Rise in formal citizenship renunciations slows in anticipation of Trump presidency

Wealthy taxpayers anticipate Trump presidency.Wealthy taxpayers anticipate Trump presidency.
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Wealthy taxpayers anticipate Trump presidency.

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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 over the first two quarters of the year, 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.

Now that the election is history and it’s clear that Donald Trump will be our next president, I predict that we could see a drop in formal renunciations in the last quarter of 2016. However, that could be overshadowed by the renunciations of wealthy celebrities, who promised to leave if Trump was elected, like Rosie O’Donnell, Cher, Whoopi Goldberg, and Barbra Streisand, to name but a few (if they keep their promises, which I sincerely hope they do). Of course, we must not forget the Clintons, who would find it wise to move to a non-extradition country, before January 20. There is also the possibility that the Obama Administration has been slow-walking this data, to make it less damaging to Hillary’s campaign. So we could see a sudden upward shift in the numbers for the last quarter. It’s anybody’s guess.

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 have taken 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 most of the rich worked for what they have. 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 political office-holders in that last group, too.

What’s happening is that, since the wealthy really don’t want to leave, they’re they have been waiting to see who wins the election. If Since it’s Trump, most will probably cancel their plans to leave or at least put them on indefinite hold. But if it’s it had been Hillary, we’ll certainly see we would have certainly seen 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 have easily exceed 50,000 a year, under Hillary. That would be have been 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 promised 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 proposed even more taxes on the wealthy. So look at our choices.

Trump will do his best to treat everyone the same and Hillary will would have continued and build built on Obama’s “soak-the-rich” agenda, driving even more wealthy taxpayers and the jobs they create, offshore. So electing Donald Trump will be was 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 will likely have the best of both worlds. Trump’s initial actions would will 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 had won, the number of wealthy expats would have skyrocketed 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.

The first and most important step in preserving our tax base is electing Donald Trump President of the United States of America.

We’ve done that. Now, we need to turn our attention to passing the FairTax.

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Formal citizenship renunciation among wealthy is up 2,000% under Obama

Formal Renunciations of the Wealthy continue to climb to new heights.Formal Renunciations of the Wealthy climbs to new heights.
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Formal Renunciations of the Wealthy climbs to new heights.

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According to the latest official Quarterly List of Individuals, Who Have Chosen to Expatriate, as published in the Federal Register, 1,158 wealthy individuals renounced U.S. citizenship in the first three months of 2016. If this continues, it is a recipe for economic disaster in the USA.

That quarterly total represents a 2,005% increase over the average quarterly number of formal renunciations, among this same income group, in the last year of the Bush Administration. In 2008, there were just 231 formal renunciations, over the whole year. That averages out to less than 58 renunciations per quarter. So do the math.

   1,158 Renunciations in 2016-Q1
 ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄ ̄  = 2,005%
  57.75 Renunciations average in 2008

The Obama Administration, aided by Democrats in Congress and a weak GOP Leadership, has wreaked havoc on the U.S. economy for the last seven years. But the loss of 16,912 wealthy U.S. citizens during that time is doing damage to our economy that will continue for years after Obama leaves office, regardless of who wins the next election. You see, when a wealthy citizen renounces his citizenship, we lose a disproportionately large portion of our tax base. Also consider that renunciation is effectively, permanent. Renunciants can re-apply for citizenship. But very few ever do.

As long as the number of wealthy expats remained low, as it was in 2008, when there were just 231 renunciations over the whole year, expatriation didn’t represent even a minor problem. But when we have over a thousand renunciations in a quarter and well over 4,000 a year, as we do now, it presents a very serious problem for our economy. Then consider that the number of wealthy expats has been growing steadily, since Obama took office.

But to understand just how bad this is, we have to look at exactly how the government is defining, “wealthy”.

These lists, known to many expats as, the TaxPatriot (or Taxpat) Lists, were legislated in the Health Insurance Portability and Accountability Act of 1996 (HIPAA – H.R.3103). According to that legislation, for a renouncer to have his name placed on one of the lists, the renouncer must be a “Covered Expatriate”. That definition was fixed in HIPAA, but has since been changed to a floating definition that is adjusted with inflation. The most recent definition can be found on the IRS website (here and here). Currently, in order to be a “Covered Expatriate,” an individual expatriate must fit one of the following three criteria:

  1. Have a net worth of $2 million on the day of expatriation,
  2. Have had an average tax liability (not income) of $161,000 over the last five tax years,
  3. Have failed to file Form 8854, declaring that he/she has filed accurate tax returns for the last five years and does not fit one of the first two criteria.

Some will argue that the third criteria allows for other than rich “covered expatriates” and they would be right. However, if a citizen who does not fit one of the first two criteria fails to file Form 8854, he unnecessarily makes himself liable for the Bush Exit Tax (part of the “Heroes Earnings Assistance and Relief Tax Act of 2008” – a.k.a. “H.E.A.R.T.”). Only “covered expatriates” are liable for the Bush Exit Tax, so why would someone who is not rich, make himself liable for a tax he is not otherwise required to pay? Even so, the names of some expats, who are not rich, do make their way on to the lists, either through failing to file Form 8854 or through bureaucratic error. But by and large, the vast majority of names on the Taxpat Lists are those of very wealthy former U.S. taxpayers.

The first criteria is pretty clear. Someone who has a net worth of more than $2 million is not poor and that’s just the low end. Most have a much larger net worth. So, let’s look closer at the second criteria.

If we work the math backwards, we find that someone who pays $161,000 a year in U.S. income tax, would have to earn somewhere in the range of $600,000, at the low end of the scale, in order to have paid that much tax. Most of the people whose names are on the list probably earn much more. That kind of income would place each of these “covered expatriates” in about the top one-half percentile (0.5%) of wealthiest taxpayers. But since more than half of all U.S. citizens don’t pay any federal income tax or they receive a refund amounting to all of what they paid in taxes or more, it means that a “covered expatriate” is in the top one-quarter percentile (0.25%) of wealthiest U.S. citizens (not just taxpayers). We don’t have specifics on the top one-half percentile of U.S. taxpayers. But the top one percentile paid 37% of all U.S. personal income tax collected in 2013, according to published IRS Collections Data (most recent data available).

Do you begin to see the problem? Look at the above chart and see how expatriations have been climbing, since Obama took office and consider who has to make up the difference, every time a wealthy U.S. citizen renounces his U.S. citizenship. It’s ordinary (other-than-rich) taxpayers, who have to pay more tax, to make up for that lost tax revenue.

If Obama’s “Soak the Rich” policies were to continue for four or eight more years, as would surely happen under a Hillary Clinton administration, formal renunciations among the wealthiest taxpayers would continue to skyrocket to far higher levels – levels that would make the above chart pale, by comparison. If that happens, it would be the middle-class and the poor, who would have to make up the difference in taxes, due to the lost tax base. The problem is that the rich pay roughly double their share in taxes, so when they leave, those of us who remain, must pay far more. After all, you don’t think the government will cut spending by 20 percent, 30 percent, or more, just because a relative handful of rich taxpayers left, do you?

But it doesn’t end with just tax rates. There is another factor that has surely contributed to this increased expatriation of the wealthy. It’s called FATCA (the Foreign Accounts Transaction Compliance Act), that was a part of the HIRE Act of 2010 (H.R. 2847) and it has been playing havoc with U.S. citizens who are living and working abroad. The idea of FATCA was to try and force foreign banks to violate the trust of their clients, by reporting details on the accounts of U.S. citizens or accounts on which a U.S. citizen is a signatory. But Obama and the short-sighted members of Congress, who thought this would work, failed to consider how valuable customer faith and trust is to banks.

Most foreign banks, instead of reporting on the accounts of their U.S. citizen customers, chose to close out the accounts of those U.S. citizens and ask them to take their business elsewhere. The problem for many of those U.S. citizens was that there were no other banks in the country where they lived and worked, that would take their money. They couldn’t pay rent, electric bills, water bills, or any of numerous other bills that required a local account.

Many of those U.S. citizens abroad, had originally planned to return to the USA within a few years, after their work contract was up. Others had married a foreign national and had chosen to keep their U.S. citizenship for convenience and pay the associated taxes that went with maintaining U.S. citizenship. Others were “Accidental Americans”, who were born in the USA, to foreign parents and who returned to their native land as an infant. The reasons were numerous. But with FATCA, all were faced with problems arising from that legislation. For most, it was a choice of either returning to the USA or renouncing their U.S. citizenship. It’s clear, from the climbing number of renunciations among the wealthy, that an increasing number of U.S. expats are deciding that the best way to deal with FATCA is to remain abroad, renounce their U.S. citizenship, and pay the Bush Exit Tax.

Now certainly, some of those expats were not rich. But just think about it. Companies can typically get plenty of low wage labor abroad. So more than likely, the people who they bring over from the USA are highly skilled in their field and just as likely to be among the higher paid employees in the company. Certainly, some of them would fit into the “covered expatriate” category. When I lived abroad, I met a number of other U.S. citizens, who were there for work and from my conversations with them, I have personal reasons for believing that a rather large number of those U.S. citizens would be “covered expatriates”, should they choose to renounce. But, in fairness, that’s one person’s experience. You be the judge.

If you search for the various expat groups on Facebook, you will find many horror stories about FATCA. One story of which I am familiar is that of an American man who married a French woman. He kept his U.S. citizenship and paid U.S. taxes, as required under U.S. law. He and his wife had a business together. Also, both names were on their home mortgage. He had broken on U.S. or French laws. But one day, without warning, their bank informed them that the bank was closing their business account, because a U.S. citizen was a signatory on the account. The bank was also calling their mortgage, because the name of a U.S. citizen was on the mortgage, as well. Fortunately, because he had lived in France for so long, he already had dual citizenship. So, thinking it was going to be a simple matter of renunciation, he went down to the U.S. Consulate and filed the forms to renounce his U.S. citizenship that day. Unfortunately, it took the U.S. government an inordinate amount of time to process the paperwork. It caused them terrible hardship, with their business and hurt their credit, while they were waiting for the U.S. government to act. There are literally thousands of stories like this and worse.

The point is that our government, which is now around $20 Trillion in debt, is getting desperate to collect more revenue from any source they can. Between Obama’s “Soak the Rich” agenda and FATCA, a constantly increasing flow of wealthy U.S. citizens is being driven to renounce their U.S. citizenships. Of course, when they do, they leave behind all U.S. tax liability on non-U.S. sourced income. But to make matters worse, when these people renounce, they most often take all of their income producing assets out of the USA, as well. When that happens, you and I end up paying more tax, to make up the difference.

There are only two things that can stop this exodus of wealthy taxpayers, before it’s too late.

Passing the FairTax (H.R.25 / S.155) would not only stop this exodus of critical taxpayers, but reverse it. Without an income tax, businesses would flock to the USA, to do their manufacturing where they would have a tremendous tax advantage, over competitors in other nations. Money would be flowing into the USA, instead of out. There would be more jobs and more people working and paying tax, instead of on welfare. But even though the FairTax has a record number of co-sponsors for a revenue bill, it will take time to get it out of committee to a floor vote. But with Trump now on a fast-track to the Oval Office, the log jam that has kept the FairTax bottled up in committee will be cleared. Sure, Trump has his own tax plan and he will probably push it through first. But once that plan is in place, he will certainly be looking for ways to improve our tax collection, even more, leaving the door for the FairTax wide open.

Taxpat projection thru 2020

Taxpatriot projection
thru Year 2020

This brings up the second thing we can do. In fact, since the presidential race is down to Donald Trump or Hillary Clinton, the most immediate thing that we need to do is elect Donald Trump. That’s because Clinton would surely continue Obama’s “Soak the Rich” agenda for the next four or eight years and by that time, the number of wealthy expats would no longer be several thousand a year, but several tens of thousands a year or more. That’s a recipe for disaster for those of us who can’t afford to move to a more favorable tax jurisdiction. The chart to the left shows a polynomial trend line projection of what the chart would look like if renunciations continued at the current rate through one year under Clinton.

By contrast, Donald Trump is a successful and respected businessman. So, whether they like him or not, wealthy U.S. taxpayers, who have been considering renunciation, will certainly be disposed to give him a chance to fix the problem, before taking such a momentous step. Furthermore, once Trump has a chance to sit down and consider the merits of the FairTax, there is a good chance that he will get behind it and use his bully pulpit, to push it through Congress, since it does benefit all the voters, takes power away from Congress, and puts thousands of tax lobbyists out of work – all of which fit his agenda.

Make no mistake. This increasing renunciation of the wealthy is a disaster in the making. Whether you believe those who are renouncing are greedy, rich traitors or that they are good people, who are just protecting what they have earned, the point is that we NEED their tax dollars and we are losing these critical taxpayers at an alarming rate. Something must be done to entice them to stay. You can make the difference at the polls.

Vote for Donald Trump for President, to stop the hemorrhaging of wealthy taxpayers and vote for congressional candidates who support the FairTax, to turn this dangerous trend around.

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