“Soak the Rich” drives 2014 citizenship renunciations of the rich to alarming new high

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Formal Renunciations of the Wealthy Reaches Another Record HighHover over image to view at full size.Renunciation of wealthy U.S. Citizens reaches new record high. (This frame may be scrolled if it doesn’t fit your browser window.)

Since Obama assumed office, formal renunciation of U.S. citizenship among the top one-half percent of income earners has risen 1,500% and the one-year total for 2014, alone, is roughly equal to the number of renunciations that occurred over the last seven years of the Bush Administration.

The above chart shows the number of wealthy U.S. taxpayers who renounced their citizenship since 1998. It’s important to note that these numbers are not some estimate or projection, based upon unfounded assumptions. There is a name of a real person attached to each number represented on this chart and it’s almost certain that the named person is rich. That’s because under the 1996 Health Insurance Portability and Accountability Act, the names of “covered expatriates” must be published in the Federal Register on a quarterly basis. You can find links to each of those quarterly lists here. So to determine how many wealthy taxpayers renounced their citizenship in a given quarter, all we have to do is count the names on the list for that quarter.

Of course, this brings up two questions. The first is, “What is a ‘covered expatriate’?” The second is, “How do we know that they are rich?”

To answer both of those questions, all we have to do is to look at the definition of “covered expatriate” on the IRS website. To be a “covered expatriate”, one must fit one of the following three criteria.

  1. 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 ($147,000 for 2011, $151,000 for 2012, $155,000 for 2013 and $157,000 for 2014).
  2. Your net worth is $2 million or more on the date of your expatriation or termination of residency.
  3. 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.

Let’s examine that first criteria a little closer. The IRS Collections Data is not granular enough to give us exact numbers, but we can use that data to extrapolate and get a pretty good idea of what it means to be a covered expatriate by that first criteria.

In 2012, the income floor for the top 1% of taxpayers was $434,682 and the average tax rate for that group was 22.83%. To be in the top tenth of a percent (0.1%), the income floor was $2,161,175 and the average tax rate was 21.67%. So based on those numbers, we can conclude that to be in the top 1% of taxpayers, one would likely pay more than $99,237.90 and to be in the top 0.1% of taxpayers, one would likely pay more than $468,326.62 in income tax.

From those two numbers and related data for other income percentiles, we can project a curve and conclude that for a taxpayer to have had a tax liability of $157,000 (which was the 2014 covered expatriate threshold), he was likely to be safely in the top one-half percent (0.5%) of taxpayers. So it follows that to determine how many of the top 1% of taxpayers are leaving, we can probably come up with a reasonable estimate by multiplying the total for each year, shown on the above chart, by two (2). Now remember that this is only an estimate. But it’s all we have to work with and as you can see, the numbers make sense.

But we can’t stop at just referring to them as the top half percent of taxpayers. That’s because, as pointed out by the Joint Committee on Taxation, 51% of tax units (roughly households) don’t have enough income to incur any tax liability. So this means that, baring the incidental inclusion of the name of the occasional less-than-rich person, on what is now commonly referred to as the “Taxpatriate Lists”, those lists represent not just the top one-half percent (0.5%) of taxpayers, but the top economic one-quarter percent (0.25%) of all Americans.

But let’s get back to that the top 1% of taxpayers (or the top economic half percent of all U.S. citizens). They form a good benchmark, because we know a lot of things about them, from that published IRS Collections Data. For example, we know that the top 1% of taxpayers pay more than 38% of all federal personal income tax. We can estimate more about them from the Taxpat Lists. We know that 11,475 of the top half percent of taxpayers have renounced their U.S. citizenship since Obama assumed office. So, if 11,475 represents just the top one half percent, then doubling that number should get us in the neighborhood of the top 1%. Therefore, it’s a pretty safe bet that more than 20,000 of the top 1% of taxpayers have renounced their U.S. citizenship in that same time period. This represents billions in lost income tax revenue, for which the government will have to find another source. Of course, the only remaining source of revenue will be those of us who remain. Our taxes will be forced up… dramatically.

Special note regarding expatriates in general and the third criteria for “covered expatriate”:

This article is not meant to suggest that all expats are rich. In fact, the vast majority of the more than 7.6 million U.S. expats are decidedly middle class and some, though not many, are even poor by U.S standards. According to the “2014 HSBC Expat Explorer Report“, 7% of worldwide expats earn more than $250,000 per year. Turn that around and it means that 93% of expats earn less than $250,000 per year. But that’s a worldwide number and the USA is the sixth richest nation on the planet. So wouldn’t that mean that the USA would have a few more wealthy expats than most other nations? Probably. But the point is that even with a percent or two difference, we are still only talking about a small, but extremely critical group of expats.

So why are these few expats so critical?  Well, based on the above mentioned lRS Collections Data, $250,000 in income would place a taxpayer in roughly the top 2.5% of taxpayers. However, since half of Americans don’t earn enough to have any tax liability, that 2.5% of taxpayers works out to be the top economic 1.25% of all U.S. citizens. So what this means is that an income group that makes up only 1.25% of U.S. citizens, most likely makes up more than 7% of U.S. expats. That’s a 5.6 times greater share abroad, than within our borders (7% of expats are high-earners / 1.25% of all U.S. citizens are high-earners = 5.6 times greater percentage of high-earning expats, than high-earning citizens). Those wealthy expats already live abroad and are therefore primed for renunciation, if attacks on success continue the way they’re going.

This article is also not meant to suggest that the names on the Taxpat Lists are exclusively those of rich people. There is, after all, that third criteria (failing to file Form 8854). One might assume that the third criteria would leave room for a lot of other-than-wealthy “covered expatriates.” But that isn’t really likely. Sure, there will probably be some names of other-than-rich expats on those lists. But that number should be statistically insignificant. Let’s look at why this is so.

Although the name of a less-than-wealthy expat can and does occasionally find its way onto the lists, if a other-than-wealthy expat fails to file Form 8854, upon renunciation, such occurrences are relatively rare. That’s because there is a very strong financial incentive for other-than-wealthy expatriates to file Form 8854. You see, under Sec. 301 of the 2008 Heroes Earnings Assistance and Relief Tax Act (HEART), a covered expatriate must pay what amounts to a punitive exit tax, at the time of renunciation (thank you George W. Bush). So why would anyone, who would not otherwise be subject to the exit tax, allow himself to become subject to that tax, when all he had to do to legally avoid it, would be to file one short form? Think about it…

But even so, there are a few such names that creep onto the lists from time to time. There might be some names of people who failed to file Form 8854, who are very poor and would not have enough assets to have anything more than an insignificant exit tax liability, if any at all. However, the number of expats who are both poor and also failed to file the proper form, are likely to be very few. After all, most really poor people don’t leave the USA. That’s because poor people would find it difficult to leave behind all the free benefits that they get in the USA. Even so, some still do leave, be it for work, family, adventure, or some other reason. There could also be a few clerical errors on the lists. After all, these lists are prepared by government workers. But the law is quite specific about including only covered expatriates on the lists and it’s written in words that even a government worker could understand, so there are not likely to be a great number of such errors. There might even be a few names of people who got bad advice about renunciation and were not aware of the requirement to file Form 8854. But think about it. Even when you consider all of these possibilities, the total number of all such cases will be statistically insignificant, when compared to the huge numbers of renunciations of wealthy taxpayers represented on these lists.

In short, there are two points to be made here. First, the above chart is probably well over 95% accurate, as relates to wealthy expats. Second, although most expats are not wealthy, the wealthy make up a significantly greater per capita share of expats than they do among U.S. citizens in general.

To help us get a handle on just how quickly this issue could explode into something critical, let’s do a little math. As shown above, based on the HSBC survey and IRS Collections Data there are proportionately 5.6 times as many $250,000-earners overseas as in the USA. There are also known to be more than 7.6 million U.S. citizens who live outside the USA. So, if the HSBC numbers are anywhere close to an accurate representation of U.S. wealth abroad, then there are probably more than half a million U.S. citizens abroad, who earn more than $250,000 per year (7% of 7.6 million = 532,000). Furthermore, as discussed above, that group would fit into the top 1.25% of wealthiest U.S. citizens. Therefore, to translate that info into meaningful terms, there are half a million very high income earners, who are already primed to easily renounce, if the U.S. government continues its assault on success. Now consider that if just “most” of those people were to renounce, the USA would probably lose somewhere around 10 to 15 percent of the top 1% of taxpayers.

These are people who don’t have any fear about having to adjust to another culture or learn a new language, should the U.S. government continue to attack them. They don’t have to worry about how they will earn a living abroad. They are already earning a living abroad, they already speak the local language, and have already adapted to the culture. They are also among the millions of U.S. citizens living offshore, who are finding that U.S. citizenship carries a heavy burden, as a result of the Foreign Account Tax Compliance Act (FATCA – Title V, Subtitle A, of the HIRE Act of 2010). It’s also highly likely that most people in that income group have probably already acquired a second passport, either through residency or an economic citizenship. That means that for these people, renouncing would be as simple as driving down to the U.S. Consulate in their country of residence, filling out the appropriate forms (including Form 8854), and turning in their U.S. passport.

Although Barack Obama’s “Soak the Rich” policies are not solely responsible for the sharp increase in formal renunciations of citizenship that have occurred since his first election, his policies have seriously exacerbated what was already a simmering issue. Also keep in mind that Obama inherited the record low number of renunciations of wealthy taxpayers, since records have been kept (only 231 in 2008).

Numerous laws aimed at punishing success and the renunciation of the wealthy were already on the books, before Obama assumed office. There was a 1996 law that tried to impose a 10-year expatriation tax on the wealthy. The same bill also gave us the “Quarterly Publication of Individuals, Who Have Chosen To Expatriate”. Those publications comprise the lists from which the above chart is drawn. The idea of those lists was to reduce renunciations of wealthy expats through the threat of shaming them, by publishing their names in the Federal Register. Then there was the 2008 Bush exit tax, which was intended to reduce renunciations of wealthy taxpayers by imposing a heavy exit tax on wealthy renouncers. There were many more such onerous bills that came between those two. But the important point to notice is that, as our chart shows, none of them had any real effect on reducing renunciations. Renunciations of the wealthy had continued to climb at a slow but steady rate (the drop in renunciations in 2006 was not related to one of these disincentive bills, but rather, to a combination of several bills that had the effect of creating positive incentives for staying).

But immediately after Obama assumed the office of President, he began to implement his “Soak the Rich” agenda and dramatically increased the government’s attacks on success. The result, as you can see above, was that formal renunciations of wealthy taxpayers shot skyward, like never seen since expatriations of the wealthy have been reported. This nation has been hemorrhaging our most prolific taxpayers at an alarming rate since that time and it just keeps getting worse.

It’s human nature that if you punish a thing, you will get less of that thing. But don’t misinterpret what’s happening. It’s not that there is less success, over all. It’s just that there is less success in the USA, since much of that success is moving outside the reach of a desperate and increasingly greedy U.S. government. That of course, leaves you and me, to pay the additional taxes and create the jobs that those wealthy expats used to create, before they left for more wealth-friendly jurisdictions. If just the top 1% of taxpayers were to leave, it would mean a 62% tax increase for those of us who remained.

If we are to turn this around, we need to do it soon, before wealth expatriation turns from a rock slide into a full blown avalanche. Furthermore, whatever we do must attract both expat wealth and foreign wealth. As it happens, there is a bill in Congress today, which would do just that. It’s called the FairTax Act of 2015 (H.R.25 and S.155) and it would absolutely turn this situation around. The FairTax would make the USA a wealth and jobs magnet. At this time, the FairTax is the only bill in Congress that can do that. It’s also the only bill since the Civil War, that would positively end citizenship based taxation (CBT) and return the USA to a territorial taxation system, like those used by every nation on the planet except China and a small nation in Africa, named Eritrea.

Sooner or later, if the numbers on the above chart keep growing, there will be a tipping point. Nobody can say where that tipping point will be or how it will appear. For example, nobody can say for sure, exactly what was the tipping point for the Great Depression. Was it the Babson Break, the crash of the London Stock Exchange, or something else? All we know for sure is that something started pushing investors to sell in September and October of 1929 and that soon turned to panic. Well the same thing applies to renunciations of the wealthy. If the numbers of wealthy renouncers keeps climbing, there will be a tipping point.

The FairTax is the only bill currently in Congress that can reverse this dangerous trend. Although we don’t know where the renunciation tipping point may be, it’s undeniable that we are getting closer to that tipping point, with each passing day. Whatever the tipping point is, when it’s reached, it will spark a panic of the wealthy to get out of the USA as fast as possible and those of us who remain will be left holding the bag… and an empty one, at that.

If you want to preserve what you’ve worked a lifetime to build, then there are only two real choices. 1) Call your members of Congress now and tell them to pass the FairTax, as written, or 2) start packing your bags.

(Hint: Option 1 is best.)

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