President Trump has significantly reduced the wealth flight, caused by Obama, but the #FakeNews media is ignoring it.For eight years, Obama’s “Soak the Rich” policies drove record numbers of our most prolific taxpayers to renounce their U.S. citizenships, leading to a substantial loss of tax revenue. But the latest official numbers show that Trump has reduced that “taxpatriation” by more than 20% in just two years.
The final official data on expatriations of the wealthy, for 2018, was just published in the Federal Register (over a month late, probably due to the shutdown). It reveals that for the second consecutive year, President Trump has significantly reduced the number of wealthy taxpayers who are renouncing U.S. citizenship and moving themselves, their disproportionately high tax base, and the many jobs they create, to another country.
It’s interesting to note that many of the tax and spend crowd in Congress like to paint these exiting former taxpayers as “evil” and “traitorous”, simply because these wealthy expats legally escaped the onerous taxes on wealth that those same members of Congress imposed. But that scorn from the lawmakers who created the problem, doesn’t seem to bother them. In fact, many of these escapees refer to themselves as “taxpatriots”, for exemplifying the spirit of our Founding Fathers, who escaped the punitive taxes of England, to found a new nation called the United States of America.
But to get back to our point, in 2018, the number of wealthy taxpayers who renounced their U.S. citizenship was down to just 3,974. That’s down from the high of 5,409, just two years ago. To put it another way, it’s 1,159 fewer wealthy taxpayers, who renounced in 2018, than in Obama’s last year in office. That represents a 21.43% drop in only two years!
But the news gets better. Not only are the numbers seriously heading in the right direction under Trump’s economic policies, but the trend indicates that the downward shift in the numbers is accelerating. The final 2018 totals were actually much lower than predicted. Even so, as the above chart shows, there’s still a lot of work to be done.
Understanding the Problem
Every time a wealthy citizen renounces his citizenship, it has a disproportionate effect on our tax base. Think of taxes from a return on investment point of view. It actually costs the government far less to provide services to the rich, than to the poor or middle class. For example, the wealthy don’t live in Section 8 housing or avail themselves of low interest housing assistance from HUD. The wealthy don’t receive free healthcare through the Health Resources and Services Administration (HRSA), nor do they receive energy bill assistance through the Low Income Home Energy Assistance Program (LIHEAP). Even wealthy seniors often have private health insurance that leaves Medicare and Medicaid in the dust, which means they are less likely to avail themselves of their Medicare benefits.
It’s clear that for every dollar the federal government spends on the wealthy, they spend thousands or even millions on the poor and middle class. However, for the sake of argument, let’s just ignore this fact and assume that it costs the government the same amount to provide services to either a rich person or a poor person. In other words, for our example, we’re creating a “best case” scenario.
Next, consider the fact that the rich pay far more of the tax load, even based on income, than do the poor. According to the IRS, in 2016 (the last tax year for which this data is available), the top 1% of income earners earned 19.72% of all personal income, but paid a whopping 37.32% of all personal income tax actually collected. That’s almost double their share, based on income. By contrast, the bottom half of income earners paid just barely over a quarter of their share, based on income. The effect is that taxes paid by each rich taxpayer pays for government services that are provided to many poor and some middle class taxpayers.
So when a poor or middle class person renounces his U.S. citizenship, there is no real adverse effect on those who remain. But when a rich person renounces, it means that the taxes that the rich person paid and that supported many less affluent taxpayers, are lost. It means that those of us who remain, must make up the difference, in additional taxes.
To understand where this is going, we need to know more about the lists from which the above chart was taken,
Under IRC section 6039G of the Health Insurance Portability and Accountability Act (HIPAA) of 1996, the IRS is required to publish quarterly, in the Federal Register, a list of the names of all wealthy taxpayers (and wealthy long term permanent residents) who renounced their U.S. citizenship (or permanent residency) in the prior quarter. This report is officially known as “Quarterly Publication of Individuals, Who Have Chosen To Expatriate”. To those in Congress, who voted to create those lists, they were “Name and Shame Lists”. But as it turned out, many of the expats whose names appear on those lists wear that placement as a badge of honor, signifying that they were smart enough to get out before things got really bad. Today, many wealthy expats just call them the “Taxpatriot Lists”.
But what, exactly, does it take to be a “covered expatriate”?
The original legislation specified that the Lists include only the names of “covered expatriates”. The exact definition of a “covered expatriate” has changed slightly, over the years, but it has always been tied to wealth. Since 2008, the net worth specification has remained at two million dollars and the income specification has been tied to the cost of living. Each year, you can find the current definition on the IRS website page titled, “Expatriation Tax“. Here is what that page says, today. (Note: The numbers in orange come from different sources, explained below.)
If you expatriated on or after June 17, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($151,000 for 2012, $155,000 for 2013, $157,000 for 2014, and $160,000 for 2015) ($161,000 for 2016 and $162,000 for 2017).
- 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.
If any of these rules apply, you are a “covered expatriate.”
Explanation for the orange text, above:
The specific tax liability requirement of $161,000 for 2016, can be found in paragraph 3.30 (page 19) of the IRS publication “Rev. Proc. 2015-53”, concerning Inflation Adjusted Items for 2016. Beginning in the first quarter of 2017, the tax liability requirement for a covered expatriate will be $162,000 and it can be found in paragraph 3.32 (page 21) of the IRS publication “Rev. Proc. 2016-55” concerning Inflation Adjusted Items for 2017.
There are some who may incorrectly think that there could be a large number of poor or middle class expats, who might qualify as a “covered expatriate”, simple because those individuals failed to file Form 8854. But that’s extremely unlikely to happen. That’s because, besides having your name included on the Taxpatriot Lists, a “covered expatriate” also incurs an additional punitive exit tax that must be paid, before renunciation will be granted. It would be foolish for anyone who did not have enough income or net worth to have to pay that additional tax, to fail to file that form. After all, the purpose of that form is to tell the U.S. government that you don’t qualify as a “covered expatriate”, under either of the first two qualifiers.
Putting the pieces together
It should now be clear that those, whose names appear on the Taxpatriot Lists are extremely wealthy. But you may still be thinking that, even as high as the taxpatriation numbers are, they are not high enough to present a serious problem. So let’s work the numbers.
(As an aside, before I started these calculations, I expected them to expose a fairly significant problem. Those of you who have read my book, “The Rich Don’t Pay Tax! …Or Do They?”, know that I’ve been following this issue for years. But even I was surprised by the results of the calculations you are about to see. In fact, before writing about the results in this article, I double and triple checked the calculations. This really is a serious issue!)
If we look at what it takes to be a “covered expatriate”, we find that it’s almost a certainty that to be a “covered expatriate”, one must be in the top 1% of income earners. If there are any “covered expatriates”, who are not yet in the top 1%, it’s only by a marginal difference. Most, if not all “covered expatriates” are probably well into that category. In fact, we know that many of the people named on those lists have incomes that run well into the millions per year. Actually, several well known billionaires have had their names appear on those lists, over the years.
Although the average is probably much higher, for the sake of argument, let’s just assume the “best case” scenario and say that all of the “covered expatriates” are just barely at the base income of what it takes to be in the top 1% of income earners
Then let’s go back to the above mentioned IRS Collections Data for 2016. In that spreadsheet, we find two pieces of important information.
- In order to be in the top 1% of income earners, in 2016, you had to earn at least $480,804.
- The average income tax rate for the top 1% of income earners, in 2016, was 26.87%. Note that this is based on actual taxes collected from that group.
So let’s do a little math with this info. Remember that we are assuming that all of the “covered expatriates” are at the bottom of the top 1% of income earners, which is being extremely conservative.
Using the above data, we can calculate what would be the average tax paid by a person who earns just exactly what it takes to qualify as a top 1% income earner.
$480,804 * 26.87% = $129,192.03
Let’s round that down to $129,000 in income tax.
Next, let’s total up the number of taxpatriots, who renounced their citizenship during the Obama years. You can see those numbers in the above chart. That total is 21,163.
But many of those taxpats were married and a large portion of those married people were probably filing jointly. In other words, they accounted for only a single tax return. Certainly, that number wasn’t half. In fact, there are many singles on the Lists. But since we don’t know the breakdown, let’s once again go for the best “best case” scenario and say that every name on the list was only half of a married couple, who filed jointly. In that case, we should cut that number of taxpats in half.
So under Obama, the total of family taxpatriations was 10,582.
Finally, we need to calculate the amount of lost taxes, from those 10,582 wealthy families that renounced. To do that, we multiply the number of taxpatriots by the tax payment of one taxpayer at the low end of the scale.
10,582 * $129,192 = $1.37 BILLION!
You read that right!
This is the number that had me surprised. I expected bad. But $1.37 Billion in lost tax revenue was quite a bit more than even I expected.
Worse yet, that’s not just a one-time loss.
That’s how much the USA will lose in taxes each and every year going forward, due to the massive taxpatriation that was caused by Obama’s disastrous “Soak the Rich” policies.
Now, consider that in each and every case, we chose to use the “best case” scenario. We assumed that all expats were at the low end of what it takes to be a “covered expatriate” and we assumed that each and every “covered expatriate” was only half of a married couple filing jointly. What if we had used more reasonable assumptions? That number would be much higher. So make your own assumptions on those scenarios and re-calculate.
Whatever you come up with, just remember that it’s only for a limited number of taxpats (21,163) and that it represents an annual loss in U.S. taxes, every year, going forward. Then consider that this only represents “personal” income tax. Many of those taxpats took businesses and jobs abroad, when they left. That’s more lost tax revenue!
But up to now, we’ve only been talking about 21,163 taxpats. So the next question becomes,
What happens if all of the top 1% leave?
You pay the difference.
After all, you can’t expect the government to cut services by more than a third, to the 99% of us who are still here, just because a relative handful of very wealthy taxpayers chose to move to a more wealth-friendly jurisdiction. In fact, this is one of the primary reasons why our debt is so high. Obama raised our taxes and increased the debt, at least partially, to make up for losing all those wealthy taxpayers.
Of course, not all of the top 1% will leave… at least not right away. So once again, let’s be very conservative and ask, what if only 10% of those top-earning taxpayers were to leave. The top 1% amounts to a little over 1.4 million taxpayers. So 10% of them would be roughly 140,000 filers. In our above calculation, we were looking at just 10,582 filers. Ten percent of the top 1% would be more than 13 times worse. So even using our “best case” scenario assumption that all of those taxpats earned barely enough to qualify as a “covered expatriate”, that would be more than $18 BILLION in lost tax revenue!
It’s getting better, thanks to President Trump.
Actually, to be technically accurate, it’s getting worse slower.
Certainly, the economy is improving dramatically, under President Trump and that improvement is reflected in the significant drop in formal renunciations of the wealthy, as shown in the above chart that tracks the Taxpatriot Lists. But we still have a long way to go. The number of wealthy expatriates is certain to keep dropping, while Trump is in office.
But much of the damage that Obama’s “Soak the Rich” policies caused will not be easily reversed. Much damage has been done that cannot be undone simply by slowing the flow of wealthy taxpayers to other tax jurisdictions.
We need to replace that lost tax base.
While the Trump tax cuts have worked wonders in slowing taxpatriation and creating jobs, there is nothing in that legislation to encourage more wealth to move here from other countries. It may sound enticing, but only till you consider that when Trump’s eight years are up, the next tax and spend politician to win the White House can easily reverse all that Trump has done.
In fact, as long as we maintain an income tax of any kind or level, we can expect to see Congress and the White House using the tax code as a ping-pong ball, to favor each party’s big donors. That’s because an income tax not only makes such tampering possible, but it encourages it.
There is, however, a solution, in the form of a bill that is currently being held up in the Ways and Means Committee of the U.S. House of Representatives. It’s also a bill that Vice President Mike Pence co-sponsored when was in Congress.
H.R.25 – The FairTax Act of 2019, would replace the entire income tax code with a simple and effortless progressive sales tax that removes the ability of Congress to tamper with the tax code, to create favorable treatment for big donors. If income is not taxed, there is no way to give particular businesses an income tax break.
But the best thing about the FairTax would be that it would create a serious enticement for foreign businesses and wealthy foreigners to invest in the USA. Consider this: Under the FairTax, U.S.-manufactured products would have no built-in income tax component in the price. That would make U.S.-manufactured goods more competitive, worldwide. Why would a major manufacturer want to build his product in Mexico, Europe, or China, where the cost of his product would be driven up by that country’s corporate income tax, when he could build in the USA, for less cost. He could sell his U.S.-manufactured product at a lower price and make a bigger profit, than manufacturing in most other countries.
However, it’s the side effects that are what’s really great. When those foreign manufacturers start building plants in the USA, it will create a massive number of new jobs. With more people being employed, there will be a broader tax base. This will mean that more people will be paying less tax, to generate record tax revenue.
But it gets even better.
Remember that, as long as the USA taxes income, any changes imposed today, can be easily undone or even reversed, tomorrow. But with a retail sales tax, there is no way to play favorites. Taxes are collected at the point of retail sale. There would be no IRS looking into your financial affairs. All of your private financial data that is currently held by the IRS would be destroyed. The infrastructure to play favorites would be gone. Any future attempt to implement an income tax would have to start over from scratch and once the income tax is gone, any attempt by politicians to re-introduce it would be political suicide. So wealthy foreigners and foreign corporations, who are considering investing in the USA, would be able to feel confident that the next administration or Congress won’t suddenly turn their move to the USA into a costly error, by weaponizing the IRS against them. That’s because there would be no IRS to weaponize.
Reducing taxpatriation is fine. But think about it. Wouldn’t it be better to not just reduce it, but reverse it?
President Trump has us going in the right direction, in reducing taxpatriation. But even his best efforts are limited, as long as his efforts are tied to an income tax. The FairTax is the lever that Trump needs, to actually turn the tide and reverse taxpatriation.
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