Hover over image to view at full size.Wealthy Americans are rushing to dump what was, not so long ago, one of their most treasured possessions – their U.S. passport.
The official list of wealthy U.S. citizens who renounced their U.S. citizenship in the first quarter (Q1) of 2015 was just published in the Federal Register and it reveals yet another record quarterly high. In Q1 of this year, 1,335 almost exclusively wealthy U.S. citizens turned in their passports and left both their U.S. citizenship and U.S. tax liability behind. To give you an idea of just how bad this is, it’s a third (36%) more than the number of people who gave up their citizenships in all of the last three years, of the Bush Administration (980 renunciations).
In five of the six years since Obama took office, we have seen significant increases in the number of wealthy U.S. citizens who have shed their U.S. passport. Furthermore, in each of those years, the year-to-year increase was greater than the single greatest year-to-year increase of any president, before he took office. The only year renunciations of the wealthy dropped, was 2012, which was the year Obama was running for re-election year. A lot of people who were considering renouncing, probably delayed their departure till after the election, in the hope that a new president would stop attacking success. This hypothesis is reinforced by the fact that formal renunciations of the wealthy climbed sharply in 2013 and again in 2014, when renunciations of the wealthy hit a record high of 3,415 formal renunciations – roughly 1,500% higher than the single-year rate Obama inherited.
But it’s getting even worse. 1,335 renunciations in a single quarter represents a greater than 2300% increase in renunciations over the single quarter average (58) for the last full year that Bush was in office (2008).
There are many reasons why one might choose to renounce his U.S. citizenship. But it’s becoming increasingly clear that the biggest single reason behind this latest rash of renunciations is 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). The intent of FATCA was to force foreign banks to disclose highly detailed account information on their U.S. customers and require those banks to withhold taxes from the accounts of their U.S. customers and forward those taxes to the IRS. By the way, had the government demanded the exact level of detail from U.S. banks, as they demand from foreign banks, it would be clearly unconstitutional. In order to get around the fact that the U.S. government has no legal authority in other countries, FATCA imposes extremely punitive taxes on the U.S. transactions of any non-compliant foreign bank.
FATCA shows the short-sightedness and lack of business acumen in the halls of Congress. They naively thought that all foreign banks would just roll over on command of their U.S. government masters and gleefully start reporting on all of the financial affairs of their U.S. citizen customers. But it didn’t work out that way. Those who voted for FATCA failed to consider the business of banking. It is a historical fact that banks, both foreign and domestic, are in the business of loaning money and of protecting two things – their client’s money and their client’s privacy. Any bank that fails to protect either, won’t have the deposits to be able to loan money and therefore, won’t be in business long. So instead of turning over all of the demanded information and in order to continue to protect the privacy of their clients, foreign banks chose the only way that they could both maintain their reputation for privacy and remain compliant with FATCA. They began sending out what many U.S. Expats now simply call, “The Letter.” It’s a letter wherein the bank informs their U.S. clients that they have 30 days (more or less), in which to find another place for their money, because the bank no longer able to deal with U.S. citizen customers.
The result of FATCA has been that rich and poor expats, alike, are facing serious banking issues. There are roughly 7.6 million U.S. citizens who live outside the USA. Many are on temporary work assignments, while others are long-term expats. Some are retirees, who chose a low-cost nation in which to retire, to make their savings go further. Others are married to foreigners and have settled permanently in another country. But whatever may be their reason for being abroad, for one reason or another, they all still carry a U.S. passport. However, that passport has gone from being a thing of pride, to being a heavy burden. As a result of FATCA and the resultant very predictable actions of foreign banks, many U.S. expats are unable to pay their rent, electricity bill, or phone bill. All of those things typically require a local checking account, which in many locals, are just not available to U.S. citizens. Some American expats, who want to start a business, are finding that loans aren’t available to them, either. Worse yet, many foreign born spouses of U.S. citizens are finding their business accounts being closed, because of the U.S. spouse.
Most of those people aren’t anywhere close to wealthy. But they were not the targets of FATCA. They were just collateral damage. They’re just U.S. citizens that our tax and spend politicians hung out to dry, in a vain effort to collect more taxes from people who don’t use any U.S. services. The politicians probably thought it was safe to ignore them, because most of them don’t vote in U.S. elections. In fact, long-term expats, who have no U.S. residence have very little representation in Congress. But all of those problems relate only to Americans who live abroad. The problem for we “home-landers”, as the expats refer to us, is that to be on one of those lists, you have to be a “covered expatriate”, which is a convoluted way of saying, “rich”.
I’m not saying that every name on those lists represents someone who is rich. There are some mistakes on the lists. After all, they’re made up by government workers, so by definition, there will be mistakes. There may also be a few expats who made the lists because they failed to fill out a Form 8854, upon renunciation. But it’s unlikely that there will be many of those, since failure to file that form not only puts your name on the Taxpat Lists, but makes you liable for the Exit Tax that George W. Bush signed into law in 2008. In reality, the lists should be at least 95% accurate, when referring to wealthy expats. After all, even if 50 names of less-than-wealthy expats managed to slip onto this quarter’s list, that would amount to less than 4% of the total number. So while the lists may not be 100% accurate, the errors are statistically insignificant.
So why should we be worried about this development? Consider this. The top 1% of taxpayers pay 38.09% of all personal income tax collected by the IRS; that’s AFTER all tax breaks and even any possible cheating. They are also the people who create the lion’s share of the jobs in the USA. When they leave, they take their tax base and jobs with them. While the rich don’t make up that large a percentage of expats, they make up a more than five times greater proportion of expats than they do of Americans in general. According to the 2014 HSBC Expat Explorer Report (see page 4) those who earn more than $250,000 per year make up barely 1.25% of all U.S. citizens, but they make up 7.0% of all expats.
Sure, it would take a lot more for this to become really serious. But look at the way renunciation is trending. The quarterly average for renunciations in 2008 was just 57.75. What this means is that in excess of 2300% more Americans chose to renounce their U.S. citizenship in the first quarter of this year, than the quarterly average for the year before Obama assumed office. At the end of last year, that increase was 1500%. It’s getting worse.
There has always been a trickle of renunciations over the years and the reasons for those renunciations have been varied. But it seems clear that Obama’s “Soak the Rich” agenda and FATCA are playing a large part in forcing many U.S. citizens to renounce their cherished U.S. citizenship. Expatriation for tax purposes has been called “Taxpatriation”. Forced expatriation due to unbearable FATCA limitations can now be called “FATCA-Patriation”.
In the worst year on record, prior to Obama taking office, there were only 762 names on the four quarterly lists for the entire year. Do the math. What this means is that in just the first three months of 2015, the number of renunciants almost doubled the number for the worst whole year before Obama became president. Projecting this trend forward, if this geometric increase in renunciations of our wealthiest taxpayers continues, we could easily lose the people who pay 10% to 15% of our tax load, by the time Obama leaves office. You and I would have to make up the difference, in the form of higher taxes.
There was once a time, not so long ago, when a U.S. passport was one of the most valuable documents an international traveler could have. When you handed hotel clerks or airport personnel your U.S. passport, you used to be able to see an instant attitude of change from that of “working drone” to that of “respectful attendant”. If you had a problem and had to call the police, they would treat you with a heightened level of respect, as soon as they realized that you were American. But all that has changed.
Today, your U.S. passport gets you no special respect. In fact, in a terrorist situation, a U.S. passport is considered to be the second most dangerous document you can carry – right behind an Israeli passport. At the current rate, we could see more than 5,000 renunciations this year. It used to be that anyone who had a U.S. passport wouldn’t think of giving it up. Today, many Americans are having to work hard to think of reasons to keep their U.S. passport.
The FairTax (H.R.25 & S.155) would not only give those U.S. citizens, who are considering renunciation, a reason to stay, but it would be a huge wealth magnet, drawing in wealth from around the globe. The more wealthy people we have paying taxes in the USA, the less tax the rest of us have to pay and the more higher paying jobs we will have, when those people invest their wealth.
There is a truism that is best expressed in this way. “If you want more of a thing, reward that thing. If you want less of a thing, punish that thing”
It’s time to repeal FATCA and tell Obama to stop punishing success.
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Time For America to Join the Rest of The Developed World and Adopt: Residence Based Taxation.
Americans in the US trumpet how great their freedom is. However the freedom of Americans is inferior to the freedom enjoyed by citizens of many countries such as Australia, Canada, and the UK and this freedom is this: the freedom to work and live in another country, and the freedom to leave one’s country.
America’s tax and compliance laws have increasingly acted to keep Americans in by punishing harshly those who have left.
Those impacted very much are part of the 99%, most part of the lower and middle class. If you are a US person living overseas, and there are 7+ million, then you are already getting taxed in the country where you live and receive government services. You receive $0 in US government services, other then those paid for on a fee basis. The US with Citizenship Based Taxation wants to tax you as if you live in the US. The US allows tax credits for your taxes paid in your country of residence. The conundrum comes in where the US has taxes that your country does not, then this flows on top of all taxes paid as double taxation; a more technical term for this is ‘tax treaty gaps.’ Most US persons already live in relatively high tax countries such as Australia, Canada, and the UK, and the US taxes representing double taxation get put on top; so these people pay way higher total tax than US persons with the same income living in the US.
US persons living overseas are tremendously disadvantaged by US tax and compliance policies.
All other countries of the OECD practice Residence Based Taxation. As a result while US persons overseas are tripped up by double taxation, reporting all their accounts, and onerous compliance and penalties; nationals from all other countries are free from such interference from their home countries.
Any US persons living overseas caught up in all this – which very much includes taxation without representation, an American founding principle that the US government has ignored for US citizens abroad – must visit the message boards of The Isaac Brock Society, whose motto is: Liberty and Justice for all United States Persons Abroad. ADCS has initiated legal action against the Canadian FATCA IGA and is seeking donations in its fight against US government injustices against US persons overseas – check it out on The Isaac Brock Website: http://isaacbrocksociety.ca/
You seem to be missing the point of renunciations. We are not avoiding paying taxes but avoiding double taxation. Income taxes should be made to the country a person lives, works, and invests in. Just as 40 million foreign nationals pay income taxes on their worldwide income to the United States, Americans abroad should also only have to pay taxes to their countries of residence. Citizen-based taxation is an arbitrary tax misconstrued as patriotic. It is not patriotic but an assault on an individual’s basic right to plan his or her finances. I cannot juggle two tax systems. I save in one, the other takes it away. The taxes we pay is foreign money. It’s nothing but a money grab that if other countries did it, America would be up in arms over the practice. 11 million Mexicans sending American capital to Mexico. Think, please.
John, please don’t take this as meant to disparage you in any way. But I think that you might want to re-read the above article. It’s not about people renouncing to avoid taxes, though some do. It’s about those U.S. citizens, who already live abroad, who are being forced to give up one of their most cherished possessions – their U.S. citizenship – due to an ill-conceived law. It’s also about the fact that the proportion of wealthy ($250K income) expats is almost six times greater than that same income group comprises of U.S. citizens, in general (1.25% of citizens in general versus 7% of expats). So if renunciations are spread rather evenly across income groups, the USA will lose a disproportionately high percentage of wealthy taxpayers, as compared to their portion of the population in general. When the USA loses wealthy taxpayers, those who remain, have to make up the difference. The top 1% of taxpayers are responsible for 38.09% of all personal income tax that is collected by the IRS. By contrast, those in the bottom 75% of taxpayers, who earn less than %73,354 per year, are responsible for only 13.58% of personal income tax collections. Therefore, on average, for each top 1% taxpayers who renounces will have roughly three times the tax revenue impact of a renunciant in the bottom 75% of taxpayers. What this means is that FATCA will have a serious, albeit indirect, affect on U.S. resident taxpayers. It will ultimately force taxes UP on every remaining U.S. citizen. When those who live inside the USA realize this fact, they’ll be far more interested in repealing FATCA.
Your comment assumes that these US persons overseas are not paying any taxes to the countries in which they live. They pay taxes there as they are citizens or permanent residents of these countries, and through this have a credit through tax treaties thus reducing US tax owed and also deflating the argument of the article that the US will lose the taxes of these people.
Also, it is about a fair share. If they are getting $0 in US government services – taxation is built on the premise of services in exchange – then their fair share is $0. All the other countries of the OECD figured this out. If you live in New York but now live in Arizona do you still pay taxes to New York because you once lived there – answer no. When/if they move back to the US then US taxes would apply again.
There is no assumption that all U.S. persons overseas are not paying any taxes to those other countries. However, the more money one has, be he an expat or resident citizen, the more likely he is to have interests in several countries. Some of those countries may have higher taxes than others and some will have lower taxes. Some may have tax treaties with the USA and some will not. Sure, some of those people will not represent a significant tax loss, but some will represent a serious tax loss. It all comes down to averages.
For example, some people will point to a single case, like Leona Helmsley, and say, “See! The rich don’t pay tax!” But in fact, the IRS Collections Data shows that the top 1% of taxpayers earn 22% of total income, but pay 38% of total taxes. It’s all about averages. There will be some who cheat, but that is more than made up for by those who just want to do business and be left alone. The same applies to expats. Some pay very little to the USA in taxes, while others are too busy making money to waste time trying to save a little on U.S. taxes and maybe end up being fined of jailed because the IRS interpreted the tax code differently than common sense would dictate. They average out.
Also, the foreign earned income exemption only applies to “earned” income. Many of those expats that make up that 7% who earn more than $250K per year, have no foreign “earned” income, at all. Money that comes from owning a business or from other investments is not “earned” income and therefor is not subject to the exemption.
Certainly, as you suggest, tax treaties do limit the amount of taxes that wealthy expats pay. But just as within U.S. borders, the more you earn abroad, the more difficult becomes to shelter that income from federal taxation. The more an expat earns, the more likely he is to pay a significant amount in U.S. taxes. We have an $18 TRILLION national debt. We can’t afford to be forcing any of these people out. Instead, we need to be encouraging wealthy expats and foreign nationals to come to the U.S. to live, work, and invest.
It is citizen-based taxation which is the root of all evil here. FATCA is just the obtuse enforcement tool of a tax system that is based on dogma and emotions rather than simply on pragmatism like all other tax systems in the world that ALL use residence-based taxation. CBT is simply out of touch with reality and overseas americans are paying a dear price so that prejudiced homelanders can continue to bask in their self-righteous ignorance.
Absolutely, Kevin.
But may I suggest that it’s not all “homelanders” who have this self-righteous attitude. I’m certainly not one of them. I would argue that it’s mostly only those in Congress, who have this attitude because they are desperate for more money to spend, while most homeland voters don’t have the slightest idea what damage this self-righteous attitude in Congress is causing for Americans abroad. If it doesn’t appear to affect their life, then they don’t pay attention to it. I’m hoping to enlighten more “homelanders” to the fact that if Congress continues their self-righteous attitude and doesn’t move to stop punishing U.S. citizens abroad, then in the not to distant future, it will ultimately affect the bottom line of homeland taxpayers in the form of having to make up for the lost taxes of the disproportionately high number of wealthy taxpayers who are leaving.