How to Stop Expatriation in its Tracks

My recent blog entry describing how easy it is to expatriate really hit a chord.  Most responses were very positive.  But a few were downright hostile.

“How can you in good conscience encourage someone to revoke all ties to the United States,?” one reader wrote.  “Don’t you have any patriotism?”  Another reader predicted, “I have no doubt that some people who take your advice to expatriate may come to regret it later.”

That may well be true.  But if these readers—or anyone else who thinks that expatriation is unpatriotic, unnecessary, or could lead to “buyer’s remorse"—really want to end expatriation, there’s something Congress to do, immediately, to shut it down.

I’m not talking about more stringent anti-expatriation laws, such as the “exit tax” Congress enacted last year.  Nor am I speaking of enforcement of  the arguably unconstitutional “Reed Amendment,” which purports to exclude persons who renounce their U.S. citizenship for “tax motivated” from ever returning to the United States.  (Fortunately, this law, enacted in 1996, has rarely, if ever, been enforced.)

No, I’m proposing something radically different: for Congress to stop taxing the approximately six million U.S. citizens and green card holders living outside the United States.  And it’s really not that radical, because the United States is one of only two countries that impose tax based on citizenship, rather than residence.  Millions of U.S. citizens, some of whom have never set foot in the United States, are subject to U.S. tax on their worldwide income.  These U.S. citizens not only must pay U.S. taxes, but also comply with U.S. offshore financial disclosure requirements.  If they’re wealthy, they must retain tax experts to avoid paying U.S. estate tax. 

America’s current tax policy also places its non-resident citizens at a disadvantage in the international marketplace.  A Canadian, British, or Japanese passport holder working in, say, Hong Kong, is only subject to Hong Kong tax on local income.  But the U.S. citizen competing for the same job must deal with U.S. tax as well. 

Congress could end this discrimination simply by amending the U.S. Tax Code.  For instance, it could stipulate that any U.S. citizen or green card holder who leaves the United States for at least one full year is no longer subject to tax on their non-U.S. income.  After a longer period—let’s say five years—they would no longer be subject to U.S. tax on capital gains.  And, should they establish a new domicile outside the United States, they would no longer be subject to U.S. gift and estate taxes.

Enacting these common sense reforms would eliminate the tax incentives for U.S. citizens to expatriate.  It would, quite literally, end expatriation overnight.  These reforms would also put U.S. tax policy back in the international mainstream.  Of course, when non-resident Americans returned to the United States under this plan, they’d have to start paying U.S. tax again on their worldwide income. 

President Obama campaigned on the promise of “Hope” and “Change.”  This simple change in U.S. tax policy would give hope to the more than five million Americans who live overseas. 

Obama, do you hear me?

Copyright © 2009 by Mark Nestmann

Comments

[Oilwelldoctor]

Dear Mr. Nestmann,

you are indeed correct about US taxes abroad but failed to mention the $85,000 tax credit and a one-to-one deduction of foreign taxes paid against US taxes due. Regardless of the Gestapo tactics the US Treasury has recently used regarding secrecy laws, there are still some good tax havens in small foreign countries; I extensively checked into one last year. Bottom line, my US tax credits more than offset any benefits gained from offshore invoicing for my services (I am an independent consulting engineer working abroad on a day-rate). I would advise anyone seriously considering relinquishing their US citizenship for tax reasons alone to think twice. Also, a US passport still opens many doors that are closed to others.

[Mark Nestmann]

You are correct about the foreign earned income exclusion, although for 2009 the applicable exclusion is $91,400, not $85,000. However, there is no reason that a US citizen who doesn't live in the United States and doesn't plan to live there should have to deal with US taxes and in particular the onerous consequences of investing in non-US mutual funds or non-US corporations. For these people, and also for truly "accidental" US citizens, expatriation is the only realistic option--unless Congress wises up and changes the law.

[j]

The 85K (or 91.4K) tax credit applies only to earned income, so it's really not all that great if you have unearned income. If you are running only in earned income, consider that when you earn dollar # 91,401, it is taxed at a rate equivalent to what it would be taxed at back home. In other words, the first "exempt" 91.4K is used to push you into a higher tax bracket, so all dollars above 91.4K are taxed at a much higher rate.

From the article: "And it’s really not that radical, because the United States is one of only two countries that impose tax based on citizenship, rather than residence."

I thought there were 3; the USA, Libya, and N Korea. Did Libya or N. Korea realize that they were too radical in taxing non resident citizens on foreign source income?

If there is only 1 other country, which country is it?

FYI, If N. Korea made me a citizen tomorrow and sent me a tax ill, I wouldn't pay it because I don't live there, and have no income from there. No countries laws apply outside of it's jurisdiction, REGARDLESS of what that countries laws say.

[Jeff]

I think Australia also has similar taxation based on Citizenship like the USA? Please correct me if I'm wrong.

[Mark Nestmann]

Other than the United States, the only other country that permanently taxes its non-resident citizen is Eritrea. To the best of my knowledge, North Korea, Libya, and Australia don't tax on this basis. Australia does impose tax on long-term residents who become non-resident if they retain significant ties to Australia, but only for a limited period of time (two years, I believe).

[oldasiahand]

Once one gives up their US ciizenship at an embassy does he have to wait for the Certificate of Renunciation from the State Department before notifying the IRS, or does he notify the IRS immediately after visiting the embassy. I am thinking of formally giving up my US passport (which expired 4 years ago)before the end of the year in London. I have not lived in the US for over 25 years.

[oldasiahand]

Just to let you know, I applied for an interview at the Embassy in London to give up my citizenship. They are sending me a package and telling me the earliest I can have an appointment is mid-May, in 5 months time.