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Saturday
Dec012012

Californians Are The New Wetbacks Headed For Mexico

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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Reader Comments (2)

Trends you see in more places.
1. Business gets more flexible and moves to low tax and cheap labour and low costs.
2. The uncivilised world is not uncivilised anymore. Some time ago in Laos (a few divisions lower than Mexico, allthough less violent), easy to reach via mainly Bangkok and similar places all with daily flights, international school, Western style housing available, Western supermarkets, First mall opened, international medical centre opened plus one just over the border with Thailand, lot of European style pubs, a few decent restaurants, telephone and internetservices look to work properly, Western TV available with several options . But prices half or less than in the West. Taxes hardly existing. You can have the same lifestyle (with a lot less choice of course, but also more colourfull), with say around 30-35% of a Western income. Not even to mention if you go for really cheap you have that option (which is basically not available in the West). But that is Laos hardly the most westernised country and until not long ago one of the poorest countries on earth.
3. Non Western immigrants going back. Often not the ones you want to leave. Same with say Turks in Germany. Inflow went down, but outflow is often graduates. 10s of times more graduates often young ones leave than come.
Braindrain in reverse. What moves to Europe is often badly educated. What moves from that group from Europe often is high potential (but sees more opportunities at home and a lot donot appreciate still to be seen as a sort of second class citizen).
4. Seen it with especially Spanish workers that went up North in Europe when their own country became prosperous they nearly all went back.

Moving from a to b has become so much easier the last 2 decades especially because of the internet. Telephone got so much cheaper, internet makes communication so much easier. 2 Decades ago I can remember 2-3 USD per minute telcons. Need faxes or worse less than 25 years ago say India not even had a fax (well maybe very few companies just had one).
Gives also the limitations of countries to tax businesses or individuals. taxes get too high, businesses and people move more and more. From the largest (that are now under attack in Europe, difficult to see that work btw) to individuals. The latter also seen the fact that few younger people get permanent employment in thier homecountries.
December 2, 2012 | Unregistered CommenterRik
As we already know by now, the biggest problem the West faces is the Debt. Both USA and the European Union ought to protect their citizens from globalisation and the global asymmetries it brings.
December 2, 2012 | Unregistered CommenterMike

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