Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.
President Obama met with the newly elected President of Mexico, Enrique Pena Nieto yesterday. While the press focused on the Administration’s talking points for discussions on a wide range of issues from energy to climate change, the real concern is that the Mexican economy is far outperforming the U.S. and the new immigration concern is increasingly from Americans illegally moving to Mexico.
Nowhere is this trend more challenging than in California, which was just awarded the booby-prize by 24/7 Wall Street survey, as the "Worst Run State" in the United States. The State has unemployment: 10.1% (2nd highest), Budget deficit: 20.7% (17th largest), Debt per capita: $4,008 (18th highest), Median household income: $57,287 (10th highest), percentage in poverty: 16.6% (18th highest) and the worst credit ratings.
State politician’s answer to get finances back on track, was to convince voters to raise sales taxes and increase the income tax rates for people making over $250,000 a year to the highest in the nation. This wasn’t difficult, since 40% of Californians don't pay any income tax and a quarter are on Medicaid. Residents making $1 million per year saw their state tax burden rise to $96,189 from $87,459 last year. For every dollar earned over $1 million, the California income tax rate jumps to 13.3%.
To complement California’s ludicrously high personal tax rates, the state is also rated as the third-worst business tax climate by the American Tax Foundation. Forbes Magazine publishes a formula for states that measures how many “makers” (those gainfully employed in the private sector) are necessary to support takers (those drawing state dollars as employees, pensioners or welfare recipients. A software entrepreneur with 100 employees in San Francisco must support 139 California takers. The same entrepreneur with 100 employees in Austin only has to support 82 Texas takers. This punishment of success explains why California's share of the U.S. economy peaked in 1990 and has shrunk faster than all but three states over the last twelve years.
California millionaires rebelling from Taxafornia tended to move to the income tax-free states of Texas, Washington and Nevada. But increasingly Californians are headed for Mexico. A Google internet search for “emigrate to the United States” generates 3.3 million hits”; but “emigrate to Mexico” generates 1.3 million hits and the number is rising fast. Besides low taxes, Mexico has six times the beachfront, half the food prices and a third the real estate costs versus California.
Because Mexico officially bans foreign ownership of land, disallows birth-right citizenship and tries to make it difficult for foreigners to find work, there are only 150,000 Americans who live legally in the Empire of the Sun. But over one million Americans live in Mexico illegally. These American Wetbacks can establish property trusts and take advantage of bank secrecy laws to hide assets from the prying eyes of IRS and California tax collectors. American Wetbacks can roll-over six month tourist visas for $25 and vehicle permits for $30. Mexican businesses seldom ask for identification.
While California’s economy is in the doldrums with 10.2% unemployment, Mexico’s economy is booming with only 5.0% unemployment. The Mexican business climate is benefiting from strong production growth and increasing job opportunities. Over 1.4 million Mexicans — including about 300,000 children born in the United States — returned to Mexico from the United States between 2005 and 2010. Net immigration to the U.S. dropped to zero since 2008, while American immigration to Mexico is thriving.
UCLA predicts that California’s employment growth will average less than 2% for the next three years. The Economist Magazine expects the Mexican boom to continue; since manufacturing costs are more competitive in Mexico than in China:
Mexico is already the world’s biggest exporter of flat-screen televisions, BlackBerrys and fridge-freezers, and is climbing up the rankings in cars, aerospace and more. On present trends, by 2018 America will import more from Mexico than from any other country. “Made in China” is giving way to “Hecho en México."
A key competitive factor according to accounting research firm KPMG is Mexico’s #1 international ranking as the best place to do business from a tax burden point of view.
President Peña Nieto told President Obama he hopes they can work together to create jobs. The Mexican President also invited Obama to return to his country -- he was last there in June for the G20 Summit in Los Cabos. Obama said he looks for “any excuse to go to Mexico, I’m always game.” When President Obama visits Mexico, he can wave to all the Taxafornians who have already escaped there.
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