U.S. citizenship-based taxation harms U.S. economy

This post is cross posted from Renounceuscitizenship.

See also:  Roger Conklin writes about why he left Brazil in 1977 ; The US trade deficit: Was it caused by greedy companies or greedy government?

We are living in interesting times. During all the years of my tax consciousness I have lived with the assumption of U.S. citizenship-based taxation. When the IRS began its “reign of terror” on U.S. citizens living  outside the United  States and many people learned about their tax filing obligations, the discussion about citizenship-based taxation began. The U.S. is the only Western democracy and of one two countries (Eritrea being the other) which taxes on the basis of citizenship. The rest of the world taxes on the basis of residence  or what is commonly referred to as “territorial taxation”. In a global world where:

See also:

Stop Citizenship-Based Taxation – Repeal FATCA
Citizenship-based taxation, the U.S. trade deficit and the destruction of U.S. capital

– professional mobility is the norm;

– citizenship  be nothing more than an “accident of birth”

– there is a consciousness of human rights and the right to remain or renounce citizenship is protected

– standards of common sense and decency are desirable objectives

Citizenship-based taxation is not a good idea! It costs the U.S. economy lots of money!

Leaving aside arguments that are based on a constitutional right to expatriate and the argument surrounding “dominant citizenship” (these are very important arguments) let’s analyze this from the perspective of the character in Jerry McGuire. In other words:

“Show me the money!”

For those who don’t like sports, but do like Bill Clinton then let’s work with the principle:

“It’s the economy stupid!”

It is  not in the economic interests of the United States to impose “citizenship-based taxation”. I presume that you are reading this because you are a U.S. citizen living outside the United States. Even if you don’t owe any U.S. tax (the earned income exclusion, foreign tax credits and your general poverty have worked their magic), after 2011, you understand that you still have both U.S. tax and reporting obligations that are complicated and expensive. It will be increasingly difficult to find a “professional” to assist you. On the most basic level  the time, cost and anxiety associated with this are a “tax on U.S. citizenship” itself. This is a tax that no other kind of citizen has. (I am not even considering the social and business restrictions that are the result of FATCA. These include minor things like: no job and no life – but, I digress.)  U.S. taxation and reporting requirements make U.S. citizens too expensive and undesirable for foreign employers. So, a U.S. citizen can physically come to another country, but he or she comes with a level of toxicity that makes him undesirable. These things are really just a problem for the U.S. citizen living outside the United States. And who cares about them anyway. They (from the perspective of the U.S.) are just FATCAt(s) drinking expensive wine on the beach and certainly evading taxes. So, they are just getting what they deserve!

Actually Citizenship-based Taxation Harms The U.S. Economy and Harms It A Lot

Let me introduce you to the best friend of those who oppose citizenship-based taxation. Some of you may already know him – he is out on the front lines commenting on the blogs. His basic thesis is that citizenship-based taxation is destroying the U.S. economy.  For example: The IRS brings in five billion dollars in taxes from U.S. citizens living outside the United States. But, to bring in that five billion in taxes, actually costs the good ole USA one-hundred sixteen billion dollars (yes for those who think that is a mistake $116,000,000,000) dollars a year. Furthermore, citizenship-based taxation is the direct cause of the U.S. trade deficit. Intrigued? Read what I call “The Conklin Report” which is really his testimony before the Ways and Means Committee.

Who is Roger Conklin? In his own words Mr. Conklin is a retired telecommunications consultant.  He is an 80 year old retired person who has actually lived the destructive effects of U.S. citizenship-based taxation. And he is willing to share his views with the government.

Here is an example of a superb comment he recently posted on the article “Obama promotes insourcing jobs

“President Obama has a very short memory. Back at the beginning of his administration he announced an Export Initiative to create jobs by doubling US exports in 5 years. And his appinted commission presented a plan to add commercial attache staff at our Embassies abroad, encourage US companies to participate in foreign trade fairs and to invite foreign purchasrs to the US. Missing from this plan was increasing the number of Americans who go abroad to sell American products. The plan has gone very badly. Products don’t sell themselves. This takes feet on the ground which all of our trade competitor have but the US does not. Yes, there has been a modest increase in exports, but impports have grown far more rapidly than exports, so far more American jobs have been destroyed as our trade deficit has increased than jobs created by increased exports. Our 12-month goods trade deficit through October is $720 billion. This represents some 7 million destroyed American jobs manufacturing for export. Our trade deficit continues to grow by $1.9 billion per day. These destoyed jobs represent $130 billion in Federal tax revenue that fails to be generated.

The US attaches a ball-and-chain to every citizen who goes overseas. He pays taxes on his worldwide income to the foreign host country and then is double taxed on this same income by the IRS. No other country taxes is overseas citizens, so they go aborad and create jobs at home whereas this punishing double taxation of our own ctizens if they do that punishes them if they relocate abroad. Germany,for example, exports 7.9 times more per-capita than the US to China and has a $12.5 billion China trade surplus whereas we have a $270 billion China trade deficit.

In order to compete with citizens of other countries for overseas postings and and end up with the same after-tax income, US citizens must be compensated between 3 to 5 times more than non US citizens in order to cover the additional tax cost that citizens of no other nation have to bear.

Instead of repealing this destructive double taxation, President Obama in 2010 signed the FATCA legislation which makes it impossible for a US citizen to open a bank account in a foreign country. It imposes such massive reporting requiremnts on the accounts held by US citizens by foreign banks that they are dumping all their US citizen account holders. This law requires foreign banks to violate the privacy laws of their countries in providing data to the IRS, a foreign tax authority, which they are prohibited from releasing to any third party.

So please, President Obama, get your priorities straightened out.”

and how about another comment by Roger Conklin  with respect to the reason for the trade deficit with China:

“There was a 11.6% increase in the 2011 US trade deficit with China over 2010 while China’s world trade surplus decreased by 14.5%. Rather than the Obama Administration appointing a commission to “monitor Chinese trade practices” it would be much more productive to appoint a commission to determine why the US does so poorly selling our competitively priced agricultural and high tech products in China. If it were not for the US trade deficit with China, that country would have ended the year with a $47 billion world trade deficit. While the rest of the high-wage industrialized nations are going gangbusters in racking up trade surpluses with China, the second-largest import market in the world, the US trade deficit continues to skyrocket. If such a commission were appointed its report delineating the reasons for our massive trade deficit would take about 5 minutes to prepare. It is a direct result of our unique world-wide and citizenship-based tax policies. They punish companies that export and our citizens who live and work abroad. This is what has destroyed the export mentality of US industry and made it impossible for Americans to compete for overseas jobs. The real loser is the US economy. Our $700 billion world trade deficit represents 7 million destroyed American jobs and $130 billion in tax revenue that these destroyed jobs fail to generate. Every other nation practices Territorial taxation. Their companies pay taxes to China on their profits in China and remit their earnings back home tax free. US companies pay a 35% tax on repatriated foreign earnings. And their citizens who relocate to China to sell their exports pay taxes to China on their world-wide income but are never double taxed back home. US citizens who relocate abroad are taxed by their host countries as well, but then they are double taxed by the IRS on this same income as if they never left home. The US tax system creates an unlevel playing field tipped against ourselves. US exporters have a competitive tax disadvantage that other exporters do not have, imposed not by China, but by our own tax laws. It takes American feet on the ground in China to sell American products, just like it took Navy SEALS to take out bin Laden, but our double taxation makes US citizens from 3 to 5 times more costly than citizens of all other nations in order to end up with the same after-tax income when employed in China.. Americans are priced out of the foreign job market, not by their wages but by our tax laws. But nobody on Capitol Hill or at 1600 Pennsylvania Avenue seems able to understand these simple economic facts. Every US citizen, anywhere in the world with income of $9,350 income must file a US tax return. The most recent Treasury Department statistics indicate that 12,000 individual tax returns were filed by US citizens and green card holders in China. There are 2.16 million Chinese citizens legally resident in the US. How many of them also pay taxes in China? Not a single one of them do. China, like every other nation, except the US, does not tax the income of its citizens residing outside of China. The freedom to deploy their own citizens abroad is an advantage our industrialized trade competitors have, and why they have China trade surpluses Their citizens go abroad and create jobs at home by selling their exports.. The additional tax burden imposed on US citizens if they are deployed abroad makes them far to costly. So they stay home and we hobble along depending on foreign mercenaries making a half-hearted attempt to sell our exports.. That’s like subcontracting the Venezuelan Navy to keep the Iranians from closing the Straits of Hormuz.”
Once again, don’t forget to read the Conklin report.

http://waysandmeans.house.gov/UploadedFiles/Retired_International_Sales_and_Marketing_Executive.pdf

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26 thoughts on “U.S. citizenship-based taxation harms U.S. economy

  1. There are some very good points made by Mr. Conklin that I think sometimes forgotten if you read his story. One is while the US has always taxed citizens in a strict legal sense on their worldwide income wherever they reside their once was an unlimited foreign income exclusion which in that time period (pre 1980s prior to things such as retirement savings accounts didn’t exist) eliminated almost all of the tax liability of US expats. However, in a time of executive weakness the US congress in 1970s passed a whole host of populist but ultimately job/export killing measures that I would argue are badly hurting the US economy to this day. Moreover the populist attitude of the US Congress to this hasn’t changed only it has become more adament not only in trying to overrule the US executive but every other countries executive branch of government. In this sense I tend to blame Congress more than Obama for example or any other US president for the problems the US is facing.

  2. Great post!

    The USG can care less about the plight of Americans abroad. Expats are legitimate targets as far as they are concerned.

    However, the interests of US corporations is another matter and probably the most realistic approach to try to convince the USG to scrap citizenship based taxation.

  3. As a matter as a tax policy the worldwide system system taxation for companies from a historical leve in the US is very much tied to the worldwide taxation of citizens wherever they reside. For example a US incorporated company headquartered in Canada still must still pay US corporate income tax while a Bermuda domiciled company with a physical headquarters in the US doesn’t any US corporate income tax obligations for business outside the US.

    One of the smarter tax policy moves Trudeau made which is often forgotten is switching Canada from a corporate income tax perspective to a territorial based system at least with tax treaty partners although effectively every foreign country just about has a tax treaty indirectly with a country Canada has one with. The only notable country Canada doesn’t have a treaty or TIEA I can think of with is Hong Kong which is currently under negotiation.

    http://www.fin.gc.ca/treaties-conventions/notices/hongkong-eng.asp

  4. This is a sobering story. Reading it gives me a sinking feeling since this has been so well documented to the House Ways and Means committee and yet nothing has been done. There is something deeply dysfunctional about the US government in that not only can it not undo very damaging legislation, but it continues to craft vast new laws in exactly the same self-destructive manner. Maybe the American Experiment doesn’t work so pretty good.

  5. Excellent, Excellent, Excellent. The politicians won’t listen to our whines about unfairness, or burdens of taxation, nor do they care if we are penalized. We are too distant and scattered of a diaspora to listen,

    But, they just might listen to the narrative about job loss and inability to grow exports. Roger makes a compelling case as to why our entire citizenship based model of taxation contributes to our non competitiveness around the world. When he writes, I read! 🙂

  6. To be fair there were a few years back some people in Canada such as Tom Kent(now deceased), Rudyard Griffiths, and Diane Francis(herself born in the US) calling for Canadians to be taxed on their worldwide income wherever they lived and banning dual citizenship. In the few media settings I saw this discussed it seemed to be heavily panned by both Canadians both inside and outside the country frequently citing the US example and comparing it unfavorably to situation in the US . If the US thinks citizenship based taxation will become the new global norm FATCA and FBAR I think have definately poisoned the well in Canada.

  7. Excellent post. I agree that Conklin is a very good, very credible, advocate for this. He writes well too and he’s patient with those who try to blow him off.

    And I think patience is key here. We are trying to explain this to people who lack the context. Many of them have never lived abroad and have some rather quaint ideas about what expats are up to. It is what it is but I think we will make more friends and win more advocates if we are both civil and persistent. My .02.

  8. I like Concklin’s work. It’s amazing how there are serious issues affecting the US and their respective answers are right in front of their faces, yet they take no action. Sometimes you just wonder — HOW? WHY?

    The only answer I can boil it down to is cronyism or institutionalized corruption. There are people who benefit from a negative trade deficit and weak US dollar. They happen to carry more force than people who are FOR a positive trade deficit, budget surplus, and a strong dollar.

    That’s I believe we have little choice and really no say in the matter, and why I’m all to happy to disassociate myself from that country. The best thing expats can do is be productive citizens in their host country, making them even better, and just let the US run its course or clean up it’s act.

  9. Tim, the Foreign Earned Income Exclusion is good for people who have jobs. For people who have businesses, or those who live off of passive income sources, it’s worthless. Take a look at what the US expects a business owner abroad to do. It’s punishment, plain and simple.

    This is why I think it’s somewhat rare, and I’ve never seen it in the BIG media that I can recall, of an American who goes overseas, starts businesses, and makes a TON of money. All I’ve seen are mom and pop shops in Europe or Asia. I think it’s this way because an American sees the US rules and renounces. So they may have a ton of money, but they are no longer American anymore.

    We could rant and rave all we want to. The words “US Expat” is an oxymoron. Having US citizenship lets people go on tourist trips overseas, but truly living a life overseas like people from other countries do is pretty much out of the equation altogether. The FACTA and all the other laws they conjure up just solidify this even more…

  10. Good find Boiled Frog. This is exactly what I am talking about. The answers are so pratical and simple, yet they make no change. That’s why I believe that some people are benefitting tremendously from the current state of affairs in the US.

  11. Yes, it is good, and only one comment has been made so far when I read it this morning. You don’t need to be a paid subscriber to the WSJ to sign up and make comments, and comments there get more eyes then comments here, as much as I appreciate the “here” of this blog.

    So, may I encourage you all to make civil and thoughtful comments over at the WSJ to support the oped piece. BTW, don’t try links. If you do, it seems that it either it doesn’t get posted, or it goes to moderation which delays any impact. If I want someone to go somewhere, I just encourage them to google the title of the article. I bet Roger ends up posting something here, as I just sent him the link. You can See Rogers most recent comments on this other WSJ piece.

    http://on.wsj.com/yxqW0t

  12. The affirmative comments are deeply appreciated.
    Although it has been 35 years since I returned with my family to the US after living abroad for 11 years, I continued to travel the world (total 98 different countries) for the next 30 years selling US products.
    One of the most difficult challenges in depending on foreigners to sell our products was finding foreign citizens as agents who were really dedicated to selling our products. You can’t be everywhere at once and I took more beatings than I like to remember when I learned the hard way that some foreign well-connected agents had alterior motives. Examples were those who had connections to foreign competitors and their real interest was to limit the sale of US products rather than expand them. They were very skillful in concealing the fact that they had other axes to grind.
    Roger Conklin

  13. Hello Roger:

    I am the author of the post that referenced your work. Thanks so much for your intelligent, well reasoned and articulate observations. Keep up the good work.

    Also I understand that this has some meaning in relation to your efforts:

  14. Mr. Conklin, thank you for your persistence. It’s a shame intelligent discourse isn’t well received by those making all the rules. Many here now follow your writings and comments.

  15. Banning dual citizenship is an interesting concept, but unless the two countries involved have the same citizenship laws, it really doesn’t work. You may be considered a citizen under the laws of one country, but that does not, under the laws of of the other country, necessarily cause you to lose your citizenship in that country. Some countries will allow you to renounce your citizenshp, but others absolutely do not allow this. Others, like China, strip you of your citizenship if you become a citizen of another country.

  16. For US citizens living outside of the US contempating renouncing your citrizenship, here is a link that provides the “how to” information. You can’t just shout “I renounce my US citizenship. It must be done before a US consular official in a foreign country and you must be up to date with your US tax filings with all taxes, penalties and fines paid.Depending on your income or the assets you own anywhere in the world, you may be subject to a substantial exit tax that must also be paid in order to renounce your citizenship It varies with location,but currently the backlog is such that it may take several months to schedule an appointmet to renounce your US citizenship.
    Here is the link: http://travel.state.gov/law/citizenship/citizenship_776.html. Renunciation is irrevocable. You cannot recuperate US citizenship once it has been renounced

  17. Thank you Mr. Conklin.

    A significant amount of us who post on this site have already renounced US citizenship or are in the process of doing so.

    The USG has really shot itself in the foot with citizenship-based taxation. The body count of lost sales reps for US products is climbing.

    Your comments and guidance are most welcome.

  18. There has always been a strong lobby throughout American history from the financial sector especially the part centered New York in favor of trade deficits, budget deficits, “financially” oriented economy etc. Interestingly, as much as the present day Democratic party tends to bash Wall Street there has always been a strong “Wall Street” wing of the Democratic party going back to the 1930s and earlier and also a natural resources/extraction wing of the party in favor of more foreign imports. The Republicans on otherhand were historically more tied to manufacturing and small business especially in the midwest.

    In regards to FATCA, Wall Street has historically very much opposed broad based witholding taxes on US source income destined to foreigners thus the information sharing requirements of FATCA are seen as eliminating the need to use witholding tax across all foreign destined income as a way of ensuring the tax base is applied to US Persons with foreign accounts(The QI program was also based upon this logic). Whereas in Canada witholding tax applies to almost all foreign destined income and is specifically used as a way charging tax on non resident Canadian citizens Canadian source income.

  19. Pingback: Getting Media Attention on Harmful US Citizenship Tax policy | The Isaac Brock Society

  20. http://www.huffingtonpost.com/chuck-marr/tax-charts_b_1432607.html
    As the charts here show, in Canada, we pay higher taxes than in the US.
    And, according to this “Average federal income tax rates for this middle-income family have been lower during the Bush and Obama Administrations than at any time since the 1950s.”
    and,
    “The downward trend in effective tax rates for middle-income families, the steep drop in federal taxes at the top of the income scale in recent decades, and the decline in corporate income tax revenue as a share of GDP have all contributed to keeping the United States a low-tax country, by international standards. The United States (including both the federal government and the states) collects less in taxes as a share of the economy than nearly any other developed country,” http://www.cbpp.org/cms/index.cfm?fa=view&id=3151

    So, don’t ask us to make up the shortfall – as the chart shows, in most of the other countries where US expats are to be found, we pay MORE than we would in the US. So, as we know, we didn’t leave or remain (or be born) outside the US in order to avoid paying US taxes. But, we will leave in order not to pay tax to two countries PLUS draconian reporting penalties to the US.

  21. Eritrea does not have a true income tax upon its citizens abroad. It has a 2% Development and Rehabilitation tax, often called a “diaspora tax” for Eritreans abroad and payment the right of passport facilities and of return to Eritrea is said to be contingent upon its payment. Doubtless most Eritreans, like most Filipinos before the Philippines abolished its US-imposed income tax on expats in 1999, misrepresent the amount of their income to the consular office. “[T]the UN report said those who don’t pay may be denied entry to Eritrea, their property in Eritrea may be seized and their family members may be harassed. Expatriates visiting Eritrea have been denied permission to leave the country on the grounds they have not paid the tax.” http://www.cireport.ca/2011/11/eritrean-in-canada-pressured-to-give-2-of-their-earnings-to-eritrean-diplomats-and-agents-in-canada-allegedly-to-finance-armed-groups-including-the-al-qaeda-affiliate-al-shabab.html

    According the the US State Dept report on the country, “Eritrea has complicated citizenship laws and does not recognize renunciation of Eritrean citizenship”.

    Still, for both Eritreans and Americans who have been naturalised elsewhere, the stickiness of their birth nationality and the demands for tax may be irrelevant, and not just because they probably have too little income and assets to become targets for enforcement. The level of IRS human assets abroad does not permit of much activity, and anyway no police-type action can be undertaken except with the cooperation and participation of local counterparts:

    4.30.3.1 (10-01-2010)
    Overseas Posts Introduction

    The Manager, Exchange of Information and Overseas Operations (EOI/OO), reports to the Director, Competent Authority and International Coordination (CA&IC), and is responsible for administering the civilian overseas and domestic Posts of duty.

    Tax Attachés (TA) and Deputy Tax Attachés (DTA) serve in the IRS overseas Posts of duty and Revenue Service Representatives (RSR) and Assistant Revenue Service Representatives (ARSR) serve in the IRS domestic Posts of duty. Tax Attachés and RSRs serve all functions of the IRS in tax administration matters within their respective Post jurisdictions.

    As of May 2010 the IRS has four overseas civilian posts of duty located in Frankfurt, London, Paris, Beijing and one domestic Post in Plantation, Florida. Each office covers a regional area and, with EOI/OO, addresses all facets of United States (US) tax administration around the world. EOI/OO handles all matters relating to Canada and the Pacific Rim countries and all matters involving exchange of information with France.

    Criminal Investigation (CI) has Country Attachés and Deputy Attachés stationed in permanent posts in Frankfurt, Mexico City, Bogota, Hong Kong, Beijing, London, Bridgetown (Barbados), Ottawa, Panama City and Sydney.

    Exchange of information provisions are the most interesting aspect of the above, see: http://www.irs.gov/irm/part4/irm_04-060-001.html

    What FATCA aims to do is to provide for more routine exchanges of mass data (“Spontaneous exchange”). Powerful US computing capacity and cooperation among US government agencies will allow for increased enforcement. It will not answer the question of whether the affairs of a foreign national (who may or may not also be a US national) are subject to disclosure.

    The situation of those who may be US citizens but who have no other connection with the USA (thinking, for example, of Boris Johnson, who renounced his US citizenship in 2006) is the most interesting. And their children, if not registered with a US consular office (assuming they are citizens within the provisions of the INA) are unlikely ever to come to IRS attention. Many thousands of such children have US citizenship as a matter of law but are never recognised as such, and may travel (albeit unlawfully) to the US on their foreign passports.

  22. Results of a survey of ‘tax and finance executives” re possible changes in the US international taxation system (corporate).

    http://www.accountingtoday.com/debits_credits/Presidential-Candidates-Tax-Issues-62539-1.html
    ‘Presidential Candidates Aren’t Spending Enough Time on Tax Issues’ By Michael Cohn
    May 2, 2012

    ……..”When respondents were asked how the U.S. international tax regime would look in five years based on what they are hearing from the candidates and current administration, 34 percent anticipate a lower corporate tax rate and a move to a territorial system, up from 17 percent last year, while 36 percent foresee a lower corporate tax rate within a worldwide system. Still, 26 percent of the survey respondents felt the status quo would remain, with the same tax rates and the same worldwide system.”

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