should buy most of your goods and services (i.e. "plant flags") in places with a low consumption tax, e.g. sales tax, value-added tax (VAT), sin tax, use tax. Several people already do this by moving to places with low sales tax, especially after retirement (e.g. Gordon and Hines, 2002). Moreover, places like Belgium allow tourists to get a VAT refund of many goods when you are leaving the country, such as at the airport. This makes them great jurisdiction for shopping for expensive goods. In the US, five states do not have a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Therefore, one can drive or fly to these states, buy expensive products, and save significant amounts of money in that way. Additionally, globalization has made it rather simple to buy goods online (e.g. Alibaba and Amazon) in countries with low VAT, and several governments do not impose VAT at the border due to monitoring costs. A sin tax is another form of consumption tax that is levied on goods that are considered bad for the society from a respective government, like alcohol, coffee, sugar, gambling, pornography, fast food, and/or soft drinks. Consequently, you are probably better off buying alcohol in Southeast Asia and cigarettes in Georgia, Armenia, Serbia, and Montenegro, than in most of the world. Lastly, use tax basically only exists in the US and it has been historically evaded (Trandel, 1992).
- Tariffs: An international trade tariff is a tax on products being imported which increase the price of the good for consumers. Historically, Latin American countries have very high tariffs, compared to the world's average. Consequently, many Brazilians and Argentinians wait to buy several goods (e.g. electronics) when they travel to places with lower tariffs, like the US.
- Inheritance tax, estate tax, gift tax, generation-skipping tax: Some countries also tax intergenerational wealth transfers, especially after death. In other words, for the next generation to own your assets after your death, they must pay a tax. If you care about the wealth of the next generation, you may also make plans of legally moving your assets to your sons, daughters, or chosen ones before the government takes a big bite on it. For example, basically, all countries allow you to transfer a certain amount per year to your heir without having to pay tax on it. If you move the maximum allowed amount for like 10-20 years, this can equal more than a million dollars in taxes legally avoided. (See "Death Taxes", "Gift Tax", "Trust" and "Generation-Skipping Tax" for more advanced strategies).
- Wealth tax: A handful of jurisdictions also tax great amounts of individual wealth. If you are above the established wealth threshold, you may want to move your fiscal residence to a place with no wealth tax. Or you may want to reallocate your investments to assets that are harder to be valuated, like human capital, rare paintings, or sculptures. Or you may want to set up trusts or partnerships to de jure devalue your assets, leading to lower wealth tax (See "Wealth Tax" for details).
Many people already follow these strategies within countries when states or regions have significant autonomy over tax policy. For example, studies have shown that Americans move to US states with low sales tax, inheritance tax, and estate tax (Bakija and Slemrod, 2004). A similar situation is observed in Switzerland where citizens move to places with lower income taxation (Liebig et al, 2007; Kirchgassner and Pommerehne, 1996). However, relatively few people do all these tax minimization strategies on an international level. Recently, a new generation of workers who can earn income online, and therefore have geographical freedom, have been trying to plant their "flags" around the world to legally decrease taxes, i.e. digital nomads. Of course, it is almost impossible to reduce all these taxes to zero. The most important part is to aware of all the major taxes and the possibility to legally avoid them.
- Bakija, Jonathan, and Joel B. Slemrod (2004), ‘‘Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns,’’ NBER Working Paper No. 10645.
- Cooper, George, (1979). A Voluntary Tax? New Perspectives on Sophisticated Tax Avoidance Studies of Government Finance, Washington D.C.: The Brookings Institution.
- Gordon, Roger and James Hines (2002). “International taxation,” in A. Auerbach and M. Feldstein (eds.), Handbook of Public Economics, Volume 4, North-Holland, Amsterdam.
- Hines, James (2010). Treasure Islands. Journal of Economic Perspectives. 24, no. 4: 103-25.
- Kirchgassner, Gebhard, and Werner Pommerehne (1996). ‘‘Tax Harmonization and Tax Competition in the European Union: Lessons from Switzerland,’’ Journal of Public Economics, 60, 351–371..
- Liebig, Thomas (2004). A New Phenomenon – The International Competition for Highly-Skilled Migrants and its Consequences for Germany. Stuttgart/Berne/Vienna: Haupt.
- Razin, A., and E. Sadka (1991), “International tax competition and gains from tax harmonization”, Economics Letters 37:69-76.
- Trandel, G.A. (1992), “Evading the use tax on cross-border sales: Pricing and welfare effects”, Journal of Public Economics 49:313-331.