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Exile On Wall Street

The Rolling Stones were at the peak of their fame in 1971 as their ninth album, “Sticky Fingers,” topped the charts on both sides of the Atlantic. But they had problems with their business management and faced massive taxes in the United Kingdom, which had a punitive 93 percent tax rate for high earners at the time.

So the band decamped to France. Guitarist Keith Richards and front man Mick Jagger wrote and recorded in the basement of Richards’ rented villa as a summer-long party fulfilled every rock and roll cliche upstairs. It is a striking image if there ever was one: a sun-soaked revel above, while Richards, Jagger and other Stones and session players worked away in a space that had served as a Gestapo quarters during the Nazi occupation.

The result was “Exile on Main St.,” which has become a classic rock album and which has just been reissued with previously unreleased takes and retooled vocal work by Jagger. But the initial process was much more haphazard than the care that has gone into this re-release. The band resorted to the basement of Richards’ villa after finding no suitable studio in the area, not out of a desire for a new or unusual sound. The raw edge to the finished album was, in many ways, a virtue made of necessity. Ultimately, though, talent can work practically anywhere.

Tax rates continue to exert pressure on the geography of talent today, though not every story can end with a brilliant album and a vivid tale for biographers. Most of us are not the Rolling Stones, after all. But exile is still a topic very much on the minds of people in talent-based, and consequently mobile, lines of work. Bankers and investment managers included.

At the end of 2009, the U.K. imposed a super-tax on banks that issued large bonuses to their employees. Banks were set to be charged 50 percent on any bonuses more than £25,000. The government’s theory was that banks would either pay the tax or skip the bonuses, and that aggressive enforcement could deter workarounds such as bumping up the employee’s base pay in lieu of a bonus. Moreover, since the tax is only supposed to last one year, banks were thought to have little incentive either to relocate their employees or to move their own operations to friendlier jurisdictions.

My guess is that the next time a bank wants to expand a European operation, London is not going to look as good as it did before the recently departed Labour government let its fiscal sharpshooters use bankers for target practice.

The United States is the only industrialized country that taxes the income of its citizens even when they are living abroad. Fleeing into exile to avoid home-country taxation, like the Rolling Stones, simply isn’t an option for American talent, unless you are willing to give up your American citizenship completely. A small but growing number of Americans are choosing to do that, even though, in some cases, they face a special exit tax on income they have not yet collected.

The Senate’s financial reform bill will reclassify the income that managers receive from hedge funds, treating such revenue as ordinary income rather than capital gains. This is, in my opinion, the equitable result, since the managers are being paid for their services rather than for the risk to their capital. But it will raise the tax rate on those fund managers from the current 15 percent on capital gains to next year’s scheduled top income tax rate of about 43 percent. In that environment, don’t be surprised if a lot of future hedge funds are organized and managed from places like Bermuda and the Bahamas, rather than Manhattan or Greenwich, Conn.

In an interview about “Exile on Main St.,” the Stones' Jagger commented, “I mean, musicians of every stripe, they tend to be cosmopolitan kind of people. Perhaps musicians were the first cosmopolitan people. In the 18th century, they would move where the patronage was.”

Today, it’s not only musicians who go where they can be best compensated for their work. When you make your living from your talent, whether musical or financial, you often have the prerogative to live and work wherever you choose. We ought to think twice before we encourage some of our best talent to go into tax-motivated exile.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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