Written by David S. Lesperance

Well it looks like the U.S. President and Congress have decided to extend the Bush tax cuts for two more years for ALL taxpayers. This only happened after the President and Democratic members of Congress finally relented on their previous demand that the “Golden Geese” (i.e. top 1% of taxpayers) not be included in this extension.

So what has been the reaction of the Golden Geese?

So far, the feedback that I have received from my Golden Geese clients is that they feel like they have been granted two more years of runway in order to arrange their orderly legal departure from the U.S. tax net. This feedback is from Golden Geese of all political stripes because they acknowledge certain Facts:

1. The U.S. tax revenue model is very skewed and relies on the 1% Golden Geese for over 40% of the total federal individual tax burden. This is situation is even more skewed at the state level, read this WSJ blog;

2. The fiscal needs of the U.S. government are dramatically increasing simply because an aging population will be placing ever greater demands on Social Security, Medicare, and Federal Government retiree benefits. Banning earmarks, cutting defense spending, and other expense cuts are just rearranging the deck chairs on a ship which is on a collision course with these fiscal icebergs. The reality is that neither party currently has the political will to address the problems that will be caused by these sacred cows; and as a result

3. When the U.S. federal and state governments look for the additional money they will need, they will turn to their best customers…..the Golden Geese. This reality is confirmed by the almost universal agreement by both Republicans and Democrats that this tax cut extension was only temporary in order to avoid the risk of a double-dip recession;

Furthermore, for Golden Geese as for everyone, their perception is their reality. While the above are agreed upon Facts, the following are the perceived realities that my Golden Geese clients see:

1) If a Golden Goose wants to address a societal need or problem, government is not a very efficient means of execution. They feel that every tax dollar saved, is another dollar to put into a strategic philanthropic vehicle (either their own or outside existing ones) which will be a more effective, sustainable and accountable method of addressing the need; and

2) If an individual Golden Goose ever had thoughts of engaging in tax evasion, they know that in a post UBS world this is not a smart thing to do, as can be read on my website. Those who were foolish enough to try this in the past, read this Bloomberg article for some examples, are now paying the price in taxes, interest, penalties. In addition, the threat or realty of incarceration along with the personal humiliation of wearing the scarlet letter of “tax evader” is just too high a price to pay for these types of games.

The bottom line is that until politicians and voters tackle the three Facts outlined above, their will continue to be an acceleration of the phenomena known as “The Flight of the Golden Geese”!

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Written by David S. Lesperance

A US hedge fund client who had been toying with the idea of setting up a personal and business back-up plan finally hired me this week. What was the “tipping point” for him in moving forward? Specifically he cited the recent subpoena request made on several high profile hedge funds, including Steven Cohen’s SAC Capital [READ MORE HERE] seeking information about their relations with outside researchers regarding pretty routine “channel checking” due diligence procedures [READ MORE HERE]. He noted that in light of the Madoff case, the power to issue subpoenas to even junior SEC officials to go on “fishing expeditions” had been vastly increased. While his fund had not been served in this round of requests, he did indicate that at a previous hedge fund he worked at, he had seen first-hand the enormous costs to answer a general subpoena. Millions were spent on legal fees to review a room full of documents; determine which may be relevant; and then have endless meetings with officials to discuss why certain documents were produced and why others were not. In addition to legal fees, the disruption cost and loss of reputation (Investors thought “Where there is smoke there must be fire!”) was incalculable. At the end of that fishing expedition, no charges were ever made but the damage to the fund had already been done. His conclusion is that, for hedge funds and many other types of businesses, operating in the US was becoming Kafka-like and financially unviable. His solution, just like his computer system, he was going to set up a “back-up plan” for himself, his family and his business.

My discussion with him prompted me to revisited a recent issue of The Economist which had a cover story article [READ MORE HERE] which underscored this reality for my American clients. The article examined why this was happening and concluded that the high US incarceration rates run counter to the claims of being “the land of the free”. Violent criminals aside, there are often cases where prosecutions and punishments are grossly disproportionate to the social ill they are trying to prevent. High net worth US citizens are often the targets of unfair civil lawsuits with the simple intent to push them into an out of court settlement to keep the legal glare away from media and shareholders. I often quote the statistic that over 90% of civil litigation worldwide occurs in the US and it always creates a jaw-drop moment. Now they also have to look at government actions which may have more to do with abuse of power or making a name for an elected official as “law and order” than with any genuine attempt to protect society from wrongdoing. Having the IRS place a neon target on your back is distraction enough. If the SEC or other government agencies can also subpoena at will, the exit gates out of the US may become as busy as the entry gates to the prisons.

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