Your underlying assumption is that the US can increase taxes and regulations indefinitely without consequence. But capital and talent are more mobile than ever before.
Record numbers have been renouncing citizenship in recent years (Google it). Most likely when the current flow of expatriation becomes a flood, though, there will suddenly be restrictions imposed on exit: an asset tax, a waiting period, anything to stop the talented from leaving. We've seen this movie before in East Germany, 1961. Remains to be seen whether the US government will do more than expropriate 50% of your assets (2008's exit tax) to deter you from leaving.
Your facts are a misrepresentation. There have been many american expats for a long time. We usually keep our citizenship because there was no need to give it up. Having to file taxes to the US every year is annoying but not enough to renounce citizenship over.
Lately, however, the US has been getting more and more intrusive in my foreign life. Why do I owe any taxes on money I earn in a foreign land? I'm not using any US resources (don't give me any nonsense about navy seals coming to my rescue if I get kidnapped), I'm not working there, I have no property there, nothing.
Now they want to know how much money is in my bank account! I have a hard time finding banks that will do business with me because I happen to be in a "tax haven" country so doing business with americans means you have to have infra to send information about my banking activity back to the US. The cost of rejecting a handful of american customers is minuscule compared to the cost of setting up such infra.
I don't want to give up my citizenship but I'm not putting up with this mafia-style protection racket anymore.
Well, the country could just say no but once the country has said yes (probably after some very one-sided negotiation) the bank no longer has a choice. That is the case here: have American customers? Then you have to comply with the US rules.
The US is making a lot of trouble in banking. For example, if two non-US parties trade some US-based stock, then the whole thing has to be reported to the US specially independent from the normal reporting they have to do. I wish the US were a small enough player that everyone could just ignore this kind of nonsense but that's not the case at the moment.
"The Exit Tax works as though you have died. It’s calculated similarly to the Federal Estate Tax. It requires American taxpayers to identify all assets and debts to determine their net worth, and then to compute a theoretical gain or loss on all assets. The Exit Tax applies to anyone with a net worth of more than $2 million. It also applies to a taxpayer whose average U.S. income tax liability for the past five years is above approximately $124,000. Net worth is without inflation adjustment, which means increasingly more individuals will fall victim. It treats all property as being sold, and all deferred income retirement accounts as being distributed. There is an exclusion of $600,000 for any unrealized gain or deferred income. Then a 30% withholding tax is automatically withheld before deferred income accounts are distributed."
Ah, yes, the 'HEROES' act. (Hard to vote against something with an acronym like that, huh?)
That's the one that might bankrupt me if either I or the federal government ever decides I'm no longer a permanent resident -- because the taxes on the value of all that illiquid (but highly-valued, on paper) startup stock, marked-to-market, would be more than my liquid assets.
And my wife wonders why I get nervous when crossing the border.
Er....no. It was not free before; section 877 of the Internal Revenue Code was amended in 2004, and even before that reflected the assumption that any expatriation from the US was for purposes of tax avoidance. All US income for 10 years after expatriation was subject to US income tax for 10 years, and if you spent more than 30 days of any given year within the US, you were treated as a resident and liable for full US taxes on all income worldwide. Now you can spend up to 120 days in the US per annum after expatriating.
They don't take 50% of your net worth; they take progressive amounts on assets above the inflation-indexed $600k exemption up to a top rate of 35% (same as the estate tax). The 50% thing is a special case for future deferred income from a US asset; you pay 30% up front and 30% on distribution, which comes out at 51%. The idea here is that you should pay more because you are trying to have your cake (live outside the US and not pay US income tax) and eat it too (enjoy the fruits of the US economy and enforce any future income claims in a US court if required). If you really don't want that, then you can sell the asset, giving up any deferred income, and take the 30% hit.
I am not a tax lawyer, or any other kind of lawyer right now. Nor do I have a very strong opinion on whether this tax is good or bad; I'm just pointing out that there are factual errors in your statements above.
By your own admission you are not a tax lawyer. Perhaps this is why you are conflating two different things, income and assets.
All US income for 10 years after expatriation was subject
to US income tax for 10 years
Yes, and that was bad enough, but what is new is this:
they take progressive amounts on *assets* above the
inflation-indexed $600k exemption up to a top rate of 35%
(same as the estate tax). The 50% thing is a special case
for future deferred income from a US asset; you pay 30% up
front and 30% on distribution, which comes out at 51%
That is a tax on assets in addition to income. Assets. Meaning everything you've built up to this point, not just your continuing revenue streams while overseas. An asset tax for expatriation is a new development in American history.
Then maybe you should have made that clear in your original post, rather than claiming that expatriation was 'free,' as if there were no costs at all. If you read the IRS instructions a little more carefully (or peruse the more detailed treatment at http://www.irs.gov/publications/p519/ch04.html#en_US_publink...) you'll see that liquidation or exchange of any US assets, including property, were booked as gains prior to 2008.
For the majority of people (ie: not multi-millionaires) it has become easier and cheaper to take up citizenship elsewhere than it used to be. The worldwide taxation approach of the IRS is an anomaly, but a long-standing one rather than some recent innovation. You have yet to show that the increase in voluntary expatriation is correlated with high earnings, much less caused by them.
While a small number of Americans hand in their passports
each year for political reasons, the new surge in
permanent expatriations is mainly because of taxes.
Amid mounting frustration over taxation and banking
problems, small but growing numbers of overseas Americans
are taking the weighty step of renouncing their
citizenship.
The IRS doesn’t tell us why people expatriate, or who they
are or where they go. Lawyers say most are wealthy
Americans who have expatriated to all manner of countries.
EDIT: Look, I'm as put off by deeply nested arguments as the next person. My empirical points are primarily two fold. One, the new exit tax is both substantial and yet also just the beginning. Two, many are seeing the writing on the wall and trying to get out while the tax is "only" 51% of assets.
Given the discussion in the United States about raising taxes on the successful* to balance the budget, do you really think this is an irrational decision on their part? Or that it is irrational to infer that this is part of their decision-making process, especially given copious media reports to this effect?
I agree about the nested arguments. We're going to disagree about the tax thing; I think your teleological argument takes no account of circumstances, but on the other hand I don't think the media saturation on fiscal questions does much to clarify the issues.
Hardly conclusive. From the same WSJ article: Other attorneys who specialize in helping the Americans expatriate say the reason is that the IRS is cracking down on overseas bank accounts and offshore income. There is a population of U.S. citizens who live overseas and may never have paid U.S. taxes on their non-U.S. earnings and non-U.S. accounts. Now that the IRS is enforcing the rules, with criminal penalties for scofflaws, the overseas residents would prefer to expatriate rather than pay. ...and a great many of the comments (by people who have actually left, as opposed to people venting their spleen) say the paperwork is more onerous than the taxes.
The Time article contains several factual errors, such as ignoring the fact that most countries have tax treaties with the US which prevent double taxation, and stating that the allowable visiting period for US expatriates is 90 days rather than 120 (which is 90 more than what it used to be- perhaps sloppy copyediting is to blame). The NYT article quotes one person who has been abroad 20 years and renounced citizenship after 10, which must logically have been back in 2000 or 2001. I fail to see how this provides any insight into current behavior. It strikes me as somewhat telling that both stories use the example of people living in Switzerland, a country famous for banking privacy, and somewhat infamous for acting as a tax shelter. I'm not sure that typifies the expatriate experience at all.
Not that I don't think taxes are an entirely irrelevant factor, mind. This paper offers a rather more plausible explanation, albeit a dry one: that low-tax entrepots with high standards of living risk becoming unaffordable for US residents unless consumption taxes can be offset against income, and recommending repeal of taxing on citizenship rather than residency (which I support, incidentally). http://www.aca.ch/joomla/images/pdfs/taxnotes.pdf
>There is a population of U.S. citizens who live overseas and may never have paid U.S. taxes on their non-U.S. earnings and non-U.S. accounts.
This really pisses me off. If I don't live in the US why on earth would I pay taxes on my non-US earnings? No other first world country expects this and no country has a right to it. Am I slave who's very soul belongs to the US government?
>Now that the IRS is enforcing the rules, with criminal penalties for scofflaws
Scofflaws? If I ignore laws of countries I don't live in I'm a scofflaw?
Instead of downvoting me, I suggest you take your complaint up with the writer of the Wall Street Journal article. I quoted that extract to demonstrate that there were contradictory points of view about the reason for the recent uptick in renunciation of US citizenship besides the one offered in the grandparent post.
As for why US citizens living abroad pay US income taxes, that has been around since the time of the civil war, when a temporary income tax was imposed for reasons that I hope are obvious. It seems to have escaped your attention that I said I don't support it, and even linked to a paper in a tax law journal arguing that it makes poor economic sense. On this topic, you should take your complaint up with the US government.
Your underlying assumption is that the US can increase taxes and regulations indefinitely without consequence. But capital and talent are more mobile than ever before.
Record numbers have been renouncing citizenship in recent years (Google it). Most likely when the current flow of expatriation becomes a flood, though, there will suddenly be restrictions imposed on exit: an asset tax, a waiting period, anything to stop the talented from leaving. We've seen this movie before in East Germany, 1961. Remains to be seen whether the US government will do more than expropriate 50% of your assets (2008's exit tax) to deter you from leaving.