According to the latest “Quarterly Publication of Individuals, Who Have Chosen to Expatriate“, published in the Federal Register, 508 “wealthy” U.S. citizens renounced their citizenship in the second quarter of 2016. However, this apparent slow down in renunciations is not the result of anything that Obama has done. Rather, it represents election-year anticipation of a Trump presidency.
The number of people who are named on these quarterly lists of expatriates is important, because for one to be on any of these lists, the law that created them requires that he or she be rich, which I’ll go into in a moment. What this means that these people are part of the very small group, who pay more than a third of all personal U.S. income tax and who are responsible for a very significant portion of all business income tax collections, as well. When these very wealthy people renounce their citizenship, the U.S. Treasury loses a disproportionate amount of income tax revenue – tax revenue that those of us who remain have to make up. Worse yet, in many cases, the businesses that these wealthy expats control move offshore with them, leaving more unemployed workers behind.
But let’s get back to why the expatriation rate appears to be dropping. The facts are that the renunciation rate really is dropping, but just not as much as it appears. We have, in fact, predicted this “election year drop”, in some of our past quarterly articles on this subject. If you look at the chart, you’ll see that in 2012, there was a dip in expatriations. Many of those who were preparing to renounce, delayed their departure, in the hope of a Romney victory, in November. But, when that didn’t happen, formal renunciations resumed, as though they had never slowed down, reaching a new record high in 2013. Also, last quarter’s slow down isn’t nearly as much as the above chart would seem to indicate.
In the second quarter of last year (2015), the renunciation total for these wealthy taxpayers was only 460. Furthermore, if we look back to the last presidential election year (2012), we will see that there were only 189 such renunciations recorded in the second quarter of that year. So this would indicate that renunciations are actually on the rise.
Reality is probably somewhere in between. The expatriation rate of wealthy Americans is probably still rising, but just not as much as in a normal year. My prediction remains that the number of formal renunciations of wealthy individuals this year will probably be somewhat lower than last year, unless something happens to make it obvious that Trump will win by a landslide, in which case, we would see a dramatic drop in expatriations. In fact, if as expected, Trump wins on November 8, formal renunciations for the rest of the year would probably be limited only to wealthy celebrities like Rosie O’Donnell, Cher, Whoopi Goldberg, Barbra Streisand (if they keep their promises, which I hope they do), and let us not forget the Clintons, who will probably be moving to a non-extradition country. Of course, if Hillary were to pull out a win, expatriations of the wealthy would immediately begin climbing to new heights.
At this point, I should also mention a 2010 law that has led to more expatriation among both the rich and poor. It’s called “FATCA” (the Foreign Accounts Transaction Compliance Act). It was enacted as a part of the HIRE Act of 2010 (H.R. 2847). This misguided law was meant to try to make it difficult for wealthy Americans, in the USA, to hold an offshore bank account. But, as with most of Obama’s initiatives, it was poorly thought out. FATCA has, in fact, made it extremely difficult for U.S. citizens of any income level, living abroad for any reason, to open a bank account in their country of residence. A lot of these people are working for U.S. companies and earning much more than they could earn in the USA, so instead of giving up that income, they are renouncing. It doesn’t matter whether or not they are rich or poor. If they want to open a bank account in their country of residence, they are effectively forced to renounce their U.S. citizenship. Since some of those Americans abroad, who find themselves in the crosshairs of FATCA are rich, they just add to the names on what have been nicknamed, the Taxpatriate Lists.
But regardless of their motivation, the point is that many wealthy taxpayers, who have been preparing to renounce their U.S. citizenship, are now taking a “wait and see” attitude about the election. You see, those wealthy taxpayers, who have been pushed to the brink, be they in the USA or abroad, know that Trump will stop those attacks on success, when he becomes president. Let’s be clear. They don’t expect, nor do they ask for preferential treatment. They’re just tired or being punished for having worked hard and having achieved the “American Dream”. They just want to be treated fairly. The wealthy also know that Hillary would not only continue Obama’s attacks on success, but increase them. She has said so, in no uncertain terms.
It should be noted that only 5% of U.S. wealth is inherited. The rest is first generation wealth, meaning that they worked for it. 70% is earned through business investments and the rest is from high income professions, such as doctors and attorneys. I suppose that, based on the Clinton family, we need to include former office-holders in that last group, too.
What’s happening is that, since the wealthy really don’t want to leave, they’re waiting to see who wins the election. If it’s Trump, most will probably cancel their plans to leave or at least put them on indefinite hold. But if it’s Hillary, we’ll certainly see formal renunciations rebound to record levels, just as they did in 2013, after Obama won re-election. A polynomial trend projection of the above chart shows us that renunciations of the wealthy could easily exceed 50,000 a year, under Hillary. That would be disastrous for low and middle income taxpayers. Both taxes and the national debt would skyrocket.
It’s about tax revenue and the national debt.
Let’s be clear. This isn’t about what you or I may think about these potential expatriates. It’s about the tax revenue that these people generate for the U.S. Treasury. The top 1% of income earners pay more than a third of all personal income tax collected in the United States and are also responsible for most business income tax revenue.
Call them names if you wish, but that’s not the point. Due to the “Heroes Earnings Assistance and Relief Tax Act of 2008” – a.k.a. “H.E.A.R.T.”), when the wealthy renounce their citizenship, the USA Treasury receives a one-time expatriation tax (a punishment for wanting to keep what you have earned). But after that, they never receive any tax revenue from those expats again. Sure, some expats will leave behind some U.S. investments, on which they will continue to pay U.S. income tax. But such investments are generally quite limited and most expats take all of their investments offshore, when they leave. This represents a very significant loss in tax revenue that someone else must make up. Guess who that would be.
The net result of punishing success, as Obama has done and as Hillary promises to continue, is not more tax revenue, but reduced tax revenue. Worse yet, that reduction isn’t something that can be easily reversed by the next administration. It is, for all intents and purposes, permanent. Once a taxpayer moves to another country and establishes a home and lifestyle there, he is unlikely to ever return, unless something “drastic” happens. Keep that word in mind.
For the record, the quarterly Lists from which these names are drawn, were mandated as a part of the “1996 Health Insurance Portability and Accountability Act (HIPAA)“ and under that law, the lists are to include the names of only “wealthy” U.S. citizens, who renounce their citizenship. Let’s take a closer look at this.
The lists are to include only the names of “covered expatriates”, as defined under HIPAA and later re-defined in the “American Jobs Creation Act of 2004″ (H.R. 4520 – 108th Congress), where the “income” requirement was changed to a “tax liability” requirement and that tax liability was indexed to inflation. The IRS maintains the definition of a “covered expatriate” on their “Expatriation Tax” page. However, that page fails to show the income tax liability requirement for the current tax year (2016). The specific tax liability requirement for 2016 can be found in paragraph 3.30 (page 19) of the IRS publication concerning Inflation Adjusted Items for 2016.
In short, to qualify as a “Covered Expatriate” in 2016 and to therefore have your name placed on the Taxpatriate Lists, you must fit at least one of the following three criteria.
- Your average annual net income tax liability for the 5 years ending before the date of expatriation or termination of residency is more than $161,000.
- 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.
When we look at the average income tax rate paid be people who paid more than $161,000 in personal income tax, we find that to have paid that amount in tax, the taxpayer probably earned well over 700,000 in each of the last 5 tax years. That’s NOT poor!
Furthermore, if you’re looking at that third item in the list and thinking that a lot of poor or middle class expats might fail to file that form, then think again. You see, the same American Jobs Creation Act that indexed the tax liability threshold for a “covered expatriate”, also imposed a first-ever U.S. Exit Tax on those “covered expatriates”. Few people, who do not qualify as a “covered expatriate” under either of the first two bullet-points, will want to make themselves liable for a tax that they would otherwise not have to pay, by failing to file Form 8854. Sure, a few expats might accidentally fail to file that form or possibly a name of a non-covered expatriate might accidentally appear on one of the lists, through bureaucratic error. But by and large, those lists contain the names of very wealthy former U.S. taxpayers.
Let’s be clear. This is not about Republican or Democrat. It’s not even about the very important segment of taxpayers who pay more than a third of all personal federal income tax and who are being increasingly punished, for having been successful. It’s not about giving the wealthy an advantage. Instead, it’s about removing the increasing disadvantage that goes with being successful in the USA. It’s about a hugely disproportionate amount of lost income tax revenue, when those wealthy taxpayers leave and it’s about who will have to make up that difference in taxes – you and me. That’s what it all comes down to – the unintended punitive effect this expatriation of wealth will have on you and me and other ordinary non-wealthy Americans.
Some may call those expats names, for leaving. Others will understand how these wealthy taxpayers have been forced to make such a painful choice. But regardless of what others think of them, they’re still human and that means they’re going to do their best to preserve what they have justly earned. Regardless of how much they may dislike the idea of leaving the USA, if keeping what they have worked so hard to achieve and being able to pass it on to their children requires renunciation, then that’s what they’ll do. But when they do, it’s those of us who remain, who will have to make up the difference in the form of higher taxes and a higher national debt.
There are just two things that will reverse this ominous trend. Obviously, the election of Donald Trump will have a decided effect on reducing renunciations. The wealthy aren’t asking for special treatment. In fact, all they want is to be treated the same as everyone else. But the current administration is not doing that and Hillary is proposing even more taxes on the wealthy. So look at our choices.
Trump will do his best to treat everyone the same and Hillary will continue and build on Obama’s “soak-the-rich” agenda, driving even more wealthy taxpayers and the jobs they create, offshore. So electing Donald Trump will be a giant step toward reversing this flight of our most critical taxpayers.
The second thing that would certainly reverse this trend is the FairTax (H.R.25 / S.155). It would replace all federal taxation of income (both personal and business), with a progressive national retail sales tax. Under such a model, playing favorites with any income group would be effectively impossible. That would bring further renunciations to a virtual halt. But since there would be no business income tax, foreign businesses would rush to build manufacturing plants in the USA, creating massive numbers of new jobs. The IRS would be abolished and all personal data held by the IRS, with the exception of that data required to calculate Social Security, would be destroyed. In it’s place would be formed a tiny sub-department, within the U.S. Treasury, that would audit the states. Those state agencies would audit a portion of approximately 25 million retail businesses and nobody would audit individuals (except those who own a sole proprietor retail business and such audits would be relative to sales tax collection). It should be noted that businesses in 45 states already undergo such sales tax audits by the same agencies that would collect the FairTax.
But it gets better. The total lack of a national income tax of any kind would be just the kind of “drastic” change that could encourage many of those prior wealthy expats to return. Although returning and going through naturalization would be costly, up front, the long term benefit would be huge, since U.S. manufactured products would be more competitive, against their foreign counterparts.
Finally, I would like to point out that Vice Presidential Nominee, Mike Pence is a FairTax supporter and will have the ear of Donald Trump for the next four to eight years. So by electing Donald Trump, we could have the best of both worlds. Trump’s initial actions would certainly cause an immediate and dramatic reduction in the expatriation rate and we could eventually get the FairTax, which would draw wealthy investors into the USA, creating more jobs and thus increasing tax revenue.
There is one thing that is certain. If Hillary were to win, the number of wealthy expats would skyrocket over the next few years – far more than under Obama, thus dramatically reducing tax revenue, increasing the deficit and driving taxes up for everyone who remains, while leaving more Americans unemployed.