Formal Renunciations of the Wealthy on Track for Yet Another Record High – projected 4295.Based on the latest federal data on expatriations of the wealthy and using a straight line projection, more wealthy U.S. citizens will formally renounce their U.S. citizenship in 2015 than renounced in all eight years under President George W. Bush.
The 2015-Q3 “Quarterly Publication of Individuals, Who Have Chosen To Expatriate“ has been released and it reveals that 1426 wealthy Americans formally renounced their U.S. citizenship in the third quarter of 2015, bringing the total number of expatriations for the first three quarters of 2015 year to 3221. That’s an average of 1,073.67 renunciations per quarter. So projecting that average number forward for one more quarter reveals that renunciations for the entire year will likely be in the neighborhood of 4,295 (3,221 + 1,073.67 = 4,295). For comparison, the total number of formal renunciations of U.S. citizenship among the wealthy, for all eight years under President Georg W. Bush was just 3,939. If expatriations reach the projected level this year, then it will amount to an increase in formal renunciations of 1,859%, over the renunciation rate that Obama inherited.
This is important, because the people whose names appear on these lists are not ordinary taxpayers. They are primarily very wealthy and as such, they represent a disproportionately large amount of federal personal income tax revenue. When they cease providing income tax revenue, those of us who remain must make up for that loss, in the form of higher taxes.
The above referenced lists were mandated under the Health Insurance Portability and Accountability Act of 1996 (HIPAA – H.R.3103) and they appear quarterly in the Federal Register. (Click here for quick links to all of the past lists.) From these lists, we know not just how many wealthy Americans renounced their citizenship every year, but we actually know the names of those people. Every number on the above chart represents that many wealthy U.S. citizens, who walked into a U.S. embassy or consulate somewhere in the world, turned in their passports, paid the Bush Exit Tax (part of the “Heroes Earnings Assistance and Relief Tax Act of 2008 (H.E.A.R.T.)“), and in doing so, left behind all further U.S. income tax liability on non-U.S. sourced income. Furthermore, most indicators show that, after renunciation, almost all of these people derive all or most of their income from offshore sources, meaning that they pay little or no U.S. income tax, after renunciation.
So just what is the requirement for a person to have his name appear on one of these lists? Well, the legal term is “Covered Expatriate“ and the definition of that term appears in the above-referenced H.E.A.R.T. legislation. The IRS publishes the specific numeric criteria, for years through 2014, on their page on the Expatriation tax. A separate document gives the specific numbers for 2015 to qualify as a Covered Expatriate and to have your name appear on one of these lists. In short, you must fit at least one of the following three criteria.
- The renouncer must have a net worth of more than $2 million at the time of renunciation, or
- The renouncer must have had an income tax liability of more than $160,000 in each of the five tax years, prior to renunciation, or
- The renouncer failed to file a form 8854, in which he is supposed to swear that he does or does not fit one of the above two criteria.
The first criteria is very straight forward. The second criteria is only slightly obscure, since it is based on tax liability, instead of income. But if you look at the average tax rate paid by high income earners (around 22 to 23 percent) and work backwards, you will find that a $160,000 tax liability would mean that the individual probably earned in excess of $700,000 in each of those five tax years. Such an income would put the taxpayer/renunciant in the top one-half percent of all taxpayers.
However, that third criteria could leave one with a wrong impression. Some people might think that many less-than-wealthy expats might fail to file form 8854 and thus have their names appear on the Taxpatriot Lists, along with the rich expats. But there is more to being considered a Covered Expatriate, than just having your name appear on a list. The Bush Exit Tax, mentioned above, applies to Covered Expatriates only. Therefore, anyone who does not otherwise qualify as a Covered Expatriate, has a financial incentive to file a form 8854, because that’s where he declares that he does not fit one of the first two criteria. By failing to file form 8854, a less-than-wealthy expatriate would become subject to an exit tax that he would not otherwise be required to pay.
This isn’t to say that “every” name on the lists represent a wealthy person. After all, we are talking about the government and the “good enough for government work” attitude of government employees might allow the names of a few less than wealthy people to appear on the lists. But even so, those mistakes would make up a statistically insignificant portion of those lists. The whole point is that to be on one of those lists, one is extremely likely to be very wealthy.
As you can see from the above chart, formal renunciations of wealthy Americans remained rather steady throughout the last half of the Clinton Administration and renunciations actually trended downward in the final three years of the Bush Administration. But that all ended with the election of Barack Obama, who made it clear that he intended to “soak the rich.” In fact, the only drop in expatriations, since Obama took office, was in 2012, which was an election year. That means that a lot of people were waiting to see who won the election, before making a decision about renouncing. Moreover, even that temporary drop was substantially above the record high, recorded under George W. Bush.
According to the latest IRS collections data, the top 1% of taxpayers pay 38.1% of all personal income taxes actually collected and the top 0.1% (one-tenth percent) of taxpayers pay 18.6% of all personal income taxes actually collected. Therefore, since we know that most of the names on the lists are in the top half percent of taxpayers, we can extrapolate that those whose names are on the lists, are in the income group that pays around 30% of all U.S. personal income taxes. So, if just the top half percent of taxpayers were to renounce, those of us who remain would have to make up the difference to the tune of a 43% tax increase (30% / 70% = 42.9% increase) But those are just the taxpayers whose renunciations have been reported. While the top half percent of taxpayers are leaving, do you think that the rest of the top 1% or the top 5% are just sitting on their hands, waiting for a 43% tax increase. If the top 1% were to leave, it would mean a 61% tax increase.
For the record, according to the IRS, the top half percent of taxpayers amounts to just 680,402 taxpayers. A polynomial projection (6th order, for the statistics geeks among you) of the above chart shows that if we elect another “Soak the Rich” president, we could be losing between 35,000 and 60,000 of these top half percent taxpayers by the end of the next president’s term, in 2020. But long before it gets that bad, this trend will likely trigger an avalanche of expatriations that will make the current trend look mild, by comparison.
Sure, not all of any particular income group will renounce. So let’s consider what would happen if just half of the top 1% of taxpayers were to renounce. It would mean a 24% tax increase for those who are left and that’s not considering that many wealthy taxpayers, who are just not rich enough to be in the top 1%, are also leaving.
The point is that “Soak the Rich” isn’t working. As a result of this misguided attack on success, the successful are leaving and with their renunciations, giving up all future U.S. income tax liability for income not earned in the USA. Furthermore, after renunciation, most of those expats earn most or all of their income abroad. So as a result of “Soak the Rich”, we are driving out our most prolific taxpayers and job-creators. What’s wrong with this picture?
It’s time to end the system that enables such attacks on success. It’s time to abolish the income tax and the IRS. Without an income tax, it becomes impossible to target a particular income group. Of the various tax reform plans, both in Congress and on the campaign trail, only the FairTax (H.R.25 / S.155) will or even can abolish the IRS. The FairTax makes the IRS superfluous, by turning over all federal tax collections to the states. The states would audit a portion of about 25 million retail businesses (as they currently do in 45 states) and a small sub-department within the Treasury Department would audit the 50 states. Nobody would audit you (unless you happen to own a retail business and then it would be the same state auditors that currently conduct your sales tax audits).
NO IRS. No individual audits. No April 15th deadline. No compliance costs. No “Soak the Rich”. The total lack of a personal or corporate income tax would draw wealth and jobs back into the USA in record numbers. With more wealthy citizens spending their money on new retail products and services, and more people working, earning a salary, and spending that money, the tax load would be spread out more, so we could all pay less tax. Everyone wins… except the illegal aliens, who would be at a significant tax disadvantage, compared to entry level working citizens. The FairTax would be a WIN-WIN-WIN situation.
For more detailed information on this ominous trend, read, “The Rich Don’t Pay Tax! …Or Do They?”, available in print and popular ebook formats on Amazon, Barnes and Noble and through other booksellers or click one of the links on the left side of this page.
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