More wealthy U.S. taxpayers renounced citizenship in the first six months of 2015 than renounced in President George W. Bush’s entire last term in office. This puts citizenship renunciations among the wealthy on track to set yet another new annual record in 2015. In fact, formal renunciations among the wealthy, which were going down when Obama took office, have risen every year since, except one. By a strange coincidence, that one year was an election year.
The IRS has released their “Quarterly Publication of Individuals who have Chosen to Expatriate“ (a.k.a. the TaxPat Lists) for the second quarter of 2015 and when combined with the first quarter numbers, it reveals that 1,795 wealthy U.S. taxpayers renounced their citizenship in the first half of 2015. By comparison, when we total the quarterly renunciation numbers from these reports for all of 2005 through 2008, we find that only 1,742 wealthy taxpayers renounced their citizenship. So, why should we care? These are the people who pay the vast majority of U.S. income tax. Without them, their share of the tax load falls to lower-income taxpayers.
Based on 1996 legislation, the IRS must publish the names of “covered expatriates” in the Federal Register every quarter. By the latest official definition, a “covered expatriate” is a renouncer who fits one of the following three criteria:
- The renouncer had a net worth of more than $2 million on the day of renunciation,
- The renouncer had a tax liability of more than $160,000 per year for each of the prior five tax years
- A renouncer failed to certify on Form 8854 that he has complied with all U.S. federal tax obligations.
Note regarding Item 3: Since, under the 2008 Heroes Earnings Assistance and Relief Tax Act, an exit tax liability goes along with being a “covered expatriate”, it is unlikely that many expats would fail to file a Form 8854 and in failing to do so, put themselves in that category, if they were not already in that category due to their wealth. There are also other negative aspects that go along with being a “covered expatriate”. In short, there may be a few non-wealthy people who, either through failing to file Form 8854 or through clerical error, have their names show up on one of those lists. But even in the worst case, such errors should be numerically insignificant.
Let’s look then, at what it means to be a “covered expatriate”. According to official IRS Collections Data, those taxpayers in the top 2% of income earners for the last three reported tax years (data for 2013 and 2014 is not yet available) paid an average tax amount of, $161,457 in 2010, $166,079 in 2011, and $202,430 in 2012. These numbers were reached by dividing the total taxes paid those in the top 2%, by the number of returns filed from that group of taxpayers, as reported in the linked IRS spreadsheet. Keep in mind that to qualify as a “covered expatriate”, the renouncer has to have had a $160,000 per year tax liability for five years and then notice that the average income tax paid by the top 2% of taxpayers in 2010 (the fifth year in that five tax year range),was only $161,457. Therefore, if a renouncer was not in at least the top 2% of taxpayers, he should not be a “covered expatriate”.
However that’s not the whole story. Since the Joint Committee on Taxation reports that 51% of U.S. tax units (roughly households) have no positive income tax liability, someone who is in the top 2% of taxpayers is in the top economic 1% of all U.S. citizens. These are the people who we desperately need to be encouraging to stay. As the above-linked spreadsheet shows, the top 2% of taxpayers are the people who pay almost half (46%) of all personal income tax. Instead, through legislation that punishes success, we are driving exactly that group of critical tapayers to renounce their citizenship and leave behind their U.S. tax liability. Worse yet, laws like the Foreign Account Tax Compliance Act (FATCA), which was passed as a part of the Hiring Incentives to Restore Employment Act (HIRE - H.R.2847). is making life extremely difficult on U.S. citizens, who live and work abroad. While most Americans abroad are not rich, statistical data shows that the wealthy make up about five-times greater portion of Americans abroad than they make up of U.S. citizens within our borders. So this group has a particularly high incentive to renounce.
Just remember that for every wealthy U.S. citizen, who renounces his citizenship, the tax load that the rest of us must shoulder increases disproportionately. One might be tempted to trivialize the term “disproportionately”, so think if it in these terms. In 2012, the top 5% of taxpayers paid 1.43 times more in total taxes than did the rest of all other personal income taxpayers combined ($699 billion versus $486 billion). Between an abusive tax system and citizenship-based taxation, the government is effectively forcing our most prolific taxpayers to seek relief in other countries. It’s time for us to turn around this exodus.
The FairTax (H.R.25) would not only turn around this exodus, but it would actually draw in wealthy foreigners, as well. Better yet, since the FairTax is and can only be residency-based, it removes all excuse for abusive laws like FATCA and requirements like the “Report of Foreign Bank and Financial Accounts” (FBAR), which are major factors driving renunciations.
You can find links to all of the quarterly TaxPat Lists, going back to 1996, here.