Trump cuts Obama wealth flight in half in less than 3 years.
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Trump cuts Obama wealth flight in half in less than 3 years.
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And so it continues… With each new quarterly release of IRS wealth flight statistics, we see more evidence of how President Trump is systematically reversing the damage done to our economy, by the failed Obama presidency. The latest release of “Covered Expatriate” data shows that wealth flight has dropped by more than half, since Donald Trump became president.
The most recent “Quarterly Publication of Individuals, Who Have Chosen To Expatriate“, covering the third quarter of 2019, was released this month and it shows that a mere 183 wealthy US citizens and wealthy long-term residents formally renounced their citizenship or long-term residency in the third quarter of 2019. Contrast that with the 2,364 renunciations of wealthy taxpayers in the last full quarter of Obama’s term in office. Or even compare it to the quarterly average rate for the whole of Obama’s last year in office, which was 1,352. Aw, what the heck. Compare it with the quarterly average of renunciations of wealthy taxpayers for the entire eight years Obama was in office, which was 661.
The legacy media won’t talk about this, because there is just no way to spin these results to look anything less than yet another spectacular success for President Trump, in reversing Obama’s failures. Obama’s “Soak the Rich” agenda drove away more than 21,000 of our most prolific taxpayers, over eight years. But, in less than three years, Trump has cut the Obama wealth renunciation rate by more than half.
Let’s look at the data.
Under IRC section 6039G of the Health Insurance Portability and Accountability Act (HIPAA) of 1996, the IRS is required to publish quarterly, in the Federal Register, a list of the names of all wealthy taxpayers (and wealthy long term permanent residents) who renounced their U.S. citizenship (or permanent residency) in the prior quarter. The above chart represents the count of names appearing on all four quarterly lists for each year. The only exception is that the 2019 actual count for the first three quarters, is represented in blue, while the straight-line projection for the fourth quarter is a semi-transparent, light salmon color.
Under Obama’s “Soak the Rich” agenda, the USA was losing our most prolific taxpayers at an alarming and skyrocketing rate. We are still losing wealthy taxpayers at a disproportionally high rate, though that rate is dropping rapidly, as a result of corrective actions taken by President Trump.
To put all of this into context, let’s look at what it takes to have your name appear on one of those lists. Those whose names appear on those lists are people who fit the definition of a “covered expatriate”. The short version is that a renouncer must either be in the top one-half percent of taxpayers, which is the top one-quarter percent of wealthiest citizens, or be extremely stupid.
I’ll get to the last part of that statement in a moment. But first, let’s look at the financial side. The term, “covered expatriate” is actually defined in law.
The exact definition of a “covered expatriate” has changed slightly, over the years, but it has always been tied to wealth. Since 2008, the net worth specification has remained at two million dollars and the income specification has been tied to the cost of living. Each year, you can find the current definition on the IRS website page titled, “Expatriation Tax“. Here is what that page says, today. (Note: The numbers in orange come from different sources, explained below.)
If you expatriated on or after June 17, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($151,000 for 2012, $155,000 for 2013, $157,000 for 2014, and $160,000 for 2015) ($161,000 for 2016, $162,000 for 2017, $165,000 for 2018, and $168,000 for 2019).
- Your net worth is $2 million or more on the date of your expatriation or termination of residency.
- You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are a “covered expatriate.”
Explanation for the orange text, above:
The specific tax liability requirement of $161,000 for 2016, can be found in paragraph 3.30 (page 19) of the IRS publication “Rev. Proc. 2015-53”, concerning 2016 Adjusted Items. Beginning in the first quarter of 2017, the tax liability requirement for a covered expatriate was $162,000 and it can be found in paragraph 3.32 (page 21) of the IRS publication “Rev. Proc. 2016-55” concerning 2017 Adjusted Items. Beginning in the first quarter of 2018, the tax liability requirement for a covered expatriate was $165,000 and it can be found in paragraph 3.32 (page 19) of the IRS publication “Rev. Proc. 2017-58” concerning 2018 Adjusted Items. Beginning in the first quarter of 2019, the tax liability requirement for a covered expatriate was $168,000 and it can be found in paragraph 3.37 (page 22) of the IRS publication “Rev. Proc. 2018-57” concerning 2019 Adjusted Items.
If we take the minimum amount of tax that would place a person’s name on the lists for 2017 and work backwards, we find that to have your name placed on one of the lists, you would have to have an income of around $617,000. That would put the taxpayer in the top 1% of taxpayers. Let’s look at how we determine this.
According to the latest IRS Collections Data (Tax Year 2017), the top 1% of taxpayers paid U.S. income tax at an average rate of 26.73%. That percentage is pretty similar for other nearby higher and lower income groups, so it’s a good starting place. We simply divide the lowest tax load by 26.73%.
$165,000 / 0.2673 = $617,284
Next we note, from the same IRS data, that the income floor, to make it into the top 1% of taxpayers in 2017, was $515,371. That means that someone who earned $617,284 should be safely in the top 1% of taxpayers in 2017. We could get a little more detailed. But the result would still place the taxpayer in the top 1% of taxpayers. The whole point is that to be a covered expatriate, one almost certainly has to be in the top 1% of taxpayers.
Using the same IRS data, we find that the top 1% of taxpayers paid 38.47% of all US income tax collected in 2017. Let’s put that a different way. Well over a third of all personal federal income tax collected in the USA, is paid by just the 1% of wealthiest taxpayers.
Then consider that, according to the Joint Committee on Taxation, 51% of tax units (roughly households) don’t have enough income to incur any tax liability. In other words, over half of Americans either don’t pay federal income tax or receive back all of what they do pay. What this means is that the top 1% of taxpayers represents the wealthiest one-half percent of all U.S. citizens and long-term permanent residents.
So what all of this boils down to is that to be included on one of the lists that have become popularly known as the “Taxpatriot Lists” or just “Taxpat Lists”, one most likely has an income that places him in the top one-half percent (1/2%) of wealthiest Americans and that income group is responsible for 38.47% of all U.S. income tax actually collected. Moreover, that very tiny group of very wealthy taxpayers is also the same group of people whose investment dollars underwrite most job creation in the USA.
During the Obama years, the wealthy were leaving at a rate DOUBLE their proportion of all U.S. taxpayers, in general.
Data from several reliable sources, including the highly respected, HSBC Expat Explorer Report (see page 4), indicates that those who earn more than $250,000 a year (a group, which makes up just three percent of U.S. citizens), makes up at least seven percent of renouncers or double their percentage of the U.S. population! Let me rephrase that. Although the 7% cited in that report doesn’t sound like much, that’s a number that should be only 3% percent, were expatriation proportional across all income groups!
Looking back at the IRS Collections Data, we see that in that year (2014), a person who earned $250,000 was in the top 3% of taxpayers. So, were expatriation proportional, expats earning more than $250,000 should make up roughly 3% of expats, not 7%. But that was in 2014. Obama was in office for two more years. Look at the chart. Things got almost 60% worse, between 2014 and 2016.
But the important thing to remember is that these people make up the income group who pay the lion’s share of taxes and whose investments are responsible for funding the lion’s share of jobs in the USA!
These extremely prolific taxpayers are the people who are still fleeing the USA in disproportionate numbers. Sure, President Trump has those numbers dropping fast. But Obama did so much damage, over eight years, that Trump still has his work cut out for him.
As you can see from the chart, the last year that George W. Bush left office, there were only 231 formal renunciations of “covered expatriates”. The last year that Obama was in office, there were a whopping 5,409 such formal renunciations. That represents a 2,342% increase in wealth flight, during Obama’s eight years of “Soak the Rich” policies. Here’s the math. Simply divide the 2016 number by the 2008 number and multiply by 100, to convert from decimal to percent.
The Obama Increase in Renunciations:
( 5,409 / 231 ) * 100 = 2,342%
But in less than three years, President Trump has managed to steadily reduce the number of formal renunciations of the rich to a point that is more than half of the Obama increase. Using a straight-line projection, the total renunciations of the rich, for 2019 should be 2,413. That’s a cut of 58% of the Obama increase. Here’s the math, to get the reduction number.
To determine the numerical decrease, we begin by subtracting the 2019 projected total (2,431) from the 2016 total (5,409). This leaves us with the numerical drop in renunciations in 2019.
Trump Numerical Cut in Renunciations
5,409 – 2,413 = 2,996 Difference
Next, it wouldn’t be fair to Obama to use just the 2016 total, when calculating the Trump decrease. That’s because the Obama increase was based on a starting point of 231, in 2008, so we must assume that Obama was not responsible for the first 231 of that 5,409 renunciations in 2016. This means that we have to subtract out the 2008 number (231) from the 2016 number (5,409).
Obama Numerical Rise in Renunciations
5,409 – 231 = 5,178 Difference
This shows that, of the 5,409 renunciations in 2016, Obama was responsible for 5,178 of them. So, now that we have both numbers, we just divide the first result by the second result and multiply by 100, to convert from decimal to percent.
Trump Cuts in Renunciations
2,996 / 5,178 * 100 = 58%
Of course, you should notice that I used a straight-line projection, to determine the likely number of renunciations for the whole of 2019. But consider that in almost every fiscal quarter since Trump took office, the actual reduction in renunciations among the wealthy was even better (the total was lower) than the straight-line projection from the previous quarter.
Those of you who have followed my tax articles know that, whenever there is any question about what set of numbers or methodology should be used, I always choose to err on the side that least benefits my thesis. I chose to use a straight-line projection, because it is the method that is least likely to help my thesis. Had I chosen to use “exponential smoothing”, “moving averages”, or any number of other projection methodologies, the projection would be even more incredible. But even using the least beneficial projection method, the results are still phenomenal.
Just three months ago, when the second quarter data was released, a straight-line projection placed the estimated total for the year at 3,254. But that number, as expected, turned out to be high. Last quarter’s projection was based on an average of 814 taxpats per quarter, for the first two quarters. But this quarter, that number is down to an average of just 603 expats per quarter, for the first three quarters.
In fact, this three-year drop in renunciations among our most prolific taxpayers is so palpable that it defies all expectations. It’s quite likely that no other president could have achieved anything close to this level of success in two full terms (eight years), let alone, in less than three years and all the while, being blocked and stonewalled by the “Swamp” at every turn.
But it’s not enough to simply slow the bleeding. Since the beginning of the Obama Administration, through last quarter, there have been more than 32,000 Very High Net Worth Taxpayers renounce their U.S. citizenship or long term permanent residency. This means that more than 32,000 of our most prolific taxpayers have legally ceased to owe U.S. income tax on non-U.S.-sourced income, since Obama assumed office. Furthermore, all indications indicate that most of those wealthy expats have dramatically reduced their investment footprint in the U.S. market, as well. In fact, many of those “covered expatriates” no longer have any financial interests in the USA, which means that they have zero U.S. income tax liability. It also means that the jobs that their investment dollars used to fund, no longer exist.
Losing more than 32,000 of the taxpayers who pay the vast majority of our taxes, along with all the jobs they create, is a massive hit to our economy. But it’s even worse than it may, at first, appear.
So it’s not just 32,000 people, who if they were still U.S. citizens and taxpayers, would contribute more than $400 million in taxes to the U.S. tax coffers this year. But were they still citizens, they would continue to pay such substantial taxes each and every year, going forward. Let’s put that into more meaningful terms. That’s an additional $400 million in taxes that has to be paid every year by those of us who remain! Have I got your attention?
When a wealthy taxpayer renounces his citizenship, it’s not just a one-time hit to our economy. It’s continuous. In fact, due to the Bush Exit Tax, the first year is actually not as bad for the U.S. as the following years. You see, under the Bush Exit Tax, wealthy expats must pay, at the time of renunciation, a mark-to-market capital gains tax on their worldwide estate. To be clear, a mark-to-market tax is a tax on the estimated un-earned capital gains of the expat. So, before they can renounce, wealthy expats are being required to pay tax on income they have not yet earned!
This does tend to soften the blow to the U.S. economy, in the year of renunciation. But after that, it’s a loss that contributes to that $400 million in lost taxes, each and every year.
But think about what this means. Since a wealthy person has to pay a huge penalty, before he is allowed to renounce, it means is that all those wealthy expats (covered expatriates) felt that it was worth paying what is often a very hefty penalty, just to get out from under the punitive U.S. tax regimen. They saw the Exit Tax as the least offensive option.
This is why it’s not enough to simply slow renunciations of the wealthy. We have to turn it completely around. We need to encourage many of those who have already renounced to return and that isn’t going to be easy, even for President Trump. But there is a way to make it happen.
Before going on, I should note that more than a few of the expats on those lists were, in fact, already living offshore and continuing to pay U.S. taxes, before deciding to renounce. But those people, regardless of wealth, had an additional reason to renounce. As a result of the onerous requirements of Obama’s Foreign Account Tax Compliance Act (FATCA – Title V, Subtitle A, of the HIRE Act of 2010), even those U.S. citizens living abroad, who do their very best to comply with all US tax laws, are finding it increasingly difficult to do such common things as rent an apartment (or buy a home), buy a car, maintain a bank account, or pay routine utility bills. This applies to U.S. taxpayers from all income groups. Even those who simply take a temporary job offshore, as a resume-booster, are finding that simply living offshore has become extremely difficult… but only if you’re an American.
While trying to “Soak the Rich”, Obama laid yet another egg, when he signed FATCA into law. Many foreign banks have chosen to tell their U.S. citizen customers that their money is no longer welcome there, rather than adhere to the onerous, anti-privacy reporting requirements of FATCA. For the record, FATCA places reporting requirements on foreign banks that are far more invasive than is legally allowed to be required of U.S. banks.
Of course, this doesn’t even consider things like FBARs (Foreign Bank Account Reports) that only U.S. citizens have to file. The whole point is that being a U.S. citizen living abroad has many hurdles that expats from other countries don’t have to overcome. But if that U.S. expat happens to be wealthy, it’s even more difficult. So regardless of how much a person may cherish his U.S. citizenship, if his work keeps him abroad, he may find renouncing his U.S. citizenship to be advantageous enough to make formal expatriation the only “tolerable” option. If he happens to be wealthy, he may find it to be the only “acceptable” option.
We know that FATCA was a significant driving force in the dramatic increase in wealth flight, during the Obama years. But for others, it was Obama’s “Soak the Rich” policies, right here at home. So it’s reasonable to conclude that if a covered expatriate renounced, to achieve better tax treatment from other countries, he might be enticed to return, if the USA implements a tax regimen that is more fair and equitable and one that creates a better business environment than in his new country.
As it turns out, such a tax bill already exists and is currently languishing in the Ways and Means Committee. The problem is that the House Leadership is currently blocking it from consideration. The bill is H.R.25 – The FairTax Act of 2019.
That bill would completely replace our whole income taxation scheme with a progressive national retail sales tax that would be collected only at the cash register. The implementation of this system of taxation would turn the USA into a giant wealth magnet. Wealthy U.S. expats and foreigners alike, would rush to invest their money in the USA. Jobs would be created in record numbers, thus creating more taxpayers. It would be a win-win scenario for everyone… except the Swamp.
Our tax base would increase dramatically. There would be thousands of new wealthy citizens and long term permanent residents, who would be buying new homes and the necessities for their new homes. There would be more ordinary people employed at jobs and those people would have more money to spend on retail goods and services. Those people would all be taxpayers who don’t exist today.
But best of all, under the FairTax, it would be virtually impossible for the taxation system to be weaponized against the political enemies of the party in power, as the IRS is weaponized, today. There would be no way for those in power to play favorites.
If you are not aware of the FairTax or how it works, you should learn more by reading “The Rich Don’t Pay Tax! …Or Do They?” or by visiting FairTax.org.
President Trump has done an outstanding job of slowing down renunciations, up to now. But slowing down the damage is only half the work. The only way to not only slow down the damage done by eight years of Obama’s “Soak the Rich” policies, but to actually reverse that damage, is to repeal FATCA and pass the FairTax.Follow us on social media