Renunciations of U.S. citizenship in first half of 2014 approaches total for Bush’s entire last term

Taxpat Chart for Q1 of 2014
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Renunciation of U.S. Citizenships continue to climb (This frame may be scrolled if it doesn’t fit your browser window.)

The federal government just released its quarterly list of the names of those wealthy U.S. citizens who formally renounced their citizenship in the most recent quarter – that being Q2 of 2014 – and once again, it paints a bleak picture.

In the second quarter of 2014, the number of “rich” U.S. citizens who formally renounced their citizenship, in favor of a citizenship from another nation, was 576. This brings the total of renunciations for the first six months of 2014 to 1,577. If the next six months is as bad – and the trend is that it will be far worse – then Obama is primed to set yet another record for expatriations of the wealthy, in a single year.

Each quarter, in accordance with IRC section 6039G of the Health Insurance Portability and Accountability Act (HIPPA) of 1996, the IRS publishes a report naming every “rich” U.S. citizen who renounced his citizenship in the previous quarter. I should emphasize that the numbers cited here are not just some estimate, but a count of the names of expatriates on each quarterly list.

Those in Congress, who advocated for these lists, called them the “Name and Shame Lists.” But most of those congressmen, being career politicians who had no record of success in the private sector and therefore had no idea of what it takes to succeed, mistakenly thought that by publishing the names of wealthy expats, they could shame them into not renouncing. But as with every other attempt by governments around the world to control wealth, it hasn’t exactly worked out that way. In fact, many expats now look at having their name on one of those Lists, not as a reason to be ashamed, but as a badge of honor, signifying that they were smart enough to leave ahead of the rush. Many of those earlier wealthy expats now point to the recent dramatic rise in renunciations, expressed in the above chart, as evidence that the “rush” appears to have begun.

Moreover, the compilation of these lists, that some naive members of Congress called the “Name and Shame Lists,” has become more commonly known as the “Taxpat Lists.” The reason for that term is based upon the fact that everyone whose name appears on any of these quarterly lists is considered, by the U.S. government, to be “rich.” Furthermore, the government incorrectly assumes that the only reason why a rich U.S. citizen would renounce his citizenship would be to end or reduce his U.S. income tax liability. Put those two government assumptions together and suddenly wealthy expatriates become “taxpatriates” – a term, by the way, that has been embraced my many former U.S. citizens and those considering expatriation.

Most expatriate’s names do not appear on the Taxpat Lists. In fact, the government has a special term that they use to identify these people. The term is covered expatriate.” In order to qualify as a covered expatriate and have your name appear on one of the lists for 2014, an individual expat must have either a net worth of more than $2,000,000 on the day prior to expatriation or have had an average annual net income tax liability of $157,000 for the 5 years ending before the date of expatriation. That means that every name on those lists are in the top one percent (1%) of income earners or the income group that pays 68% of all federal personal income tax collected. That income group is precisely the group that we can least afford to lose.

Obama’s “Soak the Rich” agenda is driving away the very small one percent of people whose taxes support almost 70% of our government. In fact, these are the people who drive the engine of our entire economy. For the most part, they are the job-creators and the risk-takers. Even those who are not job creators are big spenders, which creates the demand for jobs. They might be billionaires or just frugal investors.

Some of them may be fabulously rich people, like songwriter Denise Rich (ex-wife of billionaire, Marc Rich, who was pardoned by Bill Clinton, for tax evasion). When she renounced, she stated in no uncertain terms, that it was for tax purposes, so she could leave what she had earned to her children, without the IRS taking a huge chunk of it. But most of those wealthy expats are just ordinary business people. It might be the guy who owns two or three restaurants or a building contractor, either of which employing around 100 people. The guy who owns a night club that’s packed every night, probably earns more than enough to make the List. Even some independent internet marketers could make that List. That last group doesn’t directly create jobs, but they spend lots of money, which leads to job demand. The point here is that these people are not all billionaires. But they are job-creators and they pay more than 68% of all federal personal income tax.

Some people who have never created a job might say, “Well, when those people leave, someone else will step in to create those jobs.” But just ask yourself, “When was the last time you heard of someone getting a job from a poor person?” People who succeed make their own opportunities. They don’t wait for some other successful person to step out of the way. Sure, others might try to fill the shoes of those who left. But most will fail, because if they were capable of running a successful business, they would already be doing so. That means that when we lose these job-creators, we lose most the jobs that they create.

But it’s really far worse than these numbers would suggest. On July 1 of 2012, the Foreign Account Tax Compliance Act (FATCA), which was a part of the HIRE Act of 2010 (H.R. 2847), went into effect and it has been driving expatriations even higher for a number of months. Due to FATCA, U.S. citizens who live and work offshore have been finding it increasingly increasingly difficult to do ordinary banking in their country of residence. Foreign banks are telling U.S. citizens that their money isn’t welcome in their banks any longer. Of course, without a bank account in your country of residence, you can’t pay your rent, electric bill, or a dozen other every-day cost of living expenses. This leaves U.S. citizens working abroad only two alternatives. They can either give up their lucrative offshore job and return to the USA or give up their U.S. citizenship, which is causing them so much trouble. Many have been taking that second option.

However, more than a few expats have put off taking action until absolutely necessary. This has left many expats scrambling to get a foreign passport, so they can renounce their U.S. citizenship. But that takes time – usually several months. As those passports are issued, in the coming months, we’ll probably see even more renunciations of U.S. citizenship, than we saw leading up to FATCA implementation. What we’ve seen up to now is only the beginning. It’s going to get a lot worse.

Barack Obama inherited the lowest renunciation rate since the government began reporting expatriations, in 1996. But renunciations spiked 320% the year he took office and formal expatriations of wealthy U.S. citizens have repeatedly reached new heights since that time. It’s clear that Obama’s policies have been the primary factor forcing these renunciations.

Instead of passing punitive legislation like FATCA, Obama and both parties in Congress should be focusing on laws that reward success and encourage foreign investment. The FairTax would go a long way toward turning around this critical transfer of wealth out of the USA. Instead of jobs leaving the USA, massive growth in the job market would be seen at all levels of employment, as foreign investors rushed to be among the first to invest in a more productive USA.

Instead of pushing ill-conceived schemes like FATCA, that do nothing but drive more wealth out of the USA, Obama should be doing everything that he can to encourage more successful investors from offshore, to move themselves and their money into the USA, where that wealth will create jobs. But I suppose that we shouldn’t be too critical of Obama’s tax policy. After all, it’s easy to understand how he could be completely unaware of the damage that his tax policy is doing. All that playing golf in Hawaii and holding fund-raisers is sure to be very exhausting.

As USA celebrates independence, FATCA drives wealthy Americans to declare independence from USA

Two hundred thirty-eight years ago, the USA declared its independence from an oppressive English government, largely over the issue of taxes. Today, wealthy U.S. citizens are declaring their independence from an oppressive U.S. government, largely over the issue of taxes. The latest chapter in this developing crisis is called FATCA.

Just a few days ago, on July 1 of this year, the “Foreign Accounts Tax Compliance Act(FATCA) went into effect. But instead of raising income tax revenue by more than $800 million per year, as its promoters claimed it would, it now appears that the government will actually take in far less revenue, as a result of FATCA.

According to a March 2010 report from the Joint Committee on Taxation, FATCA was supposed to raise more than $800 million in revenue from the foreign held accounts of U.S. citizens. However, it’s now becoming obvious that the Committee seriously failed to consider the motivations of both foreign bankers and U.S. citizens, living abroad.

FATCA imposes severe requirements on foreign banks that serve U.S. clients. Among these requirements is that foreign banks provide detailed reports on the banking activity of their U.S. citizen clients. In fact, FATCA demands far more details from foreign banks, than the government is legally allowed to demand of U.S. banks. FATCA also demands that foreign banks withhold U.S. income tax and remit it to the IRS, based on estimated taxes.

Of course, the U.S. government can’t “force” foreign banks to do anything. IRS enforcement rights end at our borders. So for example, the U.S. government can’t impose a direct fine on those foreign banks. But FATCA attempts to impose what is effectively, an indirect fine on non-compliant banks, in the form of an extremely punitive tax on the bank’s U.S. investments. In other words, bank earnings generated in the USA would be tax at a punitive rate, before it would ever leave the USA. The proponents of FATCA incorrectly thought that all foreign banks would rush to comply with FATCA, in the way they proposed, rather than pay that hefty tax on their U.S. investments. Well, although they were partially right, it hasn’t exactly worked out the way they planned.

You see, the tax and spend crowd is comprised almost exclusively of politicians who have never spent a single day running a business, where they had to make a profit or lose everything. So it’s not surprising that these business neophytes failed to consider that there were several other options for those foreign banks than just the option that they wanted those banks to take. The option that they hoped the banks would take was to simply start reporting the details of the banking activity of their U.S. clients and to start withholding U.S. income tax and remitting it to the IRS. It sounded simple enough to simple-minded politicians.

But only a very tiny handful of banks have moved in that direction and some of them have already reversed course. Instead, the options chosen by almost all foreign banks have fallen into one of two categories.

  1. Many smaller banks have chosen the option of selling off the portion of their portfolio that represents U.S. investment and putting that money into non-US investments. By doing this, they take away the U.S. government’s ability to punish them with onerous taxes on their U.S. investment, since there is NO U.S. investment to tax.
  2. The vast majority of foreign banks have been telling their U.S. clients that their money is no longer welcome in their bank. They figured out that if they have no U.S. clients, then they are in compliance.

Both of those options serve exactly the opposite of the desired effect. Let’s take a look at them one at a time.

The first option means less foreign dollars supporting U.S. businesses and U.S. jobs. This will have a negative effect on the U.S. economy. But in general, since the only banks that can afford to take this option are smaller banks that tend to be more agile, the negative effect will be somewhat limited.

On the other hand, the huge number of banks taking that second option is already having a devastating effect on our economy. As we reported in May of this year, formal citizenship renunciations by wealthy U.S. citizens, which had reached a record low in 2008, are now up by more than 1700% since Obama assumed office. Obama’s “soak the rich” agenda has been largely to blame for this disastrous rise. But FATCA has complicated it even more.

Taxpat Chart for Q1 of 2014
Hover over image to view at full size.

You see, there are millions of U.S. citizens currently living and working offshore. Millions more are retired offshore. And of course, we can’t forget the American businessmen who run businesses offshore. But there are two things that these people all have in common. First, by retaining their U.S. citizenship, they must continue to pay U.S. income taxes. Second, they all maintain a residence and incur monthly bills offshore – bills that, for all practical purposes, must be paid with a check or deposit from a local bank and therein, lies the rub.

Within the last year, millions of U.S. citizens who work and maintain a residence offshore have been told by their local bank that their business is no longer welcome, because they are U.S. citizens. The banks have chosen to comply with FATCA by not having U.S. clients.

Now keep in mind that even those U.S. workers, who go offshore for what would be considered a low paying job in the USA, are probably earning a premium wage offshore. Though it’s not common, it’s not uncommon for salaries in some fields to be three times what the same job would pay in the USA. But one and a half to two times is more common. The point is that all of these people have a very strong financial incentive to stay where they are, for as long as the job lasts. Retirees, on the other hand, have planned for years where they want to retire and are not going to be willing to move back to the rat race.

So what happens when these people can no longer pay their bills, in the country where they live, because no local bank will accept their business?

They have only two options. Workers and businessmen can leave their current lucrative job or business or retirees can kiss their dream retirement goodbye and they can return to the USA or they can get a second citizenship and renounce their U.S. citizenship. The quite logical decision by foreign banks to opt out of FATCA, by denying the business of U.S. citizens, leaves U.S. citizens living offshore no other choice. It’s return to the USA or renounce.

Many U.S. citizens who might never have thought of renouncing their U.S. citizenship are now renouncing. They realize that it was their own government that put them in this unenviable position and they wonder what’s next. For many U.S. citizens living offshore, FATCA has become the tipping point.

It’s sad that, on this July 4th, while we celebrate U.S. Independence from England, more and more disenchanted U.S. citizens are declaring their independence from the USA. What makes it even more sad that this is all because our elected representatives, who are already spending far more money than the government takes in, felt it necessary to try an inane scheme like FATCA, to get even more money to spend.

So regardless of Whether you are celebrating American Independence or your own Independence from America, “Happy Independence Day!”