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

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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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